[Editors] MIT: Alternative vehicles tough sell

[Elizabeth Thomson]

MIT News Office
Massachusetts Institute of Technology
Room 11-400
77 Massachusetts Avenue
Cambridge, MA  02139-4307
Phone: 617-253-2700
http://web.mit.edu/newsoffice/www

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MIT: Alternative fuel vehicles will be tough sell
--But policy incentives will widen use
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For Immediate Release
WEDNESDAY, MAY 30, 2007
Contact: Elizabeth A. Thomson, MIT News Office
Phone: 617-258-5402
Email: thomson at mit.edu

PHOTO AVAILABLE

CAMBRIDGE, Mass.--Imagine a vehicle that runs on hydrogen or biofuels 
and offers the same features, performance and price as today's 
gasoline vehicle. Will it capture half the market? Not likely, 
concludes a new MIT analysis of the challenges behind introducing 
alternative-fuel vehicles to the marketplace. Not even if it's three 
times more fuel-efficient.

Among the barriers: Until many alternative fuel (AF) vehicles are on 
the road, people won't consider buying one-so there won't be many on 
the road. Catch-22.

The researchers' conclusions are not all gloomy, though. If policy 
incentives are kept in place long enough, adoption will reach a level 
at which the market will begin to grow on its own. But "long enough" 
may be a surprisingly long time.

Given today's environmental pressures and energy security concerns, 
we need to move away from fossil-fuel-powered vehicles. But repeated 
attempts to introduce other technologies during the past century have 
nearly all failed. Dethroning the gasoline-consuming internal 
combustion engine (ICE) has proved difficult.

"The challenge is not just introducing an AF vehicle," said 
postdoctoral associate Jeroen Struben of the Sloan School of 
Management, who has been examining the mechanisms behind such market 
transitions. "Consumer acceptance, the fueling infrastructure and 
manufacturing capability all have to evolve at the same time."

Thus, consumer exposure to AF vehicles is just one feedback loop that 
can slow adoption. Similarly, fuel suppliers won't build AF stations 
until they're certain of future demand; but until the fuel is widely 
available, consumers won't buy the vehicles. And manufacturers won't 
be able to make AF vehicles cheaper and better until their production 
volume is high; but high-volume production won't happen until such 
improvements are in place to attract buyers.

And then of course there's the status quo to be overcome-the 
well-established and highly attractive gasoline-ICE vehicle and the 
fueling infrastructure, energy supply chain and other industries that 
support it.

Understanding market behavior

To analyze the behavior of this system over time, Struben and 
Professor John D. Sterman of the Sloan School have developed a system 
dynamics model that simulates how markets for AF vehicles may (or may 
not) grow. The model can track the fate of various vehicle platforms, 
including conventional and advanced ICE, hybrids and plug-in hybrids, 
hydrogen fuel cells and biofuels. Decisions made by consumers, fuel 
suppliers and auto manufacturers change the market, consumer opinion, 
vehicle attributes and other factors, which then feed back to alter 
the decisions people make tomorrow.

Finally, the model accounts for the peculiarities of human behavior. 
"Our model doesn't assume that everybody is a perfectly rational 
economic agent," said Sterman. "Instead, we try to model how people 
actually make decisions such as which cars to buy and when and where 
to drive them. Emotion and social status matter, along with the 
economics." Thus, people's buying decisions may not reflect the 
actual features of an AF vehicle but rather what they have heard or 
read about it. And real drivers who are worried about locating fuel 
for their AF vehicles may fill their tanks early-a behavior that 
reduces the vehicles' effective range and may cause unanticipated 
side effects such as crowding at filling stations.

Analyses to date show that a key factor slowing AF-vehicle adoption 
is the long lifetime of today's vehicles. People buy cars 
infrequently, so it will be a long time before a given consumer is 
exposed to enough AF vehicles to feel comfortable buying one. Even an 
AF vehicle that's as attractive (objectively) as a gasoline-ICE 
vehicle won't catch on without strong and lasting promotion campaigns.

Concern about finding fuel also slows adoption. In a simulation 
representing California, entrepreneurs opened AF stations in urban 
areas but not in less-populated rural areas where demand is initially 
lower. Urban AF drivers must then avoid the rural areas, reducing the 
appeal of AF vehicles and slowing their sales everywhere.

Another counterintuitive result:  Tripling the fuel efficiency of the 
AF vehicle should attract more buyers. But since drivers then need 
much less fuel, energy suppliers build fewer AF stations, lowering 
the appeal of these efficient cars. The net result? Sales may 
actually decline.

Self-sustaining markets

Despite such findings, Sterman sees reason for optimism: There are 
tipping points. With policy incentives that push the new technology 
forward and sufficient coordination across decision-makers, 
eventually enough AF vehicles will be on the road that all the 
decision-makers will buy in and the AF market can become 
self-sustaining.

The researchers are not ready to make policy recommendations, but 
their analyses provide initial insights. They clearly illustrate the 
effectiveness of carbon emission taxes, but they also produce some 
more-unexpected findings. For example, given the importance of 
vehicle lifetime, providing incentives to scrap current vehicles may 
be more effective than direct efforts to get more AF vehicles on the 
road. Likewise, providing subsidies for building AF stations will 
help, but giving bonuses for building and especially keeping them in 
remote areas may be critical.

Most important, for markets to reach the tipping point, policy 
incentives may have to be kept in place for many decades, even 
through periods of declining fuel prices. Withdrawing the policies 
too soon will result in yet another failed attempt to shift the 
market away from gasoline-powered ICE vehicles.

This research was supported by the Project on Innovation in Markets 
and Organizations at the MIT Sloan School of Management, the National 
Renewable Energy Laboratory and Shell Hydrogen.

--MIT--

Written by Nancy Stauffer, MIT Energy Initiative