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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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The Main Challenges For Electric Cars This Decade

Volkswagen (VW), the world’s largest carmaker recently announced plans to spend 35 billion euros to dramatically expand electric vehicle production. VW is targeting production of 26 million electric vehicles within nine years. It seems that its goal is to eclipse Tesla in the electric vehicle (EV) market. What is more VW’s chief executive insists that the company can produce and sell those vehicles at a high profit margin. And that is the big question. Many industry observers have doubts on this score. However, like military adventure that becomes a lost cause, no one doubts the corporate ambition embedded in these capital plans nor the company’s determination to effectively take the lead as a preeminent global EV manufacturer.

Another indication of the move toward vehicle electrification can be found in the Consumer Reports automotive issue. The editors devote far more space to electric vehicles than one might think is deserved given the relatively modest EV sales to date.

In a funny way, both automobile manufacturing and the electric utility businesses face a similar dilemma.. How do they integrate new, expensive battery technology as they seek to decarbonize their product? Whether from tailpipe or smokestack both industries are seeking emissions reductions. And in both cases batteries makes up a very large component of projected capital investment.

In the US, for example, we estimate that relatively rapid decarbonization of the electricity grid might require a $2 trillion investment in battery storage over the next twenty years. In the case of a new vehicle manufacturer like Nissan, for example, a battery alone costs $12,000 and it degrades more rapidly than the internal combustion engine it replaces. Related: Warren Buffett’s Secret For Super Cheap Energy

Grid decarbonization, given the present state of technology, means radically increasing dependence on intermittent sources of energy production such as wind while harvesting and storing the excess energy produced for later use. A site planner today would we believe automatically assume that a large battery array would accompany a new wind farm.

Batteries expenditures alone could account for one third of the cost of decarbonizing the electric grid in the US, a several trillion dollar prospective expenditure. The question the utility industry faces is whether to incur very high capital costs upfront in order to completely eliminate fossil fuel expense. The alternative is to gradually phase out fossil plants while retaining maximum flexibility.

Car manufacturers face the same dilemma with internal combustion powered vehicles. But in the case of VW, it is, as they say in Las Vegas, going “all on” on EVs. This is a much bigger risk for car manufacturers than electric utilities. Electric cars are essentially storage batteries with wheels. Since most vehicle owners prefer to sleep during the night, the grid can avoid much incremental investment if most vehicle owners primarily recharge car batteries at night.

And yes, a vehicle battery recharging infrastructure is not yet available on scale appropriate for 25 - 50 million vehicles. Tesla has 762 charging stations in 47 states. Other companies have more, The Department of Energy figures that there are presently over 30,000 charging stations in the United States. However, if electric vehicle owners in large numbers need to charge up during the day, and during peak periods of electrical demand, then the electric grid will have to have its own relatively high cost storage system. And that duplicates storage, first in the grid and then in vehicles. Luckily, according to Consumer Reports, 80% of charging takes place overnight and mostly in homes. If that were not the case, electric vehicles could go from great opportunity for incremental electricity sales to a big operating headache rather quickly. Related: China Could Start A New Solar Price War

There is still another disruptive type of problem for the carmakers and possibly also for the electric industry. The question is whether technology firms choose to enter the mobility business—making people and goods mobile across varying distances. With the exception of Toyota, none of the automakers have free cash flow even close to the big tech firms. The U.S. electric industry has not had free cash flow for ages. Considering that cars are essentially a battery, drive train and computers, tech firms going into the auto business doesn’t seem like that much of a reach.

Selling electricity to vehicle owners will become a big part of the electricity business. However an entire retail delivery system will also have to be built to accommodate this prospective load. This both an opportunity and a risk. If the technology companies enter this business in scale we would expect them to rapidly move to aggregate load. We doubt the electric industry is ready for this.

By Leonard Hyman and William Tilles for Oilprice.com

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  • Mamdouh Salameh on March 07 2020 said:
    Three major challenges will face electric vehicles (EVs) this decade and the decades after. The first challenge is the trillions of dollars of investment needed to expand the global electricity generation capacity in order to accommodate the extra electricity needed to recharge 50 million EVs projected to be on the roads by 2040.

    The second challenge is the decarbonization of electricity generation meaning a quick transition from hydrocarbons to renewable energy particularly solar electricity.

    The third challenge is the availability of enough recharging stations around the world for the projected 50 million EVs.

    The first challenge is a matter of investments which can be implemented gradually during this century. However, electricity utilities may be able to save a bit of investment if most EV owners are persuaded to recharge their vehicles at night through financial incentives.

    And with the world consuming more than 100 million barrels of oil a day (mbd) and growing, the notion of an imminent energy transition is an illusion. While an increasing number of EVs on the roads coupled with government environmental legislations could slightly decelerate the demand for oil, EVs could never replace oil in global transport throughout the 21st century and far beyond. Even if 50 million EVs were on the roads by 2040, this will only reduce the global demand for oil by 0.53 billion barrels (equivalent to 1.45 mbd) or 1.79% of global oil demand by then.

    The biggest challenge facing a deeper penetration of EVs into the global transport system is the realization that oil is irreplaceable now or ever.

    And whilst EVs are benefiting from evolving technologies, internal combustion engines (ICEs) are equally benefiting from the evolving motor technology. As a result, ICEs are not only getting more environmentally-friendlier but they are also able to outperform EVs in range, price, reliability and efficiency.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Wayne morgan on March 09 2020 said:
    For starters, the statement “In the case of a new vehicle manufacturer like Nissan, for example, a battery alone costs $12,000 and it degrades more rapidly than the internal combustion engine it replaces. “ is woefully out of date. Tesla model S which has been on the roads since 2012 typically get at least 300K miles on their batteries. The new cells will go for 500k miles and in the future, 1 million miles are envisioned. Nissan didn't know what they were doing then. Batteries are now $156/kWhr and dropping, so the battery in Nissan leaf you cite would now cost $3,744 for the 24kWhr battery. So, you'd better update you data.

    As far as comparing degrading, electric vehicles are superior. Many taxis are going to electric vehicles because there is almost no maintenance. ICE cars have 1000+ moving parts. Electric vehicles, about 20. No oil changes (no oil pollution on the streets also, but do you guys care about that?), no fuel pumps, tanks, … And you can fill up an EV at home or at work or when shopping.

    The economics favor the EV in the near future. Fewer parts, lower fuel cost, higher reliability, low maintenance. They're coming and possibly faster than you predict.

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