Electric Vehicles: Imminent Breakout or Breakdown?

The media flavor of the day is “Peak Oil Demand.” It’s being predicted due to plummeting battery costs for electric vehicles, which are on the verge of reaching a point where electric vehicles become competitive with internal combustion vehicles, resulting in a drop in oil consumption.  Bloomberg New Energy Finance believes they will be as cheap as gasoline cars by 2025, and the New York Times says “Electric Cars’ Breakout Could Be Near.”

But wait, there’s more. The leading entrepreneur has been “appearing on TED talks, being featured in the New York Times, on the cover of Wired Magazine…”  He has deals in Australia, is working with major electronics companies, and has been raising huge amounts of funds while promising to make “electric vehicle grids a reality” and “to sell electric cars like cell phones.”

Oops, my bad. I used a perverse search engine called “Gargle” and the previous paragraph is about Shai Agassi, founder of A Better Place, which proposed to build stations that would robotically swap out vehicles’ battery packs instead of recharging them. His effort was widely heralded in the media, notwithstanding the obvious, and enormous, challenges. Its failure despite the optimism of so many goes to show that a large grain of salt should go into reviewing press reports and corporate aspirations.

Of course, skeptics abound (including on Bloomberg), but they are derided as resembling the 1980 report that predicted there would be only 900,000 mobile phone subscribers by 2000. Which is a good point, although the analogy is a bad one.  (Phone technology, in terms of memory, technology, and price, has advanced by orders of magnitude, while the 12 volt battery in the average car is only marginally improved from three decades ago.)

But that doesn’t mean that past failures and irrational exuberance prove this episode of enthusiasm for electric vehicles is just as irrational and likely to fail.  Electric vehicles are much improved in the past decade and batteries have become much cheaper.  Much is a key word, and all too vague while “cheaper” leaves unsaid “but still expensive.”

There are some metrics available, including the recent report that GM is paying only $100/kwh for the batteries for its new Bolt.  Except that is apparently the cost per cell, not the battery pack, and it hasn’t been confirmed.  Other manufacturers are said to be paying $195/kwh and Elon Musk allegedly promised a price of $250/kwh for a large utility scale battery installation in South Australia, but, as Forbes’ Rod Adams notes, that probably translates into a total cost of $500-600/kwh. (Several writers have also argued Musk appears to be overstating the savings from his just-announced solar shingles.)

Battery costs have certainly fallen, if as reported they are $195/kwh and that isn’t another misreading of the evidence.  Because while there are sources that show precise battery costs over the past decade or so, most reports give a broad range.  In a 2015 Nature article, Bjorn Nykvist and Mans Nilsson found that estimates for battery costs in 2012 were from $300-$1100/kwh, depending on the source.  Because there isn’t an open market for battery packs, most of the “data” is from media reports.

 

Which raises an awkward question:  if costs have declined so rapidly, why haven’t electric vehicle costs dropped?  Tesla’s Model S 70 has 70 kwh of battery power, which should cost around $30,000 just a few years ago, and the savings from cheaper batteries should be at least $10,000, but the vehicle’s price hasn’t changed.  The Nissan Leaf, which has been on the market longer, has also seen no change in price.  Possibly, manufacturers were absorbing losses on their early sales to build market share, but a little evidence would be nice to have.

Another point of skepticism concerns the widely held belief that once battery prices reach a certain level, usually said to be about $100/kwh, electric vehicles will be competitive with petroleum vehicles.  This appears to be an urban legend, frequently cited but I can’t locate the origin of the claim.  And the boosterish talk of a shift to “transportation as a service” by RethinkX’s James Arbib and Tony Seba is wildly speculative.  Tokyo has a first-class mass transit system, the world’s best taxi service, terrible traffic, and expensive registration and parking, but automobile registration is 2.7 million in a city of 9 million.  Clearly, automobile ownership has its own attraction.

The ‘tipping point’ is coming soon, between the introduction of the Tesla Model 3 and the phasing out of U.S. federal subsidies for electric vehicle purchasers.  If the EV-optimists are correct, there will be no serious market hiccup and sales of EVs will soar in the U.S.  More likely, I think, is that demand from early adopters of the Model 3 will be filled and sales taper off, leaving the company with an underutilized factory and heavy debt.

Which also raises the possibility that lithium-ion batteries will see a major price drop because of manufacturing overcapacity.  China is said to be building capacity for one million batteries a year, and combined with Tesla’s Gigafactory, the world could be awash in batteries sold at distressed prices.  (More work for trade lawyers.)  And while this might boost electric vehicle sales, albeit briefly, a glut of batteries still does not solve the electric vehicle’s other problems, namely poor range and long charging times.

So, it appears more likely that electric vehicles will continue to be a niche, and luxury, market for the time being, probably until a new battery technology is developed.  And we’ll have another sequel to “Who Killed the Electric Car?”  I’m ready for my close-up, Mr. DeMille.

 

Michael Lynch , Forbes