The law of unintended consequences is at work in China’s somewhat haphazard formation of electric vehicle policy. I call it haphazard because let’s face it, the plan has some holes in it and has progressed by fits and starts and occasional backward moves.

Talking recently with a friend whose company works with bus companies in China on EV technology, I heard about an unintended consequence of the section of the EV subsidy policy that defines the all-electric distance needed to qualify for some government largesse.

If you are from California you are very familiar with the “compliance” car. Automakers produce and sell in small volumes various types of zero-emission vehicles to meet the state’s strict emission control standards. In California, the compliance cars are produced to avoid fines. My friend told me that local governments in China are producing “compliance” EV buses to get subsidies!

Here is how it works. In order to qualify for the central government’s subsidy, which is up to RMB 250,000 for PHEV buses, a vehicle must be able to travel at least 30 kilometers on pure electricity. That distance, and the necessary battery size, was chosen, it seems, because it is not too expensive. Not cheap, but at a cost the central government figured was bearable. Another large expense associated with a fleet of plug-in electric vehicles is, however, a network of charging stations.

Some local governments have found an easier and cheaper way to qualify for the subsidy, a method that does not involve any pure electric propulsion or the need for a network of charge posts. Here is how it works: The local governments install a battery and a super capacitor on their diesel-powered buses. A super capacitor can store and discharge energy very quickly. They are often used on hybrid buses for storing energy created by regenerative braking.

On these compliance buses, the battery pack is built to the minimum spec to go 30 km on a charge. There is a connector socket on the side, or at least what appears to be a connector socket. That is never used, however. The bus is driven like a regular hybrid bus, never on pure electric power. “The main thing the battery does is allow the engine to be downsized,” my friend said. That cuts costs.

The battery is recharged while the bus is in operation, but that occurs using the diesel fuel. The battery can, as my friend put it, last forever. And while the fuel economy does improve on the hybrid bus, it is still running mainly on diesel.

Why did the government make the all-electric bar so low – 30 kilometers – that it could be met by in effect cheating? Because the policy was made using the crossing the river method. The battery is the major cost in an electric vehicle. The 30 kilometer battery was a compromise. It wasn’t that costly and still replaced liquid fuel use (when used properly). Of course, adding the super capacitor was an additional cost. But the super capacitor was small enough that the additional cost wasn’t that great, my friend figures.

Charging stations also hit by LOUC (Law of Unintended Consequences)

Another big area of cost savings under this scheme is the elimination of the need for a charging network. Charging stations for buses have to be very powerful, roughly four times the power of Level 2 charging in the U.S., my friend said. They are expensive. By producing the “compliance” buses the local governments eliminate the need for that expense, at least for now.

My friend is optimistic, however. He figures that the central government will eventually see that its current policy is ineffectual and will make the requirements for pure electric range much stiffer (that will be the next stone…).

“The thinking in the bus companies,” he figures, “is that someday, if the government changes its regulation and ups the range requirement, at some point it is going to be cost effective to use the battery. Otherwise they are hauling around 4,000 pounds of dead weight.”

That is charitable. The local governments have saved themselves money by fudging their PHEV buses and also by not building out a charging network. If they need to produce buses that have a longer pure electric range, they will cross that bridge when they come to it. Or throw down that stone.

Of course, the news lately is that the central government will throw 100 billion RMB towards funding a charging infrastructure. That may encourage some of the local governments to build out charging networks since they can nab some government funds to do that. Then they can continue to use their compliance E buses as hybrid buses and save costs on recharging.

According to the Ministry of Information Industry Technology, in June 673 commercial plug-in hybrid vehicles were produced in China, a more than four-fold increase compared to the same month in 2013. Production of commercial battery electric vehicles in June rose 85 percent to 362 units. How many of those were true PHEVs, however, and how many were in fact compliance PHEVs?

Meanwhile, true hybrid production plummets….

The latest EV policy does not subsidize regular hybrid vehicles. A consequence, perhaps unintended, perhaps not, of this omission, is that production of actual hybrid commercial vehicles has virtually ceased. And while foreign and Chinese company executives told me last year that they expected hybrid subsidies to eventually be announced, that has not occurred.

The slowdown in hybrid bus production has had a huge impact on the China sales of Maxwell Technologies, Inc. The San Diego-based company produces super capacitors, which is another name for an ultra-capacitor. Its China sales of super capacitors are down 50 percent to $25 million in the first half of 2014 compared to the same period in 2013, Mike Sund, vice president of communications and investor relations at Maxwell, told me.

Now wait a minute, you say, shouldn’t Maxwell’s sales go up if what Frank is saying is true? My best guess is that there is no need for a super capacitor of the quality that Maxwell produces to make a hybrid bus appear to be a PHEV. Also, the number of compliance buses being produced is no doubt small.

China is down on regular hybrid buses because Toyota owns most of the intellectual property associated with hybrids and China doesn’t figure it can make any breakthroughs in that area. Plus Chinese companies might end up paying to use Toyota-owned technology. So why subsidize them?

Another law of unintended consequences result. Regular hybrids do improve fuel economy and thus could be a stepping stone to China’s goal of reducing dependence on imported fuel. Indeed, some Chinese officials even called hybrids an interim step to full-electric vehicles. That step wasn’t big enough to warrant government support, apparently.

Let’s see if the latest subsidy bone the government is throwing the PEV sector has positive results i.e. more charging networks. And if that actually increases the number of PEVs on the road, both commercial and private.

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