One of the major obstacles standing in the way of widespread adoption of electric vehicles is the limited range offered by current battery technology.  While battery capabilities have improved in recent years, those who need to drive very long distances still have “range anxiety” concerns due to the prospect of being stranded with a dead battery.  BYD will introduce the all-electric e6 model with a 200 mile range in the United States in the near future, although exact timing is uncertain.  The Chevrolet Volt, to be introduced later this year, uses a gasoline powered generator to supplement the electric motor’s meager 40 mile range, but the car is likely to be a niche product due to its high cost.

Shai Agassi, CEO of Better Place, has a different approach that may be gaining some traction.  Better Place is promoting the concept of automated battery swapping where drivers will pull into a service station and exchange their depleted battery for a fully charged unit.  The concept is similar to conventional refueling and reportedly takes less than one minute.  However, the capital required to build this infrastructure will be massive and battery ranges must still improve in order to make the process viable for long road trips.

According to an article in today’s Financial Times, Better Place is planning to aggressively roll out the battery exchange concept in Israel.  Better Place has partnered with Renault to build vehicles that are equipped with swappable battery units.  The Renault Fluence ZE is capable of a 160 km (100 mile) range.

Viable Concept for Israel …

It is easy to see why Mr. Agassi has picked Israel as a pilot market for the battery exchange concept.  The country is relatively small and most trips are likely to be less than 100 miles to begin with making it possible for many customers to recharge using conventional electric outlets.  On the occasions where recharging is not practical, battery swap infrastructure could be strategically placed in locations within the small country.  Presumably few drivers within Israel venture on road trips beyond the country’s borders due to the unstable political climate in the region.  Israel seems tailor made for Mr. Agassi’s battery swap concept.

But Probably Not Elsewhere …

Whether the concept is scalable for larger countries is an open question.  Better Place has a business model that is capital intensive and relies on establishing a recurring revenue stream from customers who lease batteries and pay a service fee when battery units are swapped.  In order to achieve scale in a country such as the United States, Better Place would have to invest in a massive infrastructure and rely on standardization that would allow exchange units to work with a variety of vehicles.  Furthermore, a 100 mile range between exchanges is far less desirable than a typical 300 t0 400 mile range for a conventional gasoline powered vehicle.

Battery Improvements May Sink Business Model

The Better Place concept also relies on establishing price parity between electric and conventional vehicles by having customers lease battery units rather than having them bundled into the cost of the car.  High costs for batteries is one reason vehicles like the Volt are not competitive without massive subsidies (and even then, they are priced far higher than conventional vehicles of similar size).  The problem with the Better Place model is that  eventually battery technology may advance to the point where range is more competitive with conventional gasoline technology and unit prices decline due to the efficiencies gained through mass production.

In a hypothetical scenario where an electric car in the year 2020 can deliver a 250 to 300 mile range and can be coupled with a Volt-like range extender, the economics of the Better Place business model could quickly erode.  Since it is foreseeable that battery technology will improve and prices will decline over time, Better Place may have trouble attracting sufficient capital to invest in a massive network of battery exchange stations that may become obsolete in the not-so-distant future.

Disclosure: The author of this article owns shares of Berkshire Hathaway, a 10% owner of BYD.