Optimal Renewal and Electrification Strategy

for Commercial Car Fleets in Germany

Ricardo Tejada and Reinhard Madlener

Abstract In this paper we model the uncertainty inherent in oil, electricity, and
battery prices, in order to find the optimal renewal strategy for transport fleets in
Germany from a car fleet operators perspective. We present a comprehensive statis-
tical model of total operating costs for the usage of light duty vehicles in the transport
industry. The model takes into consideration current and future power train technolo-
gies, such as internal combustion and electric engines. The framework allows for the
calculation of sensitivities of the relevant explanatory variables (fuel price, interest
rate, inflation rate, economic lifetime, subsidy/tax policies, and economic develop-
ment). We also calculate and evaluate relevant diffusion scenarios for commercially
used e-vehicles.

1 Introduction

In Germany, internal combustion engine vehicles (ICEV) directly cause over 14 %

of the yearly CO2 emissions [1]. The increasing usage of fossil fuels, such as oil and
gas, is one of the major driving forces of climate change [2, 3]. Increasing renewable
energy supply, combined with the proliferation of electric vehicles (EV), might help
to alleviate some of these problems. However, network externalities of the incumbent
technology and the low degree of internalization of its external costs present a great
obstacle. The required investments in electric vehicle supply equipment (EVSE)

R. Tejada
RWTH Aachen University, Templergraben 55, 52056 Aachen, Germany
e-mail: ricardo.tejada@rwth-aachen.de
R. Madlener (B)
School of Business and Economics / E.ON Energy Research Center,
Institute for Future Energy Consumer Needs and Behavior (FCN),
RWTH Aachen University, Mathieustrasse 10, 52074 Aachen, Germany
e-mail: RMadlener@eonerc.rwth-aachen.de

Springer International Publishing Switzerland 2016 597

M. Lbbecke et al. (eds.), Operations Research Proceedings 2014,
Operations Research Proceedings, DOI 10.1007/978-3-319-28697-6_83
598 R. Tejada and R. Madlener

infrastructure for the usage of battery electric vehicles (BEV) can only be financed
for a high number of BEV, and the mass adoption of BEV can only be triggered
by large investments in the charging infrastructure. Still, some niche markets exist
already today where BEV are full substitutes for ICEV. Especially interesting are
commercial applications, where scheduled routes and planned working hours allow
the unreserved usage of BEV.
Our study aims at modeling the optimal diffusion of electric light duty vehicles
(LDV), depending on various endogenous factors (e.g. a companys driving profile
and fleet size) and exogenous factors (e.g. energy and gasoline prices and government
subsidies). In our study, we take a closer look into the main cost factors and the way
they influence the viability of BEV usage in commercial applications. Further, we
perform an extensive sensitivity analysis of the explanatory variables and forecast
the yearly sales and fleet structure of a company using various scenarios.

2 Methodology

The main aim of this study is to determine the optimal strategy for the introduction
of BEV in the commercial sector in Germany from a fleet operators perspective.
The economic comparison of ICEV and EV is challenging, since there are direct
and indirect factors that influence the benefits and costs of each technology. Similar
to [4], we concentrate on the measurable and quantifiable factors. This means that
we ignore the effects of non-monetizable gains since these are company-specific.
For the sake of simplicity, we assume that the benefits (B) from owning a vehicle
are constant independently of the engine technology used. Furthermore, we assume
that the supply side of the BEV market is able to provide fitting solutions for each
requirement set, i.e. the matching level of requirements and performance (M) is also
assumed constant. In case that these assumptions hold, the value comparison of both
technologies is reduced to a comparison of the total cost of ownership (TCO) of the
competing technologies.
The resulting TCO model is an integrated analytical model to determine the eco-
nomic viability of the usage of EV in the commercial sector. The model concentrates
solely on the monetizable factors that influence the vehicles TCO. Neither the exter-
nal costs nor the network externalities of ICEVs have been considered. This design
decision was taken to enhance the robustness of the results, since there is currently no
generally accepted guideline in place for the quantification of the above-mentioned
externalities, especially considering the lack of policies for their internalization. The
TCO model consists of five independent statistical models (oil price model, battery
cost model, electricity price model, inflation rate model, and interest rate model),
a deterministic model (TCO calculation module), two integrated databases (COST
and CIA), and a managing handler algorithm (the Fleet Renewal Algorithm). The
Optimal Renewal and Electrification Strategy for Commercial Car Fleets 599

Fig. 1 TCO model

architecture

overall model structure is shown in Fig. 1; for a description of the individual model
components and their interrelatedness see [5].

3 The Data

A major challenge in performing this analysis arises from the limited information
available regarding technical characteristics and pricing of BEV. Although some elec-
tric LDV are already commercially available today, the current models do not match
all the possible requirements of the industry. In order to overcome this obstacle we
have defined artificial vehicles by using the available information of similar ICEV
and extrapolated known characteristics of already commercially available electric
LDV. Even though the presented model allows for the analysis of vehicles indepen-
dently of their technical characteristics to obtain reasonable results, we have defined
three vehicle sizes in two versions. The first version of the vehicles has an electric
engine (EE), the latter an ICE. The complete set of characteristics relevant to our
model is listed in Table 1. The data used has been collected from various studies (e.g.
[68]), EEX, Datastream, and vehicle manufacturers (Renault, Iveco).
In order to find the most relevant factors for the diffusion of BEV we performed
an extensive analysis of the collected data. The analysis consists of three parts: (1) a
normalized sensitivity analysis of the TCO of ICEV and BEV and their difference;
(2) an analysis of the evolution of the TCO over time while parameterizing the results
for different variations of the describing variables; and (3) an analysis of the changes
in the TCO when varying the most relevant factors simultaneously (for a complete
list of tested variables and parameters see Table 2).
600 R. Tejada and R. Madlener

Table 1 BEV and ICEV base model characteristics

N o Characteristic Unit BEV ICEV
Large Medium Small Largea Mediumb Small
1 Pricec [1000 e] 50 40 20 42 35 16
2 Fuel typed [] E E E D D D
3 Diesel [l/100 km] 13 9 6
consumption
4 Electricity [kWh/100 km] 30 22 15.5
consumption
5 Battery size [kWh] 42 32 22 0 0 0
6 Fuel tank [l] 60 70 60
7 Range [km] 140 140 140 500 500 500
8 ICE [kW(hp)] 93(126) 78(106) 66(90)
performance
9 EE performance [kW] 84 60 44
10 Trunk [m3 ] 15/17 7/10 3/3.5 15/17 7/10 3/3.5
(min./max.)
11 Weight [t] 3.7 2.4 1.48 3.5 2.2 1.35
a IVECO Daily 35 C 11V; b IVECO Daily 29 L 11V; c excl. battery; d E = electric, D = diesel

Table 2 Parameter definition

No Variable Name Lower limit Upper limit Step size Unit
1 L Economic life 4 10 2 [a]
2 G sub Subsidies 0 7000 1000 [e]
3 Coil Oil price 50 +150 5 [%]
4 Cele Electricity price 50 +150 5 [%]
5 Cbat Battery price 50 +150 10 [%]
6 cfuel Fuel consumption 80 +180 20 [%]
7 Bat Battery size 4 10 1 [kWh]
8 kmY Annual mileage 10 40 5 [1000 km]
9 it Discount rate 2 8 1 [%]

4 Results

4.1 Normalized Sensitivity and Scenario Analysis

The sensitivity analysis is based on a small-sized LDV, the Renault Kangoo, cur-
rently the only mass-produced commercially available vehicle with diesel and elec-
tric engines. Unless stated otherwise, the assumed values of the variables match the
ones of the scenario described further below. First, we systematically vary one vari-
able value cet. par. and test for the impact of this change on the TCO normalized
Optimal Renewal and Electrification Strategy for Commercial Car Fleets 601

(a) (b)

BEV

BEV

ICEV

ICEV

2013 2025

Fig. 2 Normalized sensitivity of the TCO of a small LDV in electric and diesel version. a 2013. b
2025

to the economic life of the vehicle. Figure 2a, b show the results for the years 2013
and 2025. As expected, the annual mileage and the duration of the service life of the
vehicles are the most influential factors. Furthermore, the TCO of the BEV is more
sensitive to the electricity price changes than to battery prices. For the analogous
analysis for differences in the TCO, see [5].
Based on the results of the sensitivity analysis, we selected three variables to
define plausible scenarios (oil, electricity, and battery prices) for predicting their joint
impact on overall cost. Scen. 1 represents the base case, in which current trends are
projected into the future. The environmental awareness of the customers is reflected
in lower average CO2 emissions for new vehicles. Oil prices rise in accordance with
the statistical average to about US$110 per barrel in 2020. No new policies for the
reduction of CO2 emissions are introduced, but already passed bills are enforced. No
revolutionary innovation takes place in battery technology. The base case scenario
is founded on the results of statistical analysis of the three key variables (omitting
any cross correlations of the variables). It is the development expected when neither
major policy change nor technical breakthrough take place. Scen. 2 represents the
acceleration case, in which oil prices rise to US$180 in 2020. The environmental
problems are defining governmental policy-making; as a result, new and stricter
regulations of CO2 emissions are put in place. Governmental research funding has
triggered a technological breakthrough, enabling a substantial battery cost reduction.
The large-scale usage of BEV has allowed for the increased integration of volatile
renewable energy sources, thereby reducing the electricity price. Scen. 3 represents
the deceleration case, in which environmental concerns are assumed to diminish in
the transport industry. Sizable new oil fields are being discovered. The price of oil is
only US$60 per barrel in 2020. CO2 emission reduction efforts come to a standstill
due to low prices of CO2 certificates. The low incentives to purchase BEV reduce
the forecasted market size for batteries. We assume that the business requirements
remain constant during the time of observation, and that the decisions on the vehicle
acquisitions are solely based on vehicle replacement requirements. Furthermore,
602 R. Tejada and R. Madlener

note that we assume that these decisions are taken annually and that the vehicles
age is uniformly distributed over the economic lifetime of the vehicles. The economic
lifetime is assumed to be six years and the annual milage 30,000 km. Further details
can be found in [5].

5 Conclusions

The results show that the oil prices are the dominating factor in the calculation of the
TCO, contributing almost 40 % of the total costs of an ICEV. The total mileage, as a
product of annual mileage and the service life, is the second-most important factor.
Higher total milages allow the BEV to reduce the monetary gap incurred by its higher
TCA through lower operating costs. However, the results of our analysis on future
oil and electricity prices show that the electricity prices will increase at a higher
rate than the oil prices, thereby reducing the attractiveness of BEV. While BEV are
able to match the requirements of certain commercial applications in range, secu-
rity, and reliability, the slow market penetration limits the leveraging of economies
of scale. Despite of this, the predicted gap between the TCO of ICEV and BEV
is relatively small (510 %, depending on the framework conditions). The battery
accounts for almost 40 % of the BEV purchase costs (ca. 20 % of the total lifecycle
vehicle cost). Battery price development remains the biggest unknown for the TCO
for electric LDV. Further R&D investment could trigger the technological break-
through necessary to render BEV economical. Investment in EVSE is not considered
to be crucial for the diffusion of electric LDV, but would enable the wider usage of
BEV, thus increasing the battery market size and lowering manufacturing costs due
to economies of scale.
We can conclude that the economic introduction of small electric LDV cannot be
achieved in the near future without incentives in the form of subsidies or new pollution
regulation policies. The current tax advantages of BEV are totally insufficient for
accelerating the diffusion of electric LDV. Furthermore, the results show that low
capital costs positively influence the diffusion of BEV. Government loans at low
interest rates could have the politically desired effect.
There remains scope for further research. For instance, the model presented can
be expanded to take into consideration the actual driving profiles of the companies,
in order to present company-specific results. Furthermore, by assessing the overall
structure of the LDV market in Germany, the current model could be used to forecast
the adoption rate of the BEV technology on the country level.
Optimal Renewal and Electrification Strategy for Commercial Car Fleets 603

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