Sempra Energy gives the electric car a second chance

Sempra Energy global strategyBy Helen Akanisi, Sam Brien, Fikre Gurja, Christian Lorentzen and Jonathan Norberg

In 2006 a popular documentary asked, “Who killed the electric car?” A few years from now when documentaries are asking, “Who brought the electric car back to life?” one of the names tossed around might very well be Southern California’s Sempra Energy. Sempra, a Fortune 500 company and parent to the major electric and natural gas utilities in San Diego and Southern Orange County and a major utilities player throughout the Southwest, has strategically positioned itself in recent months to potentially be a leader in the rolling out of the “smart grid” and electric vehicle (EV) charging station infrastructure which are key to giving new life to a technological dream pronounced dead only a few years ago. Whether or not Sempra is remembered as a savior of the electric car or just another failed attempt in that direction will depend on whether they are able to overcome the technical and financial hurdles that have made the electric car an elusive goal.

The lack of sufficient infrastructure to support large scale adoption of electric cars has been among the primary stumbling blocks preventing the US and other countries from weaning themselves off of gas. Last year, however, Sempra teamed up with ECOtality, producer of the Blink EV charging station, to run a pilot program using a few thousand EVs to determine the additional infrastructure needed before everyone can pick up their own Tesla Roadster without worrying about running out of power on the side of the road and finding themselves with a $50,000 frustration. ECOtality was granted $100 million dollars from the Department of Energy plus an additional $100 million from matching donors to finance the project and subsidize installations.

Sempra’s threefold role in this program is to evaluate the level of electricity demand from EVs and its effect on the existing energy grid, to connect charging stations to the smart grid, and to determine the rate structure. To speed up the distribution of these stations and accelerate the market, Sempra will be conducting wide-scale research on the habits of the few thousand vehicles involved in the ECOtality pilot program. Both by gathering data as vehicles link up to stations as well as through consumer surveys, Sempra will conduct the market research to gain a clearer picture of consumer needs than has heretofore been seen.

The massive implementation of EV infrastructure has been hindered by a number of technical and business issues that have made the industry both complicated and expensive. First, the technical problems.

The technical problem is essentially twofold: no reliable system to charge EVs and not enough electricity in the system for existing needs. Beginning with the first problem, until recently there was little consensus on how to adopt a standard plug technology used for charging EVs. Much like the battle between Sony’s Betamax and JVC’s VCR technologies in the home movie industry during the1980s, the firm whose outlet/plug technology ultimately wins out stands to reap huge profits for years from the patent and distribution rights.

As it stands, two primary technologies appear to have won out in the competition for plug standards. One standard, called CHAdeMO, which gets its name from a Japanese pun on a phrase meaning “lets have some tea,” developed by The Tokyo Electric Power Company in conjunction with Nissan, Mitsubishi, Subaru, and Toyota, is a DC current “fast charger” capable of charging an EV to 80% capacity within 30 minutes, about the amount of time it takes to enjoy a cup of tea. It is this standard that ECOtality, Sempra’s partner, is preparing to install throughout the San Diego area.

The other dominant standard, J1772, developed in conjunction with the Society of Automotive Engineers, rates its charging capacity as either level 1 (1.44 kW) or level 2 (6.7 kW) and lacks the fast charging capacity of the CHAdeMO standard. Depending on which level of charge you receive, it can take between 10 and 20 hours, respectively, to fully charge your vehicle. Sempra made the wise decision to work with ECOtality to install the fast charging stations. Perhaps excluding high school girls, few drivers would willingly like to spend 10-20 hours shopping while your car recharges.

Up until now, the majority of EVs have been operated as short-distance fleet cars for government and large businesses, allowing them to install their own charging stations on site and not worry about finding a compatible station mid-trip. The much anticipated releases of the Tesla Sedan and Nissan Leaf have overcome the problem of compatibility by installing outlets for both standards.

The second technical problem, not enough energy in the system, will be exacerbated by the introduction of thousands of electricity-consuming vehicles, all trying to get their slice of the electricity pie, unless that pie somehow gets bigger. It is for this reason that Sempra is rapidly investing more and more capital into additional sources of renewable energy. In December 2010, Sempra completed construction of the Copper Mountain photovoltaic solar power generator in Nevada. Producing 55 MW, it is the largest functioning solar plant in the country. In addition Sempra, with Arizona’s First Solar, has begun construction of the 500 MW solar farm near Phoenix. Should Sempra be concerned about investing too much for too little returns?

As a utility company and not an automotive engineering firm, Sempra’s primary concern has been with the profitability of the energy distribution and charging stations it has spent so much money on. We believe that the charging stations, and the investment in the alternative energy generation, can in fact lead to a profit for Sempra.

There are two different types of locations where the charging stations can be located: in the home or in front of a company. For either of these locations, depending on the distance from the power grid and other technicalities, it could cost up to $20,000 to install the charging station. ECOtality is able to spend up to $1200 for residential installation from their grant money. However, in fact residents who choose to install a charging station are being 100% subsidized. ECOtality is able to spend up to $1500 to help with commercial installation. For the first 2 years of the pilot program ECOtality can use its grant money to help these hosts, but then the will be on their own. We see opportunity for Sempra to profit from charging stations installed both in residencies and outside of commercial buildings.

Currently in the California energy market there are four different payment brackets depending on how much energy is consumed. One may think of these payment brackets like tax brackets. The different between the 2nd and 3rd bracket is significant, .15 cents per kwh and .32 cents per kwh respectively. Because home owners of EVs will begin to use consume a great deal more power, they are more than likely to be bumped into the upper consumption bracket. The technology supporting the EV grid will make sure of this. Each electric vehicle is electronically registered to its owner (just as you carry your paper registration in your glove box). But the electronic registration will also serve as a identification code when charging. This means no matter whether the car owner charges at home or at any charging station, the energy company will know who to bill.

According to an industry insider consulting with another smart grid pilot city – this consultant has asked to remain anonymous – there is a great deal of money making potential for energy companies by investing in the commercial charging stations. As mentioned above, the stations are not cheap to install and many companies that would like the charging stations to attract their target demographic (think Seattle style coffee shop) can not afford the installation costs. In this case the energy company, Sempra, would install the charging station out of its own pocket, becoming a majority shareholder in the unit.

As a shareholder, Sempra would be able to profit from advertising revenue from each charging unit. Advertisers are expected to like the idea that they can use the EVs electronic identification to select advertisements based on the demographics of the owner. Additionally as a majority shareholder of the charging station, Sempra would be able to decide who will install and maintain the unit. More than likely they would select their own subsidiary SDGE to do this work.

Furthermore as a majority shareholder, Sempra would also own the data collected by each unit. The data would essentially be travelling habits of different kinds of demographics. This information would be very valuable to advertisers, retailers, consumer good companies.

As a last line of defense, Sempra can sleep tight knowing that the government supports this project. Therefore, in case Sempra does begin to loose money on the investment, the government will subsidize the efforts as creating a clean infrastructure is a prominent strategic goal of the Californian and National legislature.

Finally it stands to note that Sempra has also already concluded 25 year contracts to supply energy to other energy company’s from its alternative energy solar and wind farms. Because of the government’s initiatives to encourage green energy, all energy distribution companies must provide power generated from clean sources. Therefore the cost of investing in the solar farms is made up for by such contracts, and Sempra will not have to worry about this loss.

Based on our analysis above, we can conclude that investing in the smart-grid and EV infrastructure is a good strategic move for Sempra. There are many ways (listed above and not yet realized) that the company can generate new revenues and increase market share. Furthermore, it would only be a matter of time that someone else would have set up the charging stations and by laying the infrastructure and taking part in the pilot project, Sempra has essentially bared competitors (California’s Edison and PG&E) from encroaching on its territory.

Sources and further information
Personal interview with Electric Vehicle charging station consultant
Personal interview with Electrical Engineer overseeing charging station infrastructure development……

This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.