Electrifying Large Vehicles, with Nafisa Lohawala

Episode 243

Date

Aug. 1, 2023

Guest

Nafisa Lohawala

Host

Kristin Hayes

Producer

Elizabeth Wason

Image

Milos Muller / Shutterstock

In this week’s episode, host Kristin Hayes talks with Nafisa Lohawala, a fellow at Resources for the Future who researches the effects of government policies on the transportation sector. Lohawala discusses the findings of a recent report that explores efforts to electrify medium- and heavy-duty vehicle fleets, the opportunities and challenges of electrification as a pathway toward lower transportation-sector emissions, and policies that could aid electrification.

Kristin Hayes: Hello, and welcome to Resources Radio, a weekly podcast from Resources for the Future (RFF). I’m your host, Kristin Hayes. My guest today is Nafisa Lohawala, a fellow here at Resources for the Future. Nafisa joined RFF after completing her PhD in 2022 at the University of Michigan—that was in economics—and she’s one of the core members of RFF’s Transportation Program. She focuses on the effect of government policies on environmental and safety externalities generated by the transportation sector, as well as a range of other transportation-related issues, one of which we’ll be talking about today.

Our subject matter for today’s conversation is a recently released RFF report on the opportunities and challenges associated with electrifying the medium- and heavy-duty fleet. This is a report that Nafisa coauthored alongside RFF Transportation Program Director Beia Spiller and Research Analyst Emma DeAngeli. Stay with us as we discuss this fascinating new report.

Hi, Nafisa. It’s great to talk with you.

Nafisa Lohawala: Thanks. It’s great to be here.

Kristin Hayes: Let me start by introducing you more fully to our listeners. Maybe you can just say a little bit about how—as a researcher and maybe as an economist, in particular—you became interested in working on transportation issues.

Nafisa Lohawala: Sure. I was actually pulled into transportation-related issues in my third year of graduate school. I was exploring topics for my dissertation and I became fascinated by the design of subsidy programs for light-duty electric vehicles (EVs). I was trying to understand their implications, and that’s when I read a lot about the US auto industry and realized that it’s a very heavily regulated industry with a patchwork of regulations and incentives, and that the auto industry is an oligopoly where there’s a small set of manufacturers who enjoy market power.

That made me think: To what extent do the policies do what they are actually supposed to do? That was my push into studying the transportation sector in general. We know it’s one of the biggest contributors to carbon emissions worldwide. We do need prudent economic policies to decarbonize it. At this point, my research focuses on how policies can help decarbonize the transportation sector, taking into account that manufacturers likely have market power.

Kristin Hayes: Well, we are very fortunate to have your transportation sector expertise here at RFF. Let’s dive into the report that, as I mentioned, you and several RFF colleagues put together. It is particularly—again, just to emphasize for our listeners—about electrifying the country’s medium- and heavy-duty vehicle fleet.

Let me start by asking you what types of vehicles we’re talking about when I say medium- and heavy-duty vehicles. What types of vehicles were you and your coauthors thinking about? Maybe you can say a little bit, too, at this early juncture, about why this particular segment of the vehicle fleet matters to our overall transportation decarbonization efforts.

Nafisa Lohawala: Sure. We considered a full range of medium- and heavy-duty vehicles. You can think of large pickups, delivery vans, transit buses, garbage trucks, long-haul trucks. All these different vehicles are central to economic growth and well-being, because they move people around, they move goods around—but then, at the same time, they are also very polluting. In fact, they comprise only 5 percent of total vehicles on US roads and yet account for 26 percent of greenhouse gas emissions—at least in 2020.

These emissions also tend to disproportionately affect environmental justice communities, which are located close to major highways and warehouses and depots where these vehicles tend to be housed. So, electrifying and decarbonizing this segment can have really great benefits that will not only reduce the transportation sector’s overall contribution to climate change, but will also improve the health and well-being of communities that are historically affected by transportation pollution.

Kristin Hayes: Great. That’s a really good grounding and shows the importance of the study that you all have put together. Let me ask you next about the status of electrification efforts in this sector today. The report references what I would consider a fair amount of momentum in this area. Can you say just a little bit about where you see the opportunities for progress in electrification over maybe the short and medium term?

Nafisa Lohawala: Yeah, I agree. There’s certainly a lot of momentum in this space. The federal government is providing billions of dollars in funding for medium- and heavy-duty electrification. California and New York have their own goals. Then, there are these new companies like Rivian and Proterra that are focusing exclusively on electric medium- and heavy-duty vehicles. Then, there are large fleets like Amazon ordering thousands of electric delivery vans. There are many utilities, as well, that have started projects to ensure a smooth transition.

This is also an opportune moment to electrify these large vehicles, because the electric technology is there. It has advanced rapidly over the past few years because of the growth in light-duty EV adoption and manufacturing. The cost of producing a lithium-ion battery has fallen by more than 90 percent over the past decade, and these advancements can bring cost savings to the medium- and heavy-duty sector, as well.

Kristin Hayes: Wow. It sounds like there have been technology innovations, and there have been increases in both supply and demand for these vehicles. That sounds like quite a positive story, but I do know that you and Beia and Emma point out a number of challenges and other countervailing weights to some of these opportunities, as well.

Let’s spend a fair bit of time talking about the challenges. I know that you go into them in a fair amount of depth in the report and I want to make sure we give that enough time here. Some of those challenges, I would say, sound fairly similar to ones that we hear about in the light-duty fleet, things like cost differential compared to internal combustion engine vehicle, concerns about availability and speed of charging infrastructure—some familiar challenges, for sure, but then there are also some that I think are more specific to the larger vehicles. Let’s spend some time on challenges, and let me start with a chunk that’s related to fleets and manufacturers. How would you characterize the challenges that they are facing?

Nafisa Lohawala: Sure. We actually identify a lot of different challenges in the report. From the fleet’s perspective, as you rightly pointed out, one key challenge is that these vehicles are substantially more expensive than their diesel counterparts. Their purchase price is quite high, but unlike the light-duty vehicles, the fleets housed in depots also need to invest in their own charging station on site, the cost of which is also quite high. It can exceed $100,000. On the positive side, the maintenance cost of electric vehicles tends to be lower, but then the cost of charging them can be quite high, depending on the structure of electricity tariffs. Then, there are also these other costs, like hiring experts on the staff to maintain these fleets and higher insurance costs for electric vehicles.

Fleets also have to navigate through many logistical hurdles that are unique to this medium- and heavy-duty segment. Electric trucks typically have a driving range of less than 200 miles, which is far lower than the thousand-plus miles of diesel vehicle range. Recharging them also takes a much longer time, and the public charging infrastructure is quite sparse. That’s a big problem, because almost 50 percent of medium- and heavy-duty vehicles are owned by independent owner-operators who are more likely to charge en route than install an expensive charging station at home. The massive weight of batteries is also problematic, because it decreases the truck’s payload capacity, which is an important feature of medium- and heavy-duty vehicles.

This is just from the fleet’s perspective. Thinking about the manufacturing perspective, there is also a long list of challenges. We started thinking about what actually makes these trucks more expensive. Of course, the large batteries and high critical mineral prices are one reason, but then there are also many other issues that are particular to medium- and heavy-duty electric truck manufacturing.

One issue is that manufacturing processes for these vehicles differ substantially from their diesel counterparts. With every improvement in battery technology, there’s a need to upgrade all the equipment and the vehicle design. Another big issue is that the current demand for these vehicles is quite low—that creates uncertainty for manufacturers and also increases the costs for them, because they have to then pay higher prices for smaller orders of parts and materials.

Then, there’s a risk for fleets when the demand is so low, because when fleets buy their vehicles, the manufacturer will generally be providing servicing support throughout the vehicle’s lifetime. But if there are very few sales, fleets might worry that the vehicle might just be pulled out of the market—or if it’s a startup, the manufacturer might itself go out of business. So, that’s one challenge.

There’s another issue, which is that these different use cases are quite heterogeneous, which means that the truck manufacturers need to specialize in just one class or one use case. What we’ve seen in the data is that, for several of the use cases, there are very few manufacturers that are producing just specifically that use case, which means that there could be high market power in these segments that can also keep the prices high.

Kristin Hayes: Can you give an example of a use case that you’re talking about? Is that something like a garbage truck that has a very specific design for a specific purpose? When you say use case, can you maybe give us a flavor of what that means?

Nafisa Lohawala: Yeah. I mean, transit buses tend to be really different from garbage trucks. I guess a manufacturer who’s focusing on electrifying garbage trucks, for example, would just be focusing on that and maybe not dealing with transit buses. When you look at one segment—for example, just the transit buses—there are very few manufacturers that are producing that.

Kristin Hayes: Great. Nafisa, you also mentioned that sometimes the actions of these fleets and manufacturers can have spillover effects. I wondered if you could just say a little bit more about what spillovers you are talking about, and maybe just generally how you think about spillovers, in case our listeners aren’t as familiar with that term. But what does that mean, and how does it play out in this context?

Nafisa Lohawala: Yeah. Thanks for that question. We do talk about this challenge of spillovers. What that broadly means is that the actions that are taken by fleets or manufacturers can impose costs or deliver benefits for others. These agents may not account for these costs and benefits if they don’t see any pricing signals there. When such spillovers are unpriced, the market outcomes may not be efficient from a general welfare perspective.

For example, when fleets are purchasing vehicles, they don’t really take into account the fact that them buying an electric vehicle can reduce US dependence on imported oil or improve local air quality, unless they are subsidized. They are also unlikely to take into account the cost of charging the electric trucks. They may not internalize the time period and cost of electricity while they charge their vehicles.

Similarly, for the manufacturer’s side, research by one manufacturer tends to benefit others because then they can imitate them, and yet if there are no subsidies for research and development (R&D), manufacturers may not account for such spillovers when they choose their R&D investments, which may lead to suboptimally low investment in R&D.

Kristin Hayes: Right. Well, let’s turn to another important segment of challenges that I know you discussed in the report, which is around equity, a topic that I know is certainly something that you and Beia have focused on quite a bit. What are some of the equity challenges associated with these electrification efforts?

Nafisa Lohawala: Yeah. Making the transition equitable is another big challenge. Of course, electrifying transportation can improve air quality in disadvantaged communities and can reduce disparities. That’s a good thing, but an equitable transition doesn’t just mean reducing pollution. The fleets in these communities must also be able to switch to these medium- and heavy-duty electric vehicles affordably. Small-fleet operators are more likely to acquire electric vehicles through the used market. That’s a challenge, because they may not benefit from the incentives that are available for these new vehicles. They are also less likely to have experience navigating complex electricity tariffs, which is why they may face greater difficulty managing their electric bills for these vehicles.

Kristin Hayes: Interesting. Is there much of a used vehicle market at this juncture, or is that also going to take several years to really develop, given that the new supply is just really ramping up?

Nafisa Lohawala: Yeah, I think it’s going to take a while before there’s an established used vehicle market.

Kristin Hayes: You mentioned electricity tariffs and the challenges around navigating the cost of fuel for these electric vehicles, which is electricity. There are also broader challenges with supplying more electricity as we ramp up the number of electric vehicles overall. What are the challenges that you identified related to these electricity systems?

Nafisa Lohawala: Yeah. That’s actually a really big challenge, and it’s particularly relevant to the medium- and heavy-duty segment, because charging these large fleets may require multi-megawatt power levels. Such high demand levels can actually destabilize the system and cause blackouts if the electric grid is not upgraded first.

These upgrades would have to span the entirety of the electric system: the local distribution grid, the transmission systems, as well as the power plants. If you want to actually maximize the benefits from electrification, then the additional generation needs to come from renewables and not from fossil fuels. Now, some of these expensive upgrades can be avoided if fleets can reduce their peak demand through managed charging, but if fleets are facing a flat electric tariff, they generally don’t have an incentive to do that, so that’s another big challenge.

Kristin Hayes: Right. As you noted, as well, some of these smaller fleet owners may not have the bandwidth and expertise to figure out how to manage that charging in a way that might be optimal for reducing emissions and reducing costs. Is that fair to say?

Nafisa Lohawala: Yes, that’s fair. Exactly.

Kristin Hayes: Nafisa, this has been a really great overview of the challenges. I just want to reflect for a second. It does feel a little bit like grid decarbonization, and then, subsequently, fleet electrification. You pointed out that that’s an important sequence of events, but if we can decarbonize the power sector and then electrify the fleet, it feels like that’s, in some ways, become the de facto proposal or the de facto climate solution for much of the transportation sector.

But you also noted very articulately that there are a lot of challenges to that. In the report, you highlight that there are some alternatives to electric medium- and heavy-duty vehicles that might be more cost-effective—or maybe even necessary, in certain circumstances—given some of these challenges you just described. Let me ask you, what are some of those non-electric, but still low-carbon, vehicle options? Maybe you can give us an example of how one of those alternatives might actually be a better solution.

Nafisa Lohawala: Yeah. We actually talk about three such technologies in our report. There is this hydrogen fuel-cell technology, which may be particularly suitable for long-haul applications, because they have shorter refueling times. They also tend to have lighter weight, which means there would be less of a concern about smaller payloads. It has its own challenges, though. For example, for fuel cells to save emissions, the hydrogen must be created with renewables.

Then there is this hybrid truck technology, which can be most effective when the drivers start and stop their vehicles frequently, and that can allow the benefits of regenerative braking to improve fuel efficiency. We also discussed this biodiesel fuel. That’s another alternative that has potential to reduce emissions. The challenge with that is that biodiesel production requires expansion of crop land, and that can crowd out other land uses.

Kristin Hayes: Let me now turn to policy options—and maybe it’s even fair to say policy solutions—which is the final theme that you call out in the report, and is obviously a critical part of our conversation. I wanted to ask about policy incentives that already exist. You’ve mentioned several, and I’m guessing that those are part of recently passed legislation that might be already affecting these electrification efforts. In what ways does either the Bipartisan Infrastructure Law or the Inflation Reduction Act incentivize the adoption of these electric medium- and heavy-duty vehicles?

Nafisa Lohawala: Yeah. Both of these combined provide billions of dollars in funding for medium- and heavy-duty electrification, and they’re providing several subsidies and grants not just for purchasing these vehicles, but also for manufacturing them, for investing in electric grids, as well as developing the public charging infrastructure. I can mention a few programs.

For fleets, the Inflation Reduction Act provides up to $40,000 tax credit for purchasing a vehicle and up to $100,000 for installing charging stations. For manufacturers, the Inflation Reduction Act is providing up to $3 billion in loans for building new manufacturing facilities. It has also set aside $2 billion for grants to retool the existing auto manufacturing facilities. In terms of the electric grid infrastructure, there are production and investment tax credits for clean energy. They incentivize investment in board-distributed, as well as utility-scale, generation capacity. Then, there are also grants for transmission expansion, as well as integration for offshore wind.

Then, to invest in public charging, the Bipartisan Infrastructure Law has created the National Electric Vehicle Infrastructure, or NEVI, program funding that provides around $5 billion for public charging stations that could be used for commercial vehicles. Then, both these acts also set aside some funding to develop a robust supply of critical minerals that are used for the batteries.

Kristin Hayes: Right. Yeah, it’s a very important piece of the puzzle. Beyond what’s already on the books—which is obviously a lot, but that’s not the end of the story, either—what are some of the other policy options, looking ahead, that you and your RFF colleagues identified that might further address some challenges and maybe speed up even further the electrification of this sector?

Nafisa Lohawala: Yeah. There’s a lot that could be done. There’s an accompanying blog post with the report where we describe two policies. Let me describe them to you.

One option is to provide funds to local utilities to pay for the upgrades to the local distribution system. Why? Because when utilities make these expensive upgrades to the distribution network, they are likely to spread the cost among the commercial customers, which can increase the electricity rates for charging the vehicles. Now, given that fleets are already facing such high costs and challenges to electrify, adding additional electricity charges can reduce their incentive to electrify. This is one place where government intervention could be helpful.

Another potential area is incentivizing electric truck fleets to mitigate their impact on the electric system by reducing their peak demand. This can help not just to improve grid reliability and reduce the chances of a blackout, but it can also avoid the construction and maintenance of expensive power plants and other infrastructure that would be needed to meet the highest potential demand.

One way to do that could just be to incentivize the use of charging management software. It’s a pretty great technology. It can alleviate the pressure on the grid by reducing the speed of charging in periods of high demand and shifting these charging sessions to a time when the grid is less likely to experience congestion. Now, some fleets may adopt this software voluntarily, especially if they’re facing these demand charges or complex time-of-use tariffs, but fleets that are facing a flat electricity tariff generally have no incentive to do so. As you mentioned just a few minutes ago, some fleets may just not be aware of the benefits of investing in this software. So, future policies in this direction could potentially reduce peak demand and ensure grid reliability while keeping the electricity tariffs low.

Kristin Hayes: Interesting. Well, I would strongly encourage all our listeners to take a look at the report. It’s very readable. It is available on the RFF website. I think it does a fantastic job of emphasizing both the importance of this sector in terms of our overall decarbonization efforts and also just how the pieces are going to have to come together to really make this work to everyone’s advantage. Nafisa, thank you so much for talking us through the report. I really appreciate it.

Let me close with our regular feature, Top of the Stack. Nafisa, what kind of content would you want to recommend for our listeners—along any topic, but really what you’ve been thinking and reading about recently? What’s on the top of your stack?

Nafisa Lohawala: Yeah. I am a huge fan of Judea Pearl’s book. It’s called The Book of Why: The New Science of Cause and Effect. I think it should be at the top of everyone’s reading list—and especially for economic researchers. It presents a very compelling argument for why studying causation is crucial not just in economics but in numerous fields. I think it has the power to really enhance one’s perspective on cause-and-effect relationships.

Kristin Hayes: Right. I feel like I’ve heard a million times here at RFF that correlation is not causation, and that causation is really the key to understanding a number of things. But is that at the heart of the book?

Nafisa Lohawala: Well, that is, but the book goes into a lot more detail about how to think about causation. They have some really cool causal diagrams, and it really helps you think about mechanisms that are going on in the background there.

Kristin Hayes: Interesting. That’s a great recommendation. Thank you again, Nafisa. It’s been a pleasure, and I look forward to talking with you again soon.

Nafisa Lohawala: Thank you so much.

Kristin Hayes: You’ve been listening to Resources Radio, a podcast from Resources for the Future. If you have a minute, we’d really appreciate you leaving us a rating or a comment on your podcast platform of choice. Also, feel free to send us your suggestions for future episodes.

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RFF is an independent, nonprofit research institution in Washington, DC. Our mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. The views expressed on this podcast are solely those of the podcast guests, and may differ from those of RFF experts, its officers, or its directors. RFF does not take positions on specific legislative proposals.

Resources Radio is produced by Elizabeth Wason, with music by Daniel Raimi. Join us next week for another episode.

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