Why Australia is likely underestimating the benefits of electric vehicles

Australia’s federal government recently committed to legislating New Vehicle Efficiency Standards, or NVES. Many consider this a key milestone in the transition to electric vehicles – as it’s a policy that has successfully catalysed electric vehicle (EV) markets in many other countries.

To decide what targets will sit behind the NVES, the government conducted a cost-benefit analysis of several policy options that lead to different rates of EV uptake.

The analysis considered a range of key factors. For example, as of 2024 EVs cost more to purchase than combustion engine vehicles, but tend to have much lower running and maintenance costs over their lifetime.

It also considered factors such as the cost of replacing EV batteries over time, as well as the health and emissions benefits of EVs compared with combustion engine vehicles.

However, it excluded a very important category of benefits – those arising from integrating EVs into our electricity grid.

Forecasts from the Australian Energy Market Operator’s central Step Change scenario estimate that EV ownership could increase tenfold in the next five years, exceeding 1 million vehicles in the eastern states alone. In the next five years, it’s expected to exceed 5 million.

But these vehicles aren’t just a cleaner and more efficient form of transportation – they’re also batteries on wheels. And there’s a lot you can do with 5 million batteries on wheels.

In the UK, for example, there are about half a million electric vehicles on the road (or 2.8% of all vehicles). And when they’re not on the road, they are plugged into charging points in homes or workplaces.

Energy companies have worked out that they can pay customers to change the time at which their vehicle is charged. Charging can be turned off when demand on the grid is high, such as the early evening, and resumed when demand and electricity prices are lower. This is often called deferred or delayed charging.

This can offset the need for expensive gas generators to run during peak times, which reduces energy costs for all consumers. In fact, if this approach to charging could be coordinated across the UK’s current electric vehicle fleet, Bloomberg New Energy Finance found that EVs could provide more flexible capacity than all of the UK’s gas peaking generators combined.

This is a simple example of how EVs can provide services to the grid, and it works with the one-way chargers that are commonly sold with EVs today. Two-way, or bidirectional charging, will unlock even more opportunities.

The top five EV manufacturers selling in Australia today all either support bidirectional charging, or plan to include it in their upcoming models.

Owners will need to install a bidirectional charger in their home, which are expensive – up to $10,000. But as with any new technology, they’re expected to come down in price as demand increases. A US manufacturer is targeting a price point of US$1,500 for its upcoming charger.

Bidirectional charging enables a suite of new services, categorised as:

• Vehicle-to-load (V2L) – where the EV battery is used to power a specific load, such as an appliance, or even a winery;
• Vehicle-to-home (V2H) – where the EV battery functions as household storage and;
• Vehicle-to-grid (V2G) – where the EV battery exports energy back to the grid.

Collectively these are described as V2X, and the financial benefits they could unlock are significant.

They range from residential bill management (simply charging your battery when electricity prices are low, and discharging at times when they are high), to technical services such as balancing frequencies in the electricity grid, to avoiding the need to build new network infrastructure or gas peaking plants. These are all part of what IEEFA describes as the ‘Swiss Army knife’ of grid services that DER can provide.

IEEFA estimates that based on revenue streams available today, an individual household with a V2X-enabled EV may be able to earn $1,000 to $3,700 a year.

However, the full theoretical “stack” of V2X revenue could be even higher. Analysis by RACE for 2030 found that, if the full potential of all revenue streams from V2X services could be accessed by households, an EV could earn up to $879 a year in revenue for each kilowatt of battery capacity.

To fully realise these benefits, our electricity market will need to be equipped with the right regulations, standards and market settings to take advantage of V2X.

This requires changes such as allowing V2G charging in electricity distribution networks across Australia (something that has been allowed in South Australia since 2022).

It also means ensuring that customers can be compensated for the wide range of services their EVs provide. While early adopters of V2G technology have shown that it’s already possible to earn a profit by discharging to the grid when the wholesale electricity price is high, there are still barriers to consumers accessing markets for some of the technical services EVs can provide – such as frequency control and wholesale demand response. Markets to reward EV owners for displacing the need for new network or generation investments don’t yet exist.

Nonetheless, a window of opportunity has opened that could bring improved regulations, standards and market settings.

Federal and state energy ministers are producing a Consumer Energy Resources roadmap, that aims to develop the reforms needed to integrate small-scale energy resources into the energy system, “maximising the benefits and opportunities of increasing EV usage”.

The Australian Energy Market Commission is also progressing changes to the National Electricity Rules that target improved integration of Consumer Energy Resources. This includes recent changes to integrate price-responsive resources in the NEM, and a proposal to unlock CER benefits through flexible trading.

So why does this matter for the New Vehicle Efficiency Standards?

The current approach to setting NVES targets favours a “middle ground” policy option that will bring Australia’s vehicle fleet emission in line with US targets by 2028. A faster uptake option is considered that would bring forward and then exceed these targets – however its benefit-to-cost ratio, a key deciding factor, was found to be marginally lower (2.96 versus 3.08).

This benefit-cost ratio does not consider any of the benefits of integrating EVs into the grid even though we know these could be significant for all energy consumers (not only EV drivers). As many of these benefits grow proportionally with the number of EVs on the grid, this likely means that the true benefit-to-cost ratio of a scenario with faster uptake of EVs is being understated. Faster uptake of EVs may well work in the best interests of Australians.

Consumer Energy Resources, including EVs, have rightfully emerged as a key priority for governments and market bodies. It’s critical that our transport policies recognise and support this priority.

This article first appeared in The Driven. 

You can read IEEFA’s submission to the New Vehicle Efficiency Standards consultation here.