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Electric Drive – Still Crazy After Five More Years

John Petersen

The sunshine, lollipops and rainbows electric car press was at it again in mid-March. This time they were gushing over a $3,800 report from Pike Research predicting that automotive lithium-ion battery prices will fall by more than one-third by 2017. According to Pike, the market for Li-ion batteries for transportation will grow from $2.0 billion annually in 2011 to more than $14.6 billion for 28 million kWh of batteries by 2017. For those without a calculator handy, the figures work out to a future industry average price of $520 per kWh in 2017 versus a current industry average price of $780 per kWh.

At the outset it's probably worth observing that the Pike forecast of 28 million kWh of annual battery sales by 2017 is a good deal more aggressive than last summer's forecast from Lux Research that estimated 2017 lithium-ion battery demand at 12 million kWh in their $200 oil price scenario, 3 million kWh in their $140 oil price scenario and under 2 million kWh in their $70 oil price scenario.

3.25.12 Lux Graph.png
Where Lux is forecasting a massive glut of lithium-ion battery manufacturing capacity for at least a decade, Pike apparently believes the capacity glut will only punish manufacturers for five years. Neither scenario strikes me as particularly attractive for investors in battery manufacturers like A123 Systems (AONE) which is struggling to find customers for 645,800 kWh of government financed battery manufacturing capacity and suffered $45 million in unabsorbed manufacturing costs last year.

Regardless of whether you prefer the Pike or the Lux forecast, electric drive will remain hopelessly uneconomic because small batteries are beautiful when it comes to transportation economics but large batteries are aggressively ugly.

To prove the point again, I'm going to assume that Pike's numbers are correct. I'm also going to assume an annual average fuel consumption of 330 gallons per year in a 37.8 mpg CAFE compliant 2017 model year passenger car and:
  • A $10 gasoline price;
  • A $1,000 per kWh pack level price for high power HEV batteries;
  • A $500 per kWh pack level price for automotive grade EV batteries;
  • A $300 per kWh pack level price for the lower quality batteries used by Tesla Motors (TSLA); and
  • Fuel savings of 27% for a Prius, 75% for a Volt and 100% for an EV.

I don't believe for a minute that these assumptions are reasonable, but they do align well with the happy talk forecasts one encounters regularly in the mainstream media, political speeches and industry puff releases.

My first table summarizes the battery specifications for six electric vehicles, the cost of the battery pack and the annual fuel savings based on incremental fuel efficiency. The vehicles include the Prius HEV from Toyota Motors (TM), the Volt PHEV from General Motors (GM), the Leaf EV from Nissan Motors (NSANY.PK) and three levels of the Tesla Model S.

Vehicle Capacity Per kWh Pack Cost Fuel Savings
Prius 1.3 kWh
$1,000.00 $1,300 $897
Volt 16 kWh
$500.00 $8,000 $2,475
Leaf 24 kWh
$500.00 $12,000 $3,300
Model S-160 40 kWh
$300.00 $12,000 $3,300
Model S-240 60 kWh
$300.00 $18,000 $3,300
Model S-300 85 kWh
$300.00 $25,500 $3,300

My second table summarizes the incremental battery investment, or IBI, and incremental fuel savings, or IFS, for each step up the electrification ladder from a conventional vehicle to a Prius, from a Prius to a Volt, from a Volt to a Leaf and from a Leaf to three levels of Tesla Model S. It then calculates incremental fuel savings as a percentage return on the incremental battery investment, or ROIBI.

Vehicle IBI IFS ROIBI
Prius $1,300 $897 69%
Volt $6,700 $1,578 24%
Leaf $4,000 $825 21%
Model S-160 0%
Model S-240 $6,000 0%
Model S-300 $7,500 0%

The first thing that caught my attention was that a Tesla Model S, regardless of battery pack size, won't save the average user any more fuel than a Nissan Leaf. So the incremental battery investment of $6,000 to $13,500 has nothing to do with saving fuel and simply represents the incremental cost of range anxiety. There are a lot of folks who know they can't live with the range limitations of a Leaf, so they'll have to pay through the nose if they want electric drive and a car that suits their needs with the same set of tires.

The second thing that caught my attention was that even with $10 gasoline and sunshine, lollipops and roses battery cost figures, the ROIBI falls a cliff as soon you move beyond the Prius. I guess that's why Bill Reinert, Toyota’s US manager for advanced technology is frequently quoted for gems like these:

That’s the first law of Disney — wishing will make it so. I see it all the time from those Palo Alto types. They think the whole world is like a computer company, and they’re always trying to recreate the dot-com economy.

I used to be a big 100-miles-per-gallon guy. But I realized that we’re above the level of diminishing returns at 50 miles per gallon. So why not make a whole bunch of 50-miles-per-gallon cars and put people who are driving 20-miles-per-gallon cars into them?

"The expectations have always been too high for electric cars. The realities have always been clouded by the dreams. I like to say it’s the first law of thermodynamics versus the first law of Disney."

No matter how you analyze the facts, the economic realities of electric drive do not and cannot match the hype. Vehicle electrification that goes beyond the minimalist approach of a Toyota Prius is inherently expensive and wasteful. The only consumers that will ever buy the absurdity are the philosophically committed or the mathematically challenged. Tying a pink bow around the EV pig's neck does not change the fact that it's a pig and investors who hurry to invest their money in response to the hype will almost certainly lose that money when reality sinks in.

Start-ups and brash entrepreneurs like Elon Musk are always exciting. Experienced investors understand the grim reality underlying Paul Graham's Startup Curve.
3.25.12 Startup Curve.png
It won't be long before a new generation of Tesla investors learns the same lessons that prior generations of investors learned in the thrilling panacea energy solutions of yesteryear including Ballard Power (BLDP), Pacific Ethanol (PEIX), Vestas Wind Power (VWDRY.PK), First Solar (FSLR) and, of course, A123 Systems.

Disclosure: None



was posted on AltEnergyStocks.com.


       

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Comments

John,
I applaud your attempt to focus on the marginal benefits of including additional batteries in a vehicle. But I have two suggestions:

First, I think your results would be clearer if displayed in a graph, rather than just as a table.

Second, I think you need to refine your assumptions to make them more realistic. I don't think this will change your conclusions, but it might make your calculations more persuasive.

1) you implicitly assume that all drivers are created equal, and so your fuel savings are based on average vehicle use. However, EVs and PHEVs are economically more appealing (or less unattractive) to people who drive a lot. Further, drivers will select the higher range versions of the Model S only if they anticipate needing the extra range: people who typically only take short trips (and hence drive less) will select lower range variants than drivers who frequently take long trips (and hence tend to have higher annual driving distances.)

There *is* a gain to higher range: the vehicle can be used by a larger population of drivers, who typically drive more.

In short, average driving distances are inappropriate to evaluating the effectiveness of electric drive and battery technology in saving fuel.

Even when we are just talking about hybrids, I know several people who were considering buying them (my father and girlfriend just to name two) but who decided against, but who decided against because the gains from driving a hybrid were not sufficient because of their driving habits and lower gas prices at the time (neither drove much, and they did mostly highway driving when they did.)

Hence, to the extent that we assume car purchases are motivated by economics (and all your arguments are based firmly on this assumption), we have to assume that hybrid and EV buyers self-select in a way that makes the vehicle they choose more effective at saving fuel than it would be for an average driver.

Hence, I think you need to upgrade your fuel savings assumptions across the board, especially for the high-range EVs. I also think your 75% fuel savings for the Volt are low for the same reasons.

My suggestion would be to increase your fuel savings assumptions by the following amounts:
Prius 10%
Volt 25%
Leaf 30%
S-160 30%
S-240 40%
S-360 50%

You'll probably still find that you'll feel EVs are uneconomic, but I don't think the numbers are nearly as stark as you make them appear in this analysis.

One other tweak you should make is to deduct the savings from removing the ICE from incremental cost when you make the transition from PHEV to EV.

Tom,

My Prius number came from comparing their 50 mpg rating with the 2017 CAFE standard. Since the most common figure I've seen for PHEVs is a 75% reduction in fuel consumption, it seems far more sensible to follow the crowd instead of striking out on my own.

While I agree that it would be fascinating to make different driver behavior assumptions for each vehicle class, every step I take away from verifiable national averages dilutes the underlying logic and gives readers an opportunity to focus on my assumptions rather than the issues.

Articles like this one are always lightning rods and my House of Cards piece from early January is now over 1,000 comments on SA. I don't need to give people any more room to kvetch.

Some people (like myself) leave comments on your articles *because* there are logical errors, not because your logic has been "diluted."

Yes, your underlying logic is *simpler* than my own, but it is also less accurate.

Just as your argument has advanced when you switched from using the average fuel savings per kWh of battery to using the marginal savings from added extra batteries, so would your argument advance when you move from modeling your fuel savings on average driver behavior to the behavior of those drivers who actually use the vehicles.

Warren Buffett says it's better to be approximately right than precisely wrong. Your attachment to "verifiable national averages" is a clear example of valuing precision over accuracy.

It's funny to see you defending inaccuracy in favor of precision because of fear of a few (or even a few thousand) ill-thought out comments on Seeking Alpha.

In the Bernstein-Ricardo Black Book I wrote about last fall, they included a "cost walk" that eliminated the costs of engines, transmissions and fuel systems, and then added back in the costs of electric motors power electronics and charging equipment and batteries.

Electric drive is significantly more expensive than internal combustion drive before you add the batteries. So the adjustments you're suggesting would only make the EV comparisons worse.

Things are bad enough for electric drive as they stand. I don't need to make them any worse for the sake of a little more accuracy.

I don't agree that I've made logical errors. I haven't included all the adjustments that you might like to see but as you've already pointed out, modest changes in assumptions won't change the outcome. Changing assumptions might increase the precision in your view, but I can guarantee that there plenty of people who will argue the contrary and I'm fed up with the debating society.

In terms of the cost-walk, it may indeed make EVs look worse, but it will also make HEVs look worse relative to EVs... and your conclusion has long been that HEVs are the superior technology.

I did not say that the adustments I suggest won't change the outcome, I only said that they won't change *your* conclusion.

The adjustments I suggest are only the purely economic adjustments. I don't believe (as you seem to) that fuel savings are the only factor which makes electric drive attractive.

I personally have not decided how attractive/unattractive EVs are when all such factors are included, so an honest analysis of the economic factors would be useful to people like me, who are trying to make an informed decision.

I appreciate the economic analysis--its very important. I do not own any stock in electric vehicles.
Still, I suspect that electric car sales will surpass ICE sales in the future. The current high tide of disdain for EVs is likely to be forgotten eventually, but I do not know how long that may take or what companies will be around to benefit.

I appreciate early adopters who are buying these cars. They are paving a road for the rest of us toward a better future of electric mobility. My appreciation is driven by my understanding of the risks of climate change.

EV economics are currently bad--but getting better as gas prices rise and fewer people invest in cars that will sit at rest 90% of the time.
Anyone care to research and publish an article on the economics of the electric bus?

Tom,

I've never suggested that EVs are a superior technology. To the contrary I believe they're an impossible technology to implement in a resource constrained world. The economics do not and cannot work. The only solution that really makes sense is changing behavior to reduce waste.

It may be possible to construct scenarios where heavier users of EVs will derive a more attractive return, but my experience with batteries tell me that heavier use will only add another cost variable in the form of more frequent battery replacements. It's a stretch for me to assume that a battery will hold up for 10 years at 12,500 miles per year. I don't believe for a minute that a battery will hold up for 10 years at 25,000 miles per year. While I'd love to be able to do a complete analysis that accounts for all potential variables, it becomes absurdly complex by the time you account for the secondary impacts of those variables. This is a blog, not a book.

Me,

Our world produced 2 metric tons of energy resources last year for every man, woman and child on the planet. It only produced 8.4 kg of nonferrous metals.

If we could magically eliminate all use of nonferrous metals in applications beyond energy substitution, there wouldn't be enough metals on the planet to make a dent in energy consumption.

We might be able to build a few hundred thousand or even a few million EVs, but we can never build hundreds of millions of EVs because the metal supplies aren't available. Since EVs aren't currently economic, won't be economic in the future, and can't be manufactured at relevant scale, the entire exercise is a colossal waste of time and money.

It's not a pleasant truth, but it is an undeniable truth.

John,
I think you mis-read my comment. I said you think hybrids (HEVs) are the superior technology.

Tom,

You're right. I misread your comment. Sorry for the confusion.

Brian,

Changing battery costs will change the ROIBI numbers up or down, but it won't change the relationship between the numbers.

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