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How To Make Money On Electric Cars: Sell Green Credits (To Other Carmakers)

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Tesla Roadster final assembly, Menlo Park, California, April 2009

Tesla Roadster final assembly, Menlo Park, California, April 2009

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Most brand-new auto technologies are, at best, a breakeven proposition in their early years.

Toyota is thought to have lost money on every Prius hybrid it sold for several years, until its sales rose enough to gain economies of scale.

Makers of plug-in electric cars may be losing money on each one right now, but they can earn a bit of extra cash another way: by selling excess green-car credits.

Sell ZEVs, get credits

Those credits are bought by automakers who don't sell enough zero-emission vehicles in California to meet requirements set by that state's Air Resources Board (CARB), or whose plans don't include building enough electric "compliance cars" to comply.

Essentially, each of the six automakers with the highest California sales must earn credits by selling zero-emission vehicles. Those requirements are in addition to national fuel-efficiency rules (and the math is complex, to say the least).

Through 2014, California is requiring that 60,000 such zero-emission cars be sold by the six combined. That goal rises to a total of 1 million by 2020, and 1.4 million by 2025.

Ryan Reynolds Nissan Leaf Spokesperson

Ryan Reynolds Nissan Leaf Spokesperson

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If each maker doesn't acquire enough credits--either by selling cars or buying credits from others that do--it can be fined.

Starting this year, credits can be banked, meaning that Nissan could build up a sizable stockpile of credits to auction off to the highest bidders from sales of its Leaf and other upcoming electric cars. By 2014, Nissan will be able to build up to 150,000 electric cars a year in Tennessee alone.

Tesla can likely do the same for its Model S sales.

Tesla pioneered sales

As Bloomberg notes, both battery-electric and plug-in hybrid cars can generate such credits, which depend on battery-pack size and recharging time.

Each 2012 Nissan Leaf, the highest-selling battery electric available in the U.S., generates three credits that Nissan can sell--based on a range of 70 to 100 miles and standard 3.3-kilowatt Level 2 charging.

A 2012 Tesla Model S with a larger battery pack and built-in 20-kilowatt charging would be worth more than twice that number of credits.

Tesla began the practice of selling green-car credits four years ago, when it revealed in financial filings for 2008 that it had sold Honda credits earned from sales of its Roadster model.

A later SEC filing said Tesla had earned more than $13 million from such sales to Honda and others from 2008 through 2010.

No open market

And in fact these deals between carmakers, as private sales contracts, do not have to be disclosed. Presently no open and public market exists for trading such credits.

Light-duty vehicle type scenario, now-2050 (California Air Resources Board)

Light-duty vehicle type scenario, now-2050 (California Air Resources Board)

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As a result, the price is essentially whatever an automaker decides makes financial sense as an alternative to paying thousands of dollars of fines for not selling enough zero-emission vehicles.

"It's not a new topic," points out electric-car advocate Chelsea Sexton.

"Credit trading has been around for years, though it's become a bigger story as CARB's zero-emission vehicle requirements rise."

Risky business

But Sexton pointed to one peril of what may seem like an attractive market.

Credit-trading, she noted, "has caused the demise of certain startup electric-car companies, who premised their business plans on being able to lose money on the car but sell the credits at a profit."

In other words, first a carmaker has to build a car that buyers will actually want--and only then can it consider selling credits.

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Comments (6)
  1. So is it $13,000,000 for 2500 roadsters = $5,200 per vehicle !!! that is some serious money.
     
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  2. Except the $13 million number is from 2010 when Tesla had only sold 1000 Roadsters which makes the money per vehicle even more serious. Quite bizarre in fact. Those fines must be really something!
     
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  3. There are no economies of scale to be achieved for the electric cars currently on the market. The Leaf, Volt and Focus ALL take advantage of mass production of probably over 95 percent of their parts. To understand the current poor economics of electric cars there is only one thing one needs to know - the high cost of batteries. And if one thinks that mass production of batteries will have any noticeable effect, I point to the cheapest batteries currently used in electric cars - the laptops used by Tesla, which are produced in the billions and cannot achieve any further benefit from mass production. The high cost of electric
    cars are in no way similar to the high costs of early PCs,etc.
    Focus on the cost of batteries. Only the batteries
     
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  4. @Kent: Yes, you've written this many times in many ways on many articles.

    (1) It's just not true that economies of scale have been achieved for everything except Li-ion cells. Electric motors & power electronics are very pricey in small batches, like 10s of thousands (e.g. Volt, i-MiEV) each year. When they get to 100s of thousands they'll be cheaper, and to millions a year cheaper yet. There's a LOT of room left for cost reduction there.

    (2) Cell cost is likely to drop by 6 to 8 percent a year.
    http://www.greencarreports.com/news/1074183_how-much-and-how-fast-will-electric-car-battery-costs-fall
    That's the same rate as small consumer cells, which will continue to drop at that rate too.
     
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  5. John is correct. Powerful electric motors that are designed to use regenerative braking to charge their battery packs are not cheap as well as the subsequent electronics that are required go with it. What tends to makes things cheap is when there are a large number of manufactures that compete in a market in order to get you to buy their products. Right now there is not an abundance of competition among parts manufactures in the EV market. Also many automakers seem to be hedging their bets and Ford hired an outside firm called Magna to use their existing off the shelf hardware to create the Focus electric rather than spending their own money developing it in house.
     
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  6. I would like to second the comment that the key is to have multiple suppliers fighting for your business.
     
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