Across the United States, vehicle fleets are beginning to electrify. McKinsey estimates that there will be about ten million fleet electric vehicles (EVs), both battery electric and plug-in hybrid, by 2030.1 Meanwhile, utilities are managing multiple issues related to the integration of variable sources of renewable power, such as solar and wind. The total energy consumed by EV fleets is expected to be approximately 50 terawatt-hours, or 1 percent of total US energy consumption.2 Generating the necessary power will present few, if any, challenges. On the other hand, delivering that amount of power at the times and speeds needed will put pressure on the grid, especially on distribution infrastructure. The batteries in EV fleets offer unique potential to address these challenges.
EVs as part of the solution to rising electricity demand
The power grid—the network of transmission and distribution wires and substations that move power from generation to consumption—is designed around the existing consumption curve and its typical peaks in demand. EVs could sharpen those peaks and create problems. For example, a distribution feeder in a neighborhood where personal-EV adoption is high might suddenly have a peak load during weekday evenings, when EV owners tend to charge their vehicles. That peak could overload the circuit during those hours and necessitate substation or conductor upgrades that cost more than the revenue from incremental electricity sales. This could raise rates for everyone.
Utilities spend billions of dollars each year on infrastructure upgrades to help manage power flow, including local peak increases. Batteries in EVs have the potential to help significantly reduce these expenses by balancing the load curve to reduce stress on the grid—using vehicle batteries or vehicle-to-everything (V2X) technology (see sidebar, “Defining V2X and other vehicle-generated-energy terminology”).
There are several ways in which the battery in an EV can provide value to the grid in a V2X use case. Each offers unique benefits across energy cost reductions and added revenue. This article focuses on the potential from fleet applications in a V2X setting, outlined below. It is worth noting that the residential use case of vehicle to home is also very promising.
Backup capacity programs use EV batteries as energy storage for low-frequency power discharge at high-value times when electricity is most expensive. Grid programs for backup capacity can be either ad hoc, with power supplied in response to demand (a demand response program), or provided to the grid per a contracted payment for capacity during times of critical supply–demand mismatches (a capacity fixed program). EV fleets can also leverage their batteries for power resilience at their own facilities, known as private backup.
Rate-optimization programs use the energy stored in a vehicle to buffer energy demand and reduce the utility bill for the building to which the vehicle is connected. One type of rate-optimization program is energy arbitrage, in which energy purchased from the grid is sold back to the grid at prices that align the cost of electricity with the time of day it is used, with higher prices for electricity used in times of higher demand. This rate schedule is known as time-of-use energy pricing. Alternatively, rather than selling energy back to the grid, an EV fleet could send energy to its building during high time-of-use pricing and realize energy savings for the overall facility. In sending energy to a building, an EV fleet could reduce energy demand and related charges. This approach, called peak shaving, sends the fleet’s energy discharge to the building during load peaks, potentially lowering the site’s monthly peak power demand and the associated cost.
Bidirectional ancillary services help maintain the grid balance between energy production and consumption. A frequency-regulation service program offers the opportunity for an EV owner to receive ad hoc payments in exchange for short-interval electricity pushes to or pulls from their EV’s battery, which is used to balance supply and demand on the grid. While similar to frequency-regulation programs, reserve capacity programs can involve a grid’s use of EV energy over a longer time frame to provide balance during periods of unanticipated high energy demand or low energy production. This is one way to help address the challenge of intrahour energy forecasting that grid operators face.
V2X revenue potential for fleets
To estimate the revenue potential for V2X, McKinsey considered three primary variables: location, use case, and fleet archetype. The location of the fleet determines which utility and independent service operator (ISO) serve the fleet customer, and therefore determines what kinds of V2X applications are available to fleets and at what compensation rates. The V2X use cases considered include backup capacity, rate optimization, and ancillary services. The time and capacity needed for each use case vary widely. Fleet archetypes were used to model behavior of different fleets to explore the range of revenue potential across fleets. Archetypal fleet behaviors play a role in when and how it is most efficient to conduct V2X charging.
In this analysis, a heavy-duty truck (HDT), medium-duty truck (MDT), and school bus in Southern California Edison’s territory showed the potential to earn $7,000 to $12,000 per vehicle annually across V2X use cases (Exhibit 1). HDT, MDT, and school bus fleets can take advantage of large vehicle battery capacities and direct-current (DC) fast-charging infrastructure to maximize revenue and savings derived from V2X. School bus fleets are ahead of commercial-vehicle fleets in exploring V2X implementation; various pilots in California, Massachusetts, and elsewhere have yielded positive results.
Four key insights from the analysis
Our analysis and modeling resulted in four noteworthy insights regarding the potential value of V2X and the array of considerations and circumstances that influence use cases for fleets.
1. The value per EV can vary as much as tenfold across utility and ISO regions
The availability, program structure, and market rates of V2X programs vary widely across utility and ISO regions. The differences in revenue potential depend on both the utility serving the region and the ISO that the utility operates under. McKinsey estimates that V2X value pools for an EV school bus, for example, could range from $1,000 to $2,000 per EV annually in Georgia and from $15,000 to $16,000 in Virginia.
As shown in Exhibit 2, V2X potential cannot be quoted as a uniform value for all EVs. Depending on their location, some fleets may realize significant gains in total cost of ownership from V2X and build their EV infrastructure around it. For other fleets, the benefits of V2X may be limited. Values are based on existing rates in the early phase of V2X and could change if V2X is implemented at a larger scale.
2. Battery capacity and charger power are critical to V2G revenue potential
Earnings from vehicle to grid (V2G) depend greatly on how much (battery size) and how quickly (charger power) energy can be sent from an EV to the grid. A sensitivity analysis across V2X factors that included battery capacity, charge and discharge speed, charger-to-vehicle ratios, and dwell time during grid peaks showed that battery capacity and charge and discharge speed are the most consequential factors: a 10 percent increase in capacity or speed yields an approximately 10 percent increase in revenue.
While capacity and charger power are critical macrofactors, their relative importance varies by V2X use case. In frequency regulation, energy is rapidly pushed to and pulled from the battery in short intervals. Consequently, charger power is the most critical factor for frequency regulation. On the other hand, battery capacity is central to energy arbitrage, in which the amount of energy supplied is the driver of revenue. Overall, both charging power and battery capacity can act as binding constraints under different circumstances. For example, an EV with low battery at the end of the day will likely have constrained battery capacity, while an EV with greater spare capacity might instead be limited by speed of discharge.
3. Capturing V2X revenue potential creates trade-offs with optimizing charging infrastructure
Today, the cost of transitioning to an electric fleet is considerable. Fleets are designing their charging infrastructures and charging profiles to minimize capital expenditures and optimize operating expenses. This approach suggests that fleets should maximize charger-to-vehicle ratios and reduce charger speeds as much as possible. These decisions can have a meaningful impact on demand charges and other operating expenses as well as on the up-front capital expense. Fleet operators must evaluate how much they might earn with V2X and decide whether the price premium for bidirectional or faster DC chargers is worth the potential revenue.
Exhibit 3 illustrates the trade-off between investing in more chargers and investing in faster chargers to access V2X revenues. For example, a California school bus fleet in one scenario would not generate enough V2X revenue to justify more 19-kW chargers. Conversely, the additional V2X revenue in upgrading from a 19-kW charger to a 50-kW charger fully offsets the cost of the upgrade. The calculations and decisions vary widely based on fleet makeup, behavior, and location.
4. Frequency regulation could generate substantial revenue, but questions remain
For fast-charging fleets, frequency regulation presents a particularly compelling business case. In California, a 50-kW charger in an electric bus could earn more than $5,000 annually per vehicle from frequency regulation alone. The potential is even greater in PJM territory,3 where market rates suggest the same electric bus and charger combination could earn up to $17,000 annually per vehicle by participating in frequency regulation.
Frequency regulation helps manage the grid in real time by responding to rapid signals—either sending energy back to the grid or absorbing energy—and is paid based on power output (rather than energy) through a competitive market auction. While frequency regulation holds considerable potential, there are many uncertainties around it. First, frequency regulation markets are rich but shallow. Only a few gigawatts (less than ten gigawatts) of frequency regulation capacity is needed across the United States at any given time,4 and many stationary storage projects are already under construction or are operating to access that market. Second, many concerns related to battery degradation remain. The minimum amount of capacity required to participate differs by market and is likely to change over time.
Given the unpredictability of revenue streams, how to underwrite a potential business case remains unclear.
What will it take to enable widespread V2X adoption?
With the accelerating penetration of EVs in commercial- and personal-vehicle markets, the opportune time to bring V2X to market is at hand. But the building blocks of V2X programs are still unformed and highly fragmented. In discussions with EV and charger OEMs, utilities, ISOs, regulators, software players, and fleet operators, McKinsey identified four key enablers for widespread V2X adoption, presented below in order of importance.
1. Reliable and relevant pilots
Although selected pilots for V2X exist, they mainly involve school buses. Industry stakeholders agreed that more pilots with greater diversity of geography, use case, and vehicle types are needed to prove the business case and cash flow potential. A key enabler of this would be increased interest and participation from utilities nationwide, with utilities engaging and working with the industry to deploy pilots.
2. Certified, cost-competitive V2X hardware
Not many certified bidirectional chargers are currently available, though additional players are engaged in the certification process. This lack of availability could hinder V2X adoption, given that many fleets are already electrifying and making purchasing decisions about chargers. Additionally, bidirectional chargers remain significantly more expensive than similarly rated unidirectional DC chargers. To reduce costs while increasing charger availability, more V2X chargers need to be deployed to reach scale. The government could provide support in the form of incentives specifically for V2X hardware.
3. Industry standards
V2X requires communication across a series of stakeholders, including OEMs, charging companies, and utilities. While several protocols and standards exist, the ecosystem lacks a clear, universal standard to ensure a seamless and secure transfer of data and information. Universal, standardized communication standards among OEMs, utilities, and chargers are needed to accelerate V2X adoption and build trust among all involved parties.
4. Predictable rate structures and stable future outlook
ISOs and utilities across the United States have widely different rate structures, which means that an EV fleet trying to forecast future cash flows faces meaningful uncertainty. There is no guarantee that rates or compensation for V2X will remain at current levels, creating uncertainty about future compensation for fleet operators. To encourage adoption, utilities could offer compensation plan guarantees for the length of the typical operation of a DC charger.
V2X players will need to work together on each enabler to align their visions, timelines, and points of cooperation to build a functioning ecosystem and encourage investment in the technology.
V2G will likely play an important role in the future of EVs in the United States as a new revenue stream for fleets and an opportunity to strengthen the utility sector and reduce its capital burden. Given the complexities and multiplicity of variables surrounding implementing V2X in the United States, it is reasonable to anticipate that V2X markets will be localized rather than national.