Part 2: A primer on the broader effects of vehicle electrification – who pays the electricity piper?
In the first part of this two part series, we looked at how Electric Vehicle battery prices can't be expected to fall forever. In part two, we look at the broader implications and opportunities produced by the growth in EVs, including the need for ongoing government support.
Other than the advent of EVs, there are many issues and implications of the broad societal push towards carbon reduction and clean renewable energy:
1. Vehicle electrification, different technology paths - Hybrids, PHEVs, FCEVs, BEVs
• 100% Battery Electric Vehicles (BEVs) are not the only game in town - relatively cheap add-ons to internal combustion engine (ICE) cars such as hybrids are being mass manufactured by the likes of Toyota. Prices have come down enough that mainstream customer adoption of hybrid options is likely to grow as an economical way to reduce their gasoline consumption.
• Plug-in Hybrid Electric Vehicles (PHEVs) offer the ability to pack a smaller battery to provide sufficient range for short trips, say 60 to 70 kilometres, before switching to an internal combustion engine for longer trips. So far, there has been insufficient market demand for PHEVs to justify scale production that would lead to competitive production costs, because the early adopter market has in effect skipped directly to pure BEVs. In theory however, it is a good stepping stone alternative for consumers, particularly in cold weather climates that tend to cut into battery range.
• Hydrogen Fuel-Cell Electric Vehicles (FCEV) can be refuelled as quickly as traditional gas and diesel vehicles - provided hydrogen stations are available – and hydrogen fuel cells carry a much higher energy density than lithium ion batteries. They are significantly lighter for equivalent range, allowing more freight to be carried in trucking applications.
2. The roll-out of charging infrastructure
• In our view, a widespread roll-out of charging infrastructure is needed to alleviate anxiety over EV’s range and allow carmakers to offer cheaper EVs with smaller batteries that will be more price competitive with mass market vehicle models. Until then, EVs may have to carry heavier and more costly battery packs to provide sufficient range to satisfy the car buyer. This is likely to make it cost prohibitive on an unsubsidised basis for the mass market car buyer.
3. Who pays for the infrastructure?
• It has been estimated that in Europe, if all passenger cars became electric overnight, this would equate to a 25% increase in annual electricity consumption. While less likely given the cost and disadvantages of heavy batteries, if all trucks, buses and vans also shift to electric as well, this would lead to a 40% increase in electricity consumption. Regardless of how it turns out, these numbers are unlikely to be reached for many decades to come, given the turnover of the existing global fleet of vehicles will take significant time.
• There remains materially spare capacity compared to the theoretical output of existing power generation fleet, at least in Europe, and time-of-use pricing is likely to be used to shift electricity consumption into off peak hours. However, on a global level it is clear significant investment in charging and electricity distribution infrastructure, as well as new power plants, will ultimately need to be made and be borne by consumers in the form of higher electricity bills and tax dollars.
• It is too early to tell what the ultimate mix of power generation will be. This will likely differ significantly depending on country, and current forecasts can easily change as technologies and political preferences develop. To the extent that countries choose to significantly increase the renewables as a portion of the power generation mix, electricity rates have tended to rise to reflect the higher costs. As an example, Germany’s electricity prices are highest in all of Europe and have increased over 50% since 2006.
4. Other policy support initiatives
• Where EV adoption has been very strong, such as Norway and California, there were often other incentives stimulating EV sales. In California there are zero emission tax credits for automakers that promote the sale of EVs, and EV car buyers are able to access carpool lanes. In Norway, EV buyers had bridge and highway toll exemptions until last year and in the city of Oslo they can access free parking, free charging and carpool lane access.
• Gasoline tax is also used to fund the road infrastructure in the USA and with EV owners bypassing this tax, government will need to find alternative ways to fund the repair and maintenance of the road network.
Battery prices have fallen significantly in recent years and has given rise to great enthusiasm over the rapid displacement of internal combustion engine vehicles. Our research, however, suggests the pace of declines are set to slow within a few years as the benefits of production scaling reach a point of diminishing returns, and purchase price parity is likely to take longer than many currently believe .
In our view, the purchase cost competitiveness of EVs and mainstream adoption of EVs remains highly reliant on a multi-pronged approach to policy to promote EV sales over traditional cars in the form of tax credits, subsidies, regulations around mandatory emission reduction targets for automakers and investments in charging and power infrastructure.
Investment Analyst, PM Capital
- Bloomberg NEF forecast of 2022 purchase price parity cross-over point for large vehicles in EU, April 2019
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