Are electric vehicles cost-competitive?

The biggest risk to the thoughts I have presented on energy costs are the assumptions about the cost of batteries.

Battery costs have been shrinking at 20% per annum for the last few years.

  • If that cost improvement continues for the next 5-10 years then disruption for the energy sector will have arrived.
  • If it slows to 10% then we are talking 15-20 years.
  • If battery costs stop falling then there is a bullish case for energy prices.

The FT and BCA Research are taking the bearish side of the electric vehicle argument:

[paraphrasing] Electric vehicles are still much more expensive than petrol cars for the average person

No argument from me on that one – although I still contend that for commercial vehicles doing 100,000km per year that the costs are very close to even

[paraphrasing] The cost of a battery pack (which houses the batteries and has wiring/cooling/electronics) is unlikely to decline any more than the cost of other car parts and so real world battery costs aren’t falling

I find this argument a little weak – manufacturing the world over sees scale benefits. Manufacturing 10,000 units of just about anything is much cheaper per unit than manufacturing 100. Their claim that battery costs aren’t really falling seems strange, I’m going to look more into this as it flies in the face of every other source.

[paraphrasing] Electric vehicle manufacturers understate the battery pack replacement costs as they know no one will take them up. If you bought a Bolt with an 8 year warranty on the battery, after 8 years would you spend almost $16,000 on a battery, plus labour or would you just buy a new car?

It’s an interesting observation but doesn’t add anything to the argument. No-one is buying a new car because they think the cost savings in year 8 are going to be great.

BCA’s analysts suspect the industry is being far too optimistic about how much better batteries are getting year to year. The view that batteries are getting longer lasting, they say, flies in the face of what every consumer has experienced with mobiles phones, notebook computers or any other cordless device.

It is entirely possible that everyone is too optimistic about battery improvements. I find the anecdotal suggestion that “because my iPhone 8 has a similar battery life to what my iPhone 2 had” disingenuous. The battery life is the same because of all of the added features – streaming videos and GPS use a lot of battery.

But I agree that this is the major assumption that needs to examined.

Frustratingly for the EV industry perhaps, if durability did indeed get significantly better, there would still be a cost: prior-generation EVs would plummet in value.

Nope. Don’t buy this argument. In the early 2000s a flat screen would set you back $15-20k. 5 years later they were down to $2-3k. Did anyone consider going back to an old cathode TV because they were worried about the re-sale value of their flat screen?

But the biggest threat to the economics of batteries may, ironically, come from increasing demand for EVs.

This is a really important point.

The counterintuitive logic is based on the assumption that large scale manufacturers — the sort that have lots of access to cheap labour and cheap dirty fuel (China ahem) — will rush to compete in the sector for political strategic reasons. But rather than driving down costs by way of innovative practices or technological shifts, they’ll do so because of their access to cheap resources (both human and energy) and general willingness to undercut competitors by selling batteries at a loss.

This is a path, BCA points out, China already took with the solar industry, one reason why solar companies across the board are having trouble keeping afloat. If China were to follow a similar route with batteries — mass producing at a loss for the sake of gobbling up market share — the strategy could result in heavy losses for battery manufacturers leading to even bigger expenses from sunk costs.

I’m not sure that pointing at the solar industry (where costs have plummeted) supports their argument in any way.

What I do strongly agree with is that because of China and changing technology picking winners will be difficult.

However, picking losers is much easier. See the bottom of yesterday’s post for a list of investment ideas.

Subsidies will be hard to maintain as EVs become a greater proportion of the market. For example, about 2 million new passenger cars are registered in France every year. If only half of those were EVs, subsidies would total $7.2B. Money for roads, infrastructure maintenance, policing, and so on have to come from somewhere, and if ICEV sales decline substantially, European governments’ huge gasoline tax revenues would also deteriorate; in such an environment, it is reasonable to assume that EV subsidies would eventually disappear and be replaced by taxes

Absolutely. EV’s will only take off when the economics support them and you should do your maths assuming zero subsidies.

Adding taxes to batteries is something I haven’t done in my analysis… I’m of the view that taxes won’t get added until the economics of EVs is at parity or better. If taxes do get added, it will definitely delay the take-up. Something to keep an eye on.

Net effect is there are some interesting observations, but nothing too concerning for my base case.

I’m keen to see more bearish predictions, so post away in the comments…

Damien Klassen is Chief Investment Officer at the Macrobusiness Fund, which is powered by Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.

Comments

    • Good video. He is of course talking his own book, but his thoughts pretty much match mine in how I think things look going forward. As long as the fossil fuel vested interests don’t strengthen their grip on policy. But regardless, it will happen due to the free market.

  1. truthisfashionable

    Is there any way to figure out the total subsidies ICE vehicles have received over the years so that we can start to track when electric cars reach parity of subsidy?

  2. What about the fuel excise cost. One is being taxed to raise revenue as a defacto road user charge and electricity for powering these vehicles is not.
    I do not have the number to hand but I think it may be close to 40c a litre.
    If you gross up the cost per km by say 35% it will make the case for electric a bit harder. There is simply no way the feds would allow people to wholesale dump one taxed energy for an untaxed one without a response

    • sydboy007MEMBER

      Not sure I agree that electricity isn’t being taxed. Look at the massive increase in electricity costs this year. The majority of EVs are going to be topped up via the electricity grid. The electricity grid is one giant tax / subsidy.

    • And what about the trillions the oil industry gets in the form of tax breaks and subsidies? How much tax did chevron pay last year for the billions they took out of the ground? Maybe if we stop giving them such huge amounts of free money, we wont be so bad off?

  3. With the cost of power going up and up, I don’t think electric cars are viable or value for australians, our population is too sparse for charging stations and we still power most of our grid with coal, so there are really no carbon footprint savings here.

    • Its a city car – 90% of Australians are in the cities.

      WE have a HUGE solar system, and a MASSIVE home solar system.

      You talk rubbish.

    • We are one of the most urbanised countries on Earth. The vast majority of car trips made by Australians are short and within cities. The “we are a big country” argument is idiotic.

  4. The United Nations released its report on global warming earlier this year – it concluded that in order for humanity to survive – TO SURVIVE – we would need to stop 100% all internal combustion engine vehicles by 2030.

    Your appreciation of the PRIMARY driver towards electric vehicles is entirely missing. The subsidies on fossil fuels are astronomical – but again – you totally ignore this.

    http://priceofoil.org/fossil-fuel-subsidies/

    https://www.marketforces.org.au/campaigns/ffs/

    But its not just the trillions on oil subsidies, the cost to society, the environmental cost (the entire species if not the planet), but the international cost is also extraordinary – the almost endless wars are devastating.

    But of course this blog just believes the United States and Britain and her allies – these are Democratic Interventions of Peace – nothing to do with anything else. (Credibility ZERO).

    But of course we still digress. A small Japanese used car lasts about 8 years – in fact they have a moritorium on them and they have to be recycled or off shored. Most dont last much longer without a major overhaul.

    Eitherway – lets look at the price differential each year on a Tesla !

    In five years Tesla vehicles have gone from almost $135k down to $100K down to $60k and are now at $35k (Us dollars) – this is after having to FIGHT to be able to sell them in almost EVERY SINGLE STATE IN THE US where they have been blocked from sale due to dealership laws.

    So in less than 5 years the prices have gone down 75% or more.

    My figures rock harder than your figures.

    And this is without the subsidies that the states hand out to the dealerships – wow.

    VOLVO will not be manufacturing internal combustion engines after 2025, NOR WILL BMW. MERCEDES OR PRETTY MUCH ANY OF THE EUROPEAN MAJOR MANUFACTURERS.

    ASIA is basically the same.

    By the way – an old Nokia hand a STAND BY TALK TIME OF 10 DAYS. DERP !

    The standard measurement for computational improvements is Moors Law – the equivalent for battery tech is DOUBLE that.

    Right now the PROVEN TECH for energy storage revolves around Graphene. Which will allow a Tesla to drive around Australia without a recharge – several times. Potentially forever. Entire car being made of Graphene, which is the storage and is also the solar collector.

    Either way – governments around the world are rolling out charging points in the cities and freeways to encourage people to transition to electric.

    The cost savings to the state are absolutely MASSIVE, the cost savings to the public are HUGE, the environment, public health, safety and of course war.

    Steer Clear of Tech.

    • Graphene’s been a buzzword for a while – When it scales & the price comes in, it sounds good. Till then, I’ll only go for an EV when they can get distance out of their batteries or hot swaps, just impractical in the sticks with current range & infra.

  5. I was getting my Tesla serviced the other day and the service centre guys told me there is a Model S in the US that has been doing chauffeured drives between Las Vegas and LA for the last 4 years pretty much daily. High speed supercharging at one end of the trip every time. So far it has done 500,000 Miles and the battery is still in good condition and the motor has not required any servicing. The significance of that is pretty hard to overstate.

  6. kiwikarynMEMBER

    The economics of electric cars becomes irrelevant when countries start banning the petrol alternative, and car manufacturers stop making anything else.

  7. Any materials used in the transport sector places high demands on the supply chain. Demand for lithium is driving dramatic price rise:
    http://files.growthstockwire.com/images/lithium_VLL9IHOZQB.png
    I have been buying large format batteries from China for the last 6 years. I have not seen any reduction in price in AUD terms landed here.

    As the proportion of renewables increase there needs to be a huge excess of capacity in the collection to allow for intermittency. It is much greater than the capacity factor. For current battery prices the over capacity in solar or wind is around 7 to 10 times the average demand. For example, to use 100% solar generation into the NEM the installed generating capacity would need to be 240GW to meet the average 23GW demand using a battery with 30 hours of capacity. This is not in any way economic.

    The only means to reduce the installed capacity is a dramatic improvement in energy storage technology. The best on the horizon is water electrolysis:
    https://www.technologyreview.com/s/530331/germany-and-canada-are-building-water-splitters-to-store-renewable-energy/
    This form of energy storage is an order of magnitude cheaper than batteries and the energy loss in storage over time is negligible. Energy produced in high winds or good sunlight can be stored for months at relatively low cost. The infrastructure for transporting the fuel is in place already in Australia.

    Battery cars will carve a niche but hydrogen fuelled cars are closer to an economic option. Hydrogen could also be used in existing IC vehicles with little modification. Fuel cells have some exotic materials but are used in small quantity and there is prospect of more abundant materials being used. Water for electrolysis is essentially in endless supply on the planet and can be recycled without any infrastructure.

    The problem with subsidies is that uneconomic technologies get supported beyond their evaluation period. That is the issue with the RET. It props up uneconomic power generation rather than the market developing innovative AND economic options.

  8. Slightly OT but …

    When Tesla goes bust, which mainstream manufacturer will pick up the maintenance and servicing of Tesla cars? (If any ..)

    • Tesla go bust? Only if the technologies they’re using become so commoditised that all car manufacturers also use them at massive scale. At which point the ICE is dead anyway for most car use cases.

      Historically, people smirking about the impending deaths of new transformative market entrants like Tesla is a buy signal.

      • Kim, if you believe that Tesla is in possession of a technology that puts them at a permanent or long-term advantage to genuine auto manufacturers then I have a bridge to sell you. Tesla could not/would not exist but for the involuntary generosity of tax-payers. Any company that relies on tax-payer money to keep it propped up faces a bleak future.

        But let me not dissuade you: fans of Tesla tend to have a myopic bullishness about the company and its prospects (actually cult-like) so I accept any attempt at reasoning with them is pointless. Please buy their stock and buy their story but don’t begrudge me a little Schadenfreude when the inevitable happens.

      • They also owe their battery tech to Panasonic. Still lots of smart engineers, just like Enron – not saying “Tesla is a fraud”, only that buzzwords, engineers and high tech don’t save a company / valuation. BYD miles ahead on manufacturing and owns its own battery tech. Also 16-20,000 Chinese engineers on board. Better odds than Tesla with better financial backing.

  9. Prices for batteries and electric car’s have everything working in their favour, from here on I would think the opposite is true for ICE.

    Look at how much the price for solar has fallen even if you disregard the subsidies.

    I agree they don’t make financial sense yet at current price settings for the average driver because you don’t do enough kilometers.

    But I reckon they would be competitive a large time before 100,000Km/year. Don’t forget 100,000KM on an ICE is a lot of servicing for Engine Oil, Filters & Brakes.

    Not to mention the far higher cost of fuel.

  10. Ok Damien, bearish you say you want, here is bearish:
    Quite frankly, it doesn’t matter how cheap batteries get, the moment the EV trend becomes mainstream, the lithium extraction sector gets overwhelmed by the increased demand and lithium prices go up to levels that make EVs uneconomic once more.
    It’s just a question of how much lithium is needed for a battery, vs how much can be dug up and processed to make that battery and how fast the miners/evaporators can ramp up extraction to match.
    If EV market penetration goes at anything more than an increase of 2.5% pa, they can’t, based on recent extraction data.
    Some links to back this up.
    First up, how much lithium is required per kW/h of battery:
    http://evworld.com/article.cfm?storyid=1826
    Answer, approx 400g of pure Li per kW/h (up to 4 times higher than other theoretical estimates I found, but this is a far more believable number), or 3kg of raw technical grade lithium carbonate (LCE). i.e., for a base model Telsa 3, 165kg of LCE for the (small) battery.
    How much lithium is actually available for extraction and how well are the miners ramping up?
    From the lithium supply & markets conference in May this year:
    http://www.asx.com.au/asxpdf/20170605/pdf/43jr0p3lzbtp40.pdf
    Basically, there isn’t as much there as we would like and the miners are barely keeping up with demand at the present rate of expansion of EV construction (not even including the Tesla model 3). In 2012, miners predicted increasing extraction from ~160ktpa of LCE to ~400ktpa in 2016. Actual extraction in 2016 was ~200kt, half the miners’ earlier predictions…
    The same paper predicts that if EV takeup goes at more like a 4.5% increase, there’ll be a 100kt shortfall of LCE by 2020.
    Or to put it another way: Elon Musk will not be building a million Tesla cars in 2020…
    There is a much more optimistic (though older) assessment here:
    http://large.stanford.edu/courses/2010/ph240/eason2/
    but the conclusion here is also that we aren’t going to be replacing the existing internal combustion fleet any time soon…

    • While I like that Elon is having a go at changing things. With say trucks 1,000 litres of diesel is circa 10,500 KWh with Li energy density circa 0.2kWh/kg this is 52 tonnes of battery !! Sure electric motors are more efficient but this is still many tonnes of extra weight. For cars sure but heavy trucks i.e. Road Trains lets see if it can compete without a price on carbon.

  11. I don’t get it, what do you mean by Are electric vehicles cost competitive?
    Are BMW’s cost competitive? course not if cost competitiveness was really important we’d all be driving something like an Hyundai i20 or the Toyota equivalent those of us that were pinching pennies would be trying their luck with Great Wall , Cherry and Tata.
    Same thing applies to electric cars, it’s product differentiation at it’s most basic and plays directly into value affirmation / value signaling, opex costs are at best a secondary consideration, nah lets be honest opex costs are not even a secondary consideration. The idea: Are electric cars competitive? completely misses the whole point of the E-cars and is clueless when it comes to understanding how humans create and recognize Value.

    • Hyundai builds ~10m cars a year. Cost competitiveness basically the main game in town for most large autos. BMW etc have a decent business model and sure Tesla will compete there if they can.

      They have not missed the point re: business case for mass-market cheap or premium segments.

  12. The FT article quotes a report done by analysts using “listed replacement battery pack costs” as their “data”… FFS give me a break… these guys are outsiders who have no f…king idea what they’re talking about. Some anti-EV lobbyist paid them to generate a BS report.. and they succeeded on that score.

  13. If you recall the start of the internet era youd be investing in Netscape Yahoo AOL … I dont envy you picking stocks in that space.

  14. As an aside I think the autonomous driving vehicles get exciting if you can get it to your train station and then have it go home. No parking hassles! Even if you drive it to town you program it to park itself cost free in the burbs, and you call it with your mobile to come and collect you.

    • No you won’t own the AV. You will be driven to the station by a driverless Uber, which will then pick up someone else from the station.

      • I remain skeptical of the claim that everyone will give up private car ownership just because they’re driverless. Taxis haven’t done it already, why would taxis without puny humans driving them be any more likely to ?

      • drsmithy, Gas falcon + puny human = too expensive ( and almost always smelly)
        autonomous AV that works 14/7 (allowing time for charging + cleaning) will be very competitive. esp if anyone can call a car and have it arrive in < 2 mins

        we're already being conditioned for the subscription world, netflix, google play, itunes etc etc why not subscribe to your daily commute? esp if you don't even have to drive the car yourself!

      • drsmithyMEMBER

        Taxis aren’t expensive because of the poor bugger in the driver’s seat earning $10-15/hr.

        I reckon people will continue to want private cars even when they drive themselves for the same reasons they want them today. Status, convenience, comfort, fit-for-purpose, etc.

        I can foresee people maybe giving up their _second_ car, that they use for commuting, shopping, etc, but I reckon private car ownership will remain high. Anyone with kids (/bikes/canoes/etc) will be able to tell you how much stuff needs to stay in the car.