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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Tesla Downgrades Recharging

  • Tesla's decision to fire the staff in charge of its recharging network is a major setback for the proliferation of electric vehicles.
  • Without a ubiquitous charging network, electric vehicles will remain limited in market share.
  • Ignoring the transportation evolution to EVs and the associated charging network needs means opting out of the growth opportunity of a lifetime
Tesla Fleet

Tesla just fired the staff in charge of its recharging network? No explanation. Best explanation: recharging stations lose money. There’s a chicken and egg problem here. You can’t sell electric vehicles without them. Or perhaps this is an accounting problem. Yet fear of being stranded without a place to recharge may be the most powerful reason not to buy an electric vehicle.  Without a ubiquitous charging network, electric vehicles will remain limited in market share. Shouldn’t the developers of the vehicles underwrite recharging until the market enlarges? Tesla had led the way to create a recharging network. Ford, last year, signed up to use the Tesla recharge stations, so the Tesla turnaround is troubling. The Biden administration is pouring money into recharging while the biggest recharge station owner is running away? What is missing from this picture?

Let’s go back in history. When the auto pioneers in the previous century started manufacturing internal combustion cars, they did not create networks of gas stations. Entrepreneurs like John D. Rockefeller saw the opportunity because these newfangled vehicles represented an entirely new market for petroleum products. Get the message? The fuel suppliers built up a service station industry. It took about 20 years for gasoline sales to exceed kerosene sales. But it happened. Now, on to today. Shouldn’t we expect the suppliers of electricity to jump on the opportunity to encourage the sales of electric vehicles (which will eventually consume about 30% of electricity produced), to take an active role by building up a charging industry? Why are they waiting for the government, or Tesla, or whomever to develop it for them? This seems like one of the most spectacular opportunities for the electricity business since the invention of air conditioning, right? Related: Governments Deliver Blow To EV Darlings

How much might this type of charging network cost? We did some rough calculating. Let’s say that every electric car charges once every two-three days. And that each charger is used 10 times a day while automakers sell 1.5 million electric vehicles a year. Roughly speaking, the 1.5 million cars require 50,000 chargers. Based on estimates we have seen, those chargers would cost about $1.5-$2.0 billion. Add on the need for grid upgrades and the bill exceeds $5.0 billion. (These numbers are rough but we think realistic.) The electricity industry now spends close to $200 billion per year in capital expenditures. A full scale charging buildup would barely make a dent in these numbers. McKinsey recently estimated that a charger station would lose about $50,000 pretax per year at current levels of business, or about $2.0 billion aftertax for the 50,000 chargers. But the electricity provider would earn an after tax profit selling power to the charging station, which might exceed $10,000 per year/per station, or $0.5 billion. So the potential after tax loss from each annual increment to the  national charging network sums to around $1.5 billion  at this early stage of the EV industry,  The utility industry’s annual earnings exceed $40 billion. The economic losses from an EV charging network looks like a small downside investment with initial losses that would decline as volume and EV penetration rose. But an investment with considerable upside that could propel the industry to a new level, as they say.

So, what is the US electric utility industry spending its capital (investment) dollars on? Building up the rate base upon which shareholder earnings are based. Any company presentation or brokerage analyst’s report inevitably contains the following observation: “Rate base will increase by x % a year.”  Whether productive or unproductive doesn’t really matter because rate base is rate base and a higher rate base equals higher earnings. Maybe if regulators could put EV chargers into the electric utility’s rate base, the industry might take note. Imaginative regulators and imaginative utility executives could figure out how. Or are we expecting too much from a staid industry with a regulatory environment to match?

Let’s take a step back and recall that the US electric utility industry chose as its literal spokesman a climate change denying official from the Trump administration. It seems to us that the industry's executives are sitting on their hands, waiting for Donald Trump to return to office and relieve them of any and all environmental obligations. Why do we think this? Because the US electric industry continues to behave in a manner that suggests the best energy transition for consumers is from coal to natural gas regardless of the long-term environmental consequences. It’s almost as if they regard CO2 as a four-letter word. Why do we care? Ignoring the transportation evolution to EVs and the associated charging network needs means opting out of the growth opportunity of a lifetime. Instead, the industry's executives appear to satisfy themselves with “bread and butter” rate base growth, thinking that continuing to do the same thing as before in a changing environment is not without risk. The former titans of the power industry—Edison, Insull, Sporn, Lilienthal and Lee—would be mortified to see how their successors eschewed great challenges in favor of comfortable incrementalism. But of course they wouldn’t understand. None of them had MBAs. 

By Leonard Hyman and William Tilles for Oilprice.com

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Leave a comment
  • DoRight Deikins on May 09 2024 said:
    «But of course they wouldn’t understand. None of them had MBAs.»

    Ouch!

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