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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