The True Cost of Gasoline

The True Cost of Gasoline

Three questions with Andy Chu of A123 Systems

In September, A123 Systems Inc. opened the largest lithium-ion-battery factory in North America, thanks in part to a $249 million grant from the U.S. Department of Energy. A123 also plans to open a coating plant in Romulus, Mich., with the help of $125 million in state incentives.

Born out of the research labs of the Massachusetts Institute of Technology, Waltham, Mass.-based A123 got its start in 2001 with a $100,000 grant from the Department of Energy. The company also has raised several hundred million dollars in private capital from investors, including GE.

Andy Chu, vice president of marketing and communications for A123 Systems Inc.
A123 believes its nanotechnology-based batteries and energy-storage systems represent "game-changing technology" for applications ranging from electric vehicles to the power grid. Andy Chu, A123's vice president of marketing and communications, recently spoke with IndustryWeek about electric-vehicle adoption and the government's role in making it happen. IW: Even with the federal tax credit, the price tag of electric vehicles has been cited as barrier to mainstream adoption. What do you see as the value proposition for EVs? AC: The benefits of electric vehicles and hybrids -- or you could turn it around and say the negative consequences of standard internal-combustion vehicles -- are borne by society as a whole. So if you looked at the true cost of gasoline, it's not really reflected in the price that we pay at the pump, or through the vehicles that we drive. Those costs include things like the impact to the environment and global warming, and the military and human costs to secure the free flow of oil. We spend tens of billions of dollars specifically to ensure that oil flows from the Mideast, and we lose soldiers every month; in times of war, a lot more. There's a really high human cost and military cost in addition to the fact that it distorts our foreign policy. We're buying oil from countries and entities that maybe are not doing all the things that we think they should be doing with respect to human rights and those sorts of things. So it really impacts our foreign policy as well. So if you took into account all of the true costs of gasoline, if that was reflected in the price at the pump, then electric vehicles and plug-ins would compare quite favorably. IW: Essentially, you're saying that the U.S. government subsidizes gasoline for consumers. Is that how you justify federal support for electric vehicles, in the form of the $7,500 tax credit as well as the billions of dollars of stimulus funds being provided to EV manufacturers and suppliers such as A123? AC: I would argue that that's really just making it closer to the reality of what is going on economically. So whether you call it an incentive or leveling the playing field, it's just a different way to try to make it a more rational allocation of resources. But the reality is that [government support] is important. ... Having additional assistance from the government to say, 'There's a $7,500 tax credit if you buy these kinds of vehicles' -- that's great, it helps adoption. And part of the reason you need that is the auto industry is very much volume-based. It's not very economically feasible to make small volumes of these production vehicles. It takes a lot of money, it's very cap-ex-intensive, to tool up the manufacturing plants. Before you even make the first vehicle, you've sunk in tens or hundreds or more millions of dollars. So to get those economies of scale, you need to sell a lot of those vehicles to get the costs down, because you're spreading out those costs over whatever number of vehicles you sell. Whether you sell one or a million, the tooling costs are the same, basically. That's why you want to get the volumes up and get the costs down, and the government support through tax incentives and other policies helps get those volumes up. It's encouraging or catalyzing the market that otherwise would normally exist, but it's accelerating it. And that allows the automakers then to say, 'OK there's more of a demand for these products and we can bake that into the plans, we can try to get those economies of scale.' IW: Aside from gas prices hitting, say, $5 a gallon, what's the one thing that could jumpstart adoption of electric vehicles? AC: It's important to try to get the electric-drive vehicles out on the road. Once consumers actually start driving them, they're going to realize all the advantages of these kinds of vehicles. A lot of people don't like going to the gas station, they don't like getting their hands dirty. [With an electric vehicle], you can go home, pull up in the garage, you just plug it in and go in. It's just like a cell phone. In addition, a lot of people like the fact that electric vehicles are quieter and their acceleration from stop is very good. So when you're at a stoplight and you start accelerating in an electric vehicle, the performance is very good. And I think once people start experiencing it firsthand, or talking to people that have them, I think that's going to accelerate adoption as well. There's also of course the green component. People who want to have an impact on society, who don't want to add to the burden of using petroleum and gasoline, this is a way for them to vote with their pocketbooks and say they want to get off foreign oil. It's something very tangible they can do about that. See Also:
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