Smart Charging of Electric Vehicles: An Innovative Business Model for Utility Firms

Problem definition: By providing an environmentally friendly alternative to traditional vehicles, electric vehicles will transform urban mobility, particularly in smart cities. In practice, after an electric vehicle is plugged in, the charging station completes charging as soon as possible. Given that the procurement cost of electricity and associated emissions vary significantly during a day, substantial savings can be achieved by smart charging—delaying charging until the cost is lower. In this paper, we study smart charging as an innovative business model for utility firms. Academic/practical relevance: Utility firms are already investing in charging stations, and they can achieve significant cost savings through smart charging. Methodology: We consider a mechanism design problem in which a utility firm first announces pairs of charging price and completion time. Then, each customer selects the pair that maximizes their utility. Given the selected completion times, the utility firm solves the optimal control problem of determining the charging schedule that minimizes the cost of charging under endogenous, time-varying electricity procurement cost. We assume that there are ample parking spots with chargers at the charging station. Results: We devise an intuitive and practically implementable policy for scheduling charging of electric vehicles under given completion times. We prove that this policy is optimal if all customers arrive at the station simultaneously. We also characterize the optimal pairs of charging price and completion time. By using real electricity demand and generation data from the largest electricity market in the United States, we find that cost and emissions savings from smart charging are approximately 20% and 15%, respectively, during a typical summer month. Managerial implications: In contrast to the current practice of charging vehicles without delay, we show that it is economically and environmentally beneficial to delay charging some vehicles and to set charging prices based on customers’ inconvenience cost of delays. We also find that most of the savings from implementing smart charging can be achieved during peak-demand days, highlighting the effectiveness of smart charging.