Why Long Range EVs Can Never Be Cost Effective
by John Petersen
America’s love affair with the automobile has always been based on the freedom of the road and the ability to hop in the car and drive wherever we want to go; be it to the corner store to buy a loaf of bread or out to the lake for a long weekend. Even though most of our trips are short, people invariably want the flexibility to go for a long drive when the open road beckons. Unfortunately, that mentality is disastrous when it comes to EV economics.
I’ve been writing about energy storage issues for several months and discussing a variety of battery technologies that could be used in EV applications. My basic premise has been that advanced lead-acid and lead-carbon batteries are good enough for EV applications and they are far cheaper than their sexier NiMH and Li-ion cousins. My critics have argued that the size and weight advantages of NiMH and Li-ion batteries are essential to the development and widespread acceptance of EVs that have the flexibility we’ve come to expect in an automobile. It finally occurred to me last week that most of the visionaries who advocate the widespread adoption of EVs do not understand that:
• You can have an EV that will travel 100 or 200 miles between charges, but
• You cannot have both in a single package.
It’s a classic economic conflict between capital costs and operating costs. In a conventional automobile, you pay almost nothing for the fuel tank and then pay pump prices for gas when you use it. In an EV, you pay a huge price for the batteries that give you an acceptable travel range and then pay a low price to fill your ‘tank’ with electricity. If you buy more batteries than you use on a daily basis, the breakeven cost of daily travel skyrockets.
In other words, the phrase “cost-effective long-range EV” is an oxymoron and an economic impossibility.
To demonstrate the point, I’m going to become a technology agnostic for a couple of minutes and discuss the basic laws of battery economics. While I will use a pure EV for discussion purposes, the fundamental rules apply with equal force to both EVs and PHEVs. In an attempt to avoid controversy and focus solely on fundamental economics, I’ll work with the following basic assumptions:
• EV Range – 4 miles per kWh of battery storage;
• Battery Cost – $500 per kWh;
• Average Use – 12,000 miles per year (40 miles per day); and
• Comparable Gas Mileage – 25 mpg (480 gallons per year);
The following table shows the battery economics for EVs that have ranges of 40, 60, 80 and 100 miles based on these assumptions. For purposes of the table, I’ve used straight-line depreciation of 10% per year on battery cost, imputed interest of 6% per year on unamortized battery cost, an average electricity price of $0.06 per kWh and annual maintenance savings of $180. The only assumption that varies is the maximum EV range. If you don’t like my assumptions, feel free to change them and re-run the numbers using assumptions you like better.
The table shows that when you cut through the bafflegab, EVs only offer attractive economics if you carefully match your EV range with your daily driving habits. As soon as you start adding EV range that you won’t use on a daily basis, the economic benefits of EVs plummet. You can have an EV that is cost-effective, or you can have an EV that has long range for the weekend, but you can’t have it both ways!
There is an inherent logical conflict in the visionary argument that we need to develop expensive batteries so that we can manufacture a long-range EV that cannot possibly be cost effective. General Motors’ EV1 was a great car that was initially powered by lead-acid batteries. GM ultimately changed over to NiMH batteries because the lead-acid batteries of the day were not robust enough to handle the heavy demands of an EV. In the last decade there have been tremendous advances in lead-acid and lead-carbon technology and we now have a new generation of products that can stand up to the demands of an EV, but can’t provide the elusive 100 or 150 mile range that the visionaries assume everyone needs and wants.
As the EV markets develop, there will undoubtedly be buyers who insist on a long-range EV and are willing to pay a substantial premium for the flexibility. Those purchasers, however, will be a very small minority who don’t need to worry about petty details like monthly budgets, payment books and cost-benefit comparisons. For average consumers that need to stretch a paycheck and balance a household budget, the only sensible EV will be one where battery capacity and daily use are carefully paired to optimize the cost-benefit relationship. Given the basic laws of battery economics, I can’t help but believe average consumers will choose the cost-effectiveness of advanced lead-acid and lead-carbon batteries over the svelte lines and lower weight of their NiMH and Li-ion cousins.
The underlying theme of the Clinton and Obama campaigns was “It’s the economy stupid!” As long as the newly elected policy team in Washington remembers that theme, the market advantage in the energy storage sector will go to lead-acid and lead-carbon battery producers like Exide (XIDE), Enersys (ENS), C&D Technologies (CHP) and Axion Power International (AXPW.OB) who make affordable products for ordinary consumers. Developers of expensive Li-ion batteries like Altair Nanotechnologies (ALTI), Ener1 (HEV) and Valence Technology (VLNC) will then find themselves fighting over the small percentage of the market that doesn’t care about price. If the new policy team forgets that fundamental economics matter in flyover country, the current push for electric automobiles will follow the same disastrous route as ethanol and result in huge capital outlays for feel-good facilities that have no economic value or enduring benefit.
Disclosure: Author holds a large long position in Axion Power International (AXPW.OB), a leading U.S. developer of lead-carbon batteries, and small long positions in Exide (XIDE) and Enersys (ENS).
John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-acid battery research and development.