To say that 2020 was an unusual year in markets would be a vast understatement.
The last year not only went on record for the quickest and deepest bear market decline in history but also saw an unprecedented level of global stimulus, the highest volatility (VIX) on record, negative oil prices, and, thankfully, the fastest recovery from a bear market.
But, perhaps, the biggest megatrend of them all: ESG Investing finally came of age in 2020.
A recent report by clean energy watchdog Bloomberg New Energy Finance (BNEF) proves that the renewable energy sector has remained largely immune to the ravages of Covid-19, with global energy transition investments in 2020 clocking in at a record $501.3 billion, good for 9% Y/Y growth.
Yet, digging deeper into that report reveals that the clean energy boom is heavily lopsided in favor of a single segment: Electric vehicles or EVs.
BNEF analysis shows that both public and private investments in renewable energy capacity came to $303.5 billion in 2020, up 2% on the year, thanks mainly to the biggest-ever build-out of solar projects as well as a $50 billion surge for offshore wind.
The EV sector, however, performed way better, with investments in the burgeoning sector, including charging infrastructure build-out clocking in at $139 billion, good for a 28% Y/Y increase. Meanwhile, the passenger EV market reached an estimated $118 billion representing a four-fold growth compared to 2016 levels.
But here’s the gist in the two numbers: Renewable energy investments have been mostly flat, managing a meager 0.15% CAGR growth over the past five years compared to 20.74% CAGR for electrified transport over the timeframe.
The sector leaders have recorded absurd rallies over the past 12 months: Tesla Inc. (NASDAQ:TSLA) has rallied 438%; NIO Inc. (NASDAQ:NIO) is up 1,105%, Workhorse Group Inc. (NASDAQ:WKHS) has returned 476%, while Fisker, Inc.(NYSE:FSR) has gained 194%.
By almost any yardstick, those are very impressive returns considering the S&P 500 finished 16.3% higher for the year; Yet, a section of Wall Street is now saying that the EV boom is just getting started with bigger things to come.
Wedbush Securities’ analyst Dan Ives has predicted that EV stocks could be up another 40- 50% in 2021.
Another Bull year for EVs?
The current year is already looking like another slam dunk for the EV sector, with the Global X Autonomous & Electric Vehicles ETF (DRIV) having rallied 13.6% YTD compared to 3.3% gain by the broad market.
But Dan Ives says this year will not be all about usual suspects such as Tesla and NIO.
The Wall Street analyst says the ocean is now big enough for more than one boat.
Indeed, Dan Ives says the EV market is set to grow from $250B in 2020 to a staggering $5 trillion by 2030, good for nearly 2,000% growth in the space of just a decade.
There’s a method to this madness, though.
Falling battery costs
At a time when the Covid-19 pandemic continues to decimate the global transport sector, the EV trajectory has remained incredibly bullish. S&P Global has reported that global EV sales expanded an eye-popping 43% in 2020 to reach 3.24 million units. In sharp contrast, global light vehicle sales are estimated to have tanked 20% last year, with sales in the United States declining 14.7% to 14.5M units, the lowest level since 2012.
Yet, despite the robust growth, only 4.2 of 100 new vehicles sold last year worldwide were of the electric type.
Whereas many buyers cite sustainability and environmental concerns as some of the most compelling reasons for switching to an electric vehicle, high initial costs of EVs still act as a leading deterrent.
EVs’ higher sticker price can primarily be blamed on expensive batteries, bearing in mind that powertrain costs make up ~70% of an EV’s initial costs.
The biggest catalyst for the global EV sector is this: The sector is close to a “tipping point” of mass adoption thanks to falling costs.
Batteries and the EV powertrain make up 70% of the cost of an EV. Luckily, the cost of lithium-ion batteries has dropped dramatically since 2010 and is expected to continue to do so. To illustrate the point, consider that back in 2010, the price of an EV battery pack was $1,160/kWh (USD) compared to 2018 average price of $176/kWh. Related: Oil Prices Falter On Colossal Crude Inventory Build
BloombergNEF has forecast the cost will be nearly cut in half to $94/kWh by 2024, and then to just $62/kWh by 2030.
The International Council of Clean Transport sees Tesla Inc. (NASDAQ:TSLA) getting there first, reaching $100/kWh by 2022 thanks to its NCA-based battery pack technology as well as due to better economies of scale thanks to its higher production volumes compared to its peers.
Source: International Council of Clean Transport
In fact, Bloomberg had predicted that EVs would achieve upfront price parity with ICE vehicles as early as 2022. The current health crisis will probably knock that back a few years, but it’s almost certain to happen in the next few years.
Further, advances in battery tech are not only lowering costs but could also help to boost range and charging times--both key considerations by buyers.
Source: West Monroe Partners
Whereas many buyers cite sustainability and environmental concerns as some of the most compelling reasons for switching to an electric vehicle, the potential fuel savings remain a major factor while the high initial costs of EVs act as a leading deterrent.
This sounds like bad news in this era of low oil prices since paying significantly less at the pump is likely to act as a disincentive for people looking to make the switch.
However, the reality is that oil prices would have to fall really low before they can begin to challenge electricity as a low power source.
According to AAA fuel price data, the average motorist is paying just $2.73/gallon of regular petrol, more than 90% higher than what the average EV driver is paying for charging costs across the country.
It would take oil prices to fall to unprecedented lows and stay there forever for ICE running costs to become competitive with EVs.
That, however, is a pretty tall order given that oil prices have more than doubled from recent lows, with most analysts predicting a slow but sure rebound.
But ultimately, the fact that the United States has rejoined the Paris Climate Accord means that the transport sector--the biggest contributor of GHG emissions--is going to become a major focal point of the clean energy drive. This fact alone implies that the EV sector is likely to see major investments in the U.S. and globally over the coming years.
By Alex Kimani for Oilprice.com
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