Is California’s Low Carbon Fuel Standard Incentivizing Electric Vehicle Deployment?

Under California’s Low Carbon Fuel Standard program, electric vehicle charging can generate credit revenues – for utilities and drivers – to support further vehicle and infrastructure deployment. The 2018 amendment of LCFS introduced capacity-based credits for fast EV chargers and a mandate to establish a statewide point-of-sale vehicle rebate program. These additional financial incentives could prove critical as major EV makers reach the 200,000-vehicle maximum threshold for $7,500 federal tax credits to customers.

The author conducted research and interviews with stakeholders in the EV industry for a project with the Natural Resources Defense Council, aiming to identify the current opportunities and barriers for capacity-based credits and point-of-sale rebates to effectively incentivize electric vehicle use. This research suggests the LCFS program design of capacity-based credits has the potential to increase EV deployment, but that some unanswered questions need to be addressed before the point-of-sale rebate program can do the same.

California LCFS: An Overview

LCFS is a market-based, fuel-neutral policy designed to reduce the average carbon intensity of transportation fuels. Regulated entities with a carbon intensity value above the target level generate deficits, while clean fuel producers can opt in to generate credits. Under LCFS, oil and diesel producers, for example, therefore need to purchase a certain amount of credits from the local LCFS market each year because of their high carbon intensity.

California is the first U.S. jurisdiction to implement such a policy, with a target of 10% reduction from a 2010 baseline in average fuel carbon intensity by 2020 and 20% by 2030. Oregon and British Columbia are two other regions that have adopted LCFS, while several other states in the U.S. are considering the option. 

Ethanol and renewable diesel have generated the most credits throughout the course of California LCFS, at a respective average of $180 million and $120 million worth of credits annually between 2013 and 2017. The electricity pathway has received an average of $45 million credit revenue per year, but has grown more rapidly in recent years and generated $108 million of revenue in 2017 alone. This amount is comparable to EV rebates distributed by California’s Clean Vehicle Rebate Project, which offers an up to $2,500 rebate to EV purchasers and distributed a total of $97 million in rebates in 2017. The credit volume from electricity also increased from 1% of total credit flow in 2011 to 15% in 2018. 

In both California and Oregon, utilities are the main credit generator for residential EV charging credits. Since EV owners are the ones actually investing in the vehicles that ultimately generate credits for utilities, participating utilities currently offer a one-time vehicle rebate for customers who purchase an EV. The amount of the rebates range from $500 to $1,000.

The charging needs of one battery EV can generate around 11.45 credits in its lifetime, yielding a total credit revenue of $1,717 at an average credit price of $150. The $500 vehicle rebate—offered by many California utilities to incentivize customers to help them generate credits—was designed based on a much lower anticipated credit value. The price of LCFS credits in California has been rising steadily over the past decade from $40 to $180.

Capacity-Based Credits

One significant change to the California LCFS through the 2018 amendment is the introduction of capacity-based credits – based on projected capacity of charging infrastructure instead of solely relying on usage – for fast direct-current chargers and hydrogen fueling stations. Interviews with stakeholders in the EV charging, hydrogen fuel and clean transportation advocacy space suggest that California capacity-based credits have strong potential to further boost EV deployment.

The high upfront cost associated with these fast chargers, which could help expand EV use, has been widely recognized as a barrier to their further deployment. The ability to generate capacity-based credits could help infrastructure developers address the high upfront capital need.

The new regulation laid out a set of qualifications for charging stations allowed in this capacity-based pathway. These qualifications intend to incentivize more public charger installations for currently underserved areas or populations as well as to avoid overbuilding of large-capacity stations with potentially infrequent usage. The overall amount of capacity-based credits is limited to 5% of all credits.

Stakeholders of other fuel pathways have voiced concerns about these capacity-based credits making  LCFS no longer technology-neutral. Nevertheless, according to Jeremy Martin from the Union of Concerned Scientists, this change is a necessary step for LCFS both technically and politically. Since most of the current charging credits go toward vehicle rebates or commercial charger owners, fast public chargers should be incentivized through a separate credit stream, according to Martin.

Former California Governor Jerry Brown also specifically mandated that the state’s Air Resources Board scale up EV incentives provided by LCFS, recognizing that LCFS has the potential to help the state to achieve its transportation electrification goal. Therefore, the policy design change was an intentional move towards further incentivizing EV deployment by tackling part of the “chicken and egg” problem – that vehicles need charging stations to be economically viable, and vice versa.

According to Eileen Tutt, Director of the California Electric Transportation Coalition, these capacity-based credits could also attract more private capital into EV charging infrastructure investment. They could help transportation network companies and other larger mobility and logistics providers further electrify their fleet and see more business benefits in investing in charging infrastructure. The upfront claim of LCFS credits could give investors some certainty in their return on investment. Since most public chargers in densely populated areas in California (like San Francisco) are already used at capacity, a safer investment environment could nudge more private investors who have been eyeing the opportunity to actually put in their capital. These zero-emission miles driven by transportation network companies or other private fleets will be additional to what the previous form of LCFS and other EV policies have been incentivizing.

Vehicle Rebate Program

LCFS could provide more substantial EV rebates through the planned statewide point-of-sale rebate program. How to design this rebate program to achieve a high level of transparency and efficiency is still under deliberation, according to interviewees.

The Union of Concerned Scientists estimates that credit volume from the electricity pathway will continue to increase rapidly, from $150 million in 2020 to $700 million in 2030, presenting huge potential for California LCFS to provide a substantial reduction of the cost of EVs. If the 2017 total on-road electricity credit revenue (about $72 million) was used by utilities to provide rebates to the buyers of all the 48,000 battery EVs sold that year, the rebate level would have been around $1,500 per vehicle.

Despite the great potential of LCFS, the current rebate program administered by individual utilities is post-purchase, low in amount and not well advertised. Post-purchase rebates have proven to be a much weaker incentive than point-of-sale rebates, where customers receive an upfront discount from the dealer when they purchase a vehicle. Therefore, the 2018 amendment to California LCFS mandated the shift to a statewide point-of-sale rebate program.

Initial outreach to dealers on a transition from post-purchase to point-of-sale rebates will require a significant amount of time and effort. However, once the outreach to dealers is done, there would be strong incentives for dealers to help distribute rebates. According to Neal Reardon, Director of Regulatory Affairs at Sonoma Clean Power Authority, the cost of EV customer acquisition can be as high as $10,000 per customer for certain dealers. A point-of-sale LCFS rebate would be a great way to attract customers interested in EVs, without costing the dealer significant marketing expenses.

The planned statewide point-of-sale rebate program will pool residential EV charging credits from all utilities and distribute credit revenues to dealerships across the state. A third-party governing board will administer the credit pool and the transfers. A statewide program plays an important role in removing geographic disparities and reaching a broader base of EV customers with a more flexible, resilient credit revenue pool.

However, community choice aggregators and automakers raise reasonable concerns about the transparency and efficiency of a utility-centric statewide rebate. Considering the lack of transparency on how utilities spend the 60% of charging credit revenue that they currently hold back, it is uncertain whether the new statewide rebate program would be transparent about undistributed credit revenues.

Under the new system, utilities will still be able to hold back a portion of the charging credit revenue as they deem fit. For instance, Southern California Edison plans to hold back a small portion of the total credits and potentially use them for second or third EV rebates, since the planned statewide program only covers first-time EV customers. Other utilities may use the held-back credits for general EV infrastructure development. Regulatory requirements to publicize the flow of credits in and out of the statewide rebate fund as well as the use of held-back credits would be crucial for ensuring an equitable distribution of residential charging credits.

The Air Resources Board could also provide general guidance on potential best use of these held-back credit revenues. Vehicle-to-grid technology is an example of commonly applicable and critically important investment. LCFS credit revenue is well suited for promoting this kind of early-stage technology that would be immensely useful for clean transportation in the near future.

Meanwhile, there is inherent inefficiency associated with the process of pooling credit revenues from each utility and re-distributing them to numerous dealers across the state. Utilities are aiming for reimbursing dealers in less than two weeks after the sale of EVs and ideally within five days of sale. Stakeholders suggest that an effective administrative design of this statewide program is necessary to assure smooth and timely flow of credit revenue. Data management is also critical in this case.

In addition, the initial dealer outreach and education efforts could benefit from collaboration with automakers or community choice aggregators who have a preexisting dealer network. The utilities alone may find it challenging to reach a large number of dealerships in an efficient manner.

The Future of LCFS

Stakeholders project that the amended California LCFS design will provide an increasing and significant amount of incentive for EV and EV infrastructure deployment. Both capacity-based credits and the upcoming statewide point-of-sale rebate program significantly expand the capability of LCFS in incentivizing electrification. Nevertheless, in order to create a successful rebate program, the efficiency and transparency of the processes need to be ensured.

The evolution of California LCFS has strong implications beyond its own jurisdiction. Oregon followed the general design of California LCFS, while Washington and other states that are considering LCFS will likely do the same. These states are now hesitant to kick off their policy with a statewide rebate program, since California just initiated this change in 2018. However, lessons learned from California’s individual utility program present a lot of evidence that even an imperfect statewide program – coupled with capacity-based charging credits – would be a better starting point for an LCFS that drives electric vehicle adoption.

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