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Alice in EVland Part III; Cost Benefit Analysis For Dummies

John Petersen

Sometimes I think bloggers like me are the real dummies. We spend so much time delving into the minutiae of a stock or sector that we manage to obscure the big picture with too much detail. I've certainly been guilty of that particular flaw over the last couple years and want to offer an apology to readers I've confused rather than enlightened.

Yesterday a reader sent me a copy of a presentation that Exide Technologies (XIDE) used in its December 2010 Investor Meetings. The slide on page 6 of the presentation did a great job of separating the wheat from the chaff on the subject of vehicle electrification and clarified my thinking on several points I've been trying to make for a long time. Using Exide's presentation data as a guide, I'm going to see if I can finally nail down the economics in terms everybody can understand. I'm sure we'll hear from those who don't want to understand in the comment section.

The following table summarizes the operating capabilities, incremental costs, expected fuel savings and expected CO2 emissions abatement of the leading vehicle electrification technologies. For the baseline case I used a new car with 30-mpg fuel economy and anticipated usage of 12,000 miles per year, which works out to a basline gasoline consumption of 400 gallons per year. The numbers aren't spot-on accurate, but they're certainly in the right range. Since subsidies distort comparisons by shifting the cost of consumption from the buyer of a plug-in vehicle to the taxpayers who pay for the subsidies, I'll ignore them for purposes of this article.

1.20.11 Electrification Table.png

My next graph uses the table data to show the comparative capital cost of leading vehicle electrification technologies per gallon of annual fuel saving and per kilogram of annual CO2 abatement. You can download an Excel file with the calculations here.

1.20.11 Cost Graph.png

It doesn't matter whether you use fuel savings or CO2 abatement as your preferred metric. Vehicles with plugs simply can't deliver anywhere near the bang for the buck that their simpler and cheaper hybrid cousins offer.
  • In the four hybrid categories, the average capital cost per gallon of annual fuel savings is $24 and the average capital cost per kg of annual CO2 abatement is $2.24.
  • In the two plug-in vehicle categories, the average capital cost per gallon of annual fuel savings is $46 and the average capital cost per kg of annual CO2 abatement is $7.25.
Cars with plugs may feel good, but until somebody repeals the laws of economic gravity they will never be an attractive fuel savings or emissions abatement solution.

Lead-acid batteries from Exide and Johnson Controls (JCI), supercapacitors from Maxwell Technologies (MXWL) and lead-carbon batteries from Axion Power International (AXPW.OB) are the only rational choices for stop-start systems and micro-hybrids. Lux research has recently forecast global production of up to 34 million vehicles per year by 2016. Since the growth of stop-start and micro-hybrids is being driven by pollution control and fuel economy regulations in Europe, the US and elsewhere, it's as close to a bird in the hand as most investors will ever find.

Mild and full hybrids have historically used NiMH batteries for their electric drive functions and lead-acid batteries for their starters. Unfortunately, the "M" in NiMH is the rare earth metal lanthanum and production restrictions in China will limit global ability to ramp NiMH battery production until alternate sources of lanthanum come on line. Due to the rare earth metal crisis, I'm convinced that mild and full hybrids will be a competitive market where lead-acid and lead-carbon batteries vie for a share of the down-market offerings while lithium-ion batteries and supercapacitors vie for a share of the up-market offerings. Since design and production decisions will ultimately be made by the automakers, I won't even try to forecast potential market penetration rates for the competing technologies.

Lithium-ion batteries from A123 Systems (AONE), Ener1 (HEV), Altair Nanotechnologies (ALTI), Valence Technology (VLNC) and a host of foreign manufacturers are the only technically feasible choice for plug-in vehicles. Since the basic economics of plug-in vehicles don't make sense to me, neither do the basic economics of their manufacturers and battery suppliers. I'm sure we'll hear from commenters who hold different views.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.



was posted on AltEnergyStocks.com.


       

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Comments

Correct me if I'm wrong but in your excel document you've assumed that $1 = 1 gallon of fuel (in most of Europe a gallon is about $9) and that 1kg of CO2 abatement = $1 which is actually a gross overestimation of the price of CO2. You ignore costs of unburnt hydrocarbons, NOx, CO and other exhaust gases of regular cars.

Using this figure EVs make a lot of sense for anyone paying over $5 a gallon (ignoring any CO2 savings) on this simple model (we've ignored electricity costs of charging the thing!)

You also state that the extra price to pay for a full EV is $18,000, going by the Leaf (excluding subsidy) and comparing that to, say, a VW Golf then the difference is a lot less - more like $12,000.

This brings down the break-even value to $3/gallon

You include generation emissions in plug in versions. This all depends on the makeup of the electricity supply industry. Indeed some consumers could choose to buy power from purely emission free sources (nuclear, wind, solar etc) rendering your calculation useless.

Since mass market EVs are new technology then it would be silly to expect similar prices at the outset compared to a well-established industry.

I don't have a motive either side here but at least getting the figures right could contribute to a well-informed debate.

My mistake for not reading closely enough.

It makes no sense whatsoever to include the cost figures in your calculations.

Besides the mistaken points regarding the costs etc I made above - there are still some things to be said:

Obviously the cost of CO2/kg is pretty low, but so is the price.

EVs are new technology so need to become orders of magnitude cheaper before they make sense to the American consumer.

However, in order to get those efficiencies then they need to have a mass market presence hence the logic for government subsidy?

I don't mean to spam the comments - but one final comment on the calculations:

The gallons saved etc are per year costs, and the extra price for an EV is a one off?

If that's the case then all an EV has to do is last 10 years and then it makes sense to a consumer paying $4.50/gallon?

The driver in these calculations is obviously the extra price of the car - where did these figures come from?

I'm sorry Will but you're wrong.

My spreadsheet takes the cost of upgrading a car from a simple ICE to each level of electrification. It then divides that cost by the number of gallons you'll save each year from the upgrade, and the amount of CO2 you'll abate each year from the upgrade. Using those values, I've calculated a capital cost per gallon of gasoline and a separate capital cost per kg of CO2 because the CO2 abatement costs change when you add a plug.

Regardless of what the price of gasoline is, you will always pay twice as much for your gasoline savings when you add a plug to the mix.

The same holds true for future reductions in the cost of plug-ins, unless you're willing to assume that plug-in costs will drop from economies of scale but the costs of stop-start and micro, mild and full hybrids won't.

The important point to remember in all of this is the target market for plug-ins is people who would otherwise buy an HEV. The advocates like to use SUV numbers for comparison, but those are not the people who are going to pay up for eco-bling.

Mr Peterson: Just a clarification request on your very well written article and analysis. I understand the conclusion is based on a capital cost evaluation (i.e., the cost to acquire the capability/service - moving from point A to Point B). However to complete the analysis wouldn't the life cycle cost (operation and maintenance) of the capability/service need to be accounted for. For example if we compare a car using an internal combustion engine (ICE) and a car using an electric motor (EV) we can assume the only difference acquisition cost is the cost of the propulsion system - the rest of the car (the glider - seats, windows, radio,etc)is equivalent. Lets assume the ICE propulsion cost is about $2,000 (engine block, accessories, exhaust system, emissions equipment, fuel system, etc.) and the cost of the electric propulsion system is your $18,000 (motor, controller, battery, cables, etc.) At 30 mpg the cost of the fuel for the ICE at $4.00/gal for your 12,000 miles would be $1,600. Let's assume the cost of maintenance is $400/year (mainly because it makes a nice round number of $2,000, year.) The EV "fuel" cost would be about $600 per year (assuming $.15/kWh, a 25 kWh battery, and an 80 mile delivered range). Let's assume for argument sake that there is no maintenance on the EV propulsion system (no oil changes, filters, etc). If we use a 10 year ownership, the ICE car would have a total cost of $22,000 ($2,000 for the propulsion system, and $2,000 for operations and maintenance for 10 years) and the EV would have a total cost of $24,000 ($18,000 for the propulsion system and $6,000 for the operation and maintenance). Not a huge difference. So wouldn't the EV stack up well compared to the ICE as a viable alternative? (BTW this analysis breaks down in year 11 when the battery needs to be replaced unless batteries cost less than an engine rebuild 11 years from now.)

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