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Valuing Plug-In Hybrid Electric Vehicles' Battery Capacity Using a Real Options Framework

Abstract:
Plug-in hybrid electric vehicles (PHEVs) enable their drivers to choose whether to use electricity or gasoline, but this fuel flexibility benefit requires the purchase of additional battery capacity relative to most other vehicles. We value the fuel flexibility of PHEVs by representing the purchase of the battery as the purchase of a strip of call options on the price of transportation. We use a Kalman filter to obtain maximum likelihood estimates for three gasoline price models applied to a U.S. municipal market. We find that using a real options approach instead of a discounted cash flow analysis does not raise the retail price at which the battery pays for itself by more than $50/kWh (or by more than 15%). A discounted cash flow approach often provides a good approximation for PHEV value in our application, but real options approaches to valuing PHEVs� battery capacity or role in climate policy may be crucial for other analyses.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Electricity – R&D and Emerging Technologies; Electricity – Policy and Regulation

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
O32 - Management of Technological Innovation and R&D
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Plug-in hybrid electric vehicles, Real options, DCF, Gasoline, Battery prices

DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No2-5


Published in Volume 31, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.