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


Derek Lemoine


University of Arizona - Department of Economics

August 6, 2009

USAEE Working Paper No. 09-022

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.

Number of Pages in PDF File: 26

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Date posted: January 5, 2009 ; Last revised: May 6, 2010

Suggested Citation

Lemoine, Derek, Valuing Plug-In Hybrid Electric Vehicles' Battery Capacity Using a Real Options Framework (August 6, 2009). USAEE Working Paper No. 09-022. Available at SSRN: http://ssrn.com/abstract=1322164 or http://dx.doi.org/10.2139/ssrn.1322164

Contact Information

Derek Lemoine (Contact Author)
University of Arizona - Department of Economics ( email )
McClelland Hall
Tucson, AZ 85721-0108
United States
HOME PAGE: http://www.dereklemoine.com/
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