Putin’s global carbon tax kills fossil fuel future

A side effect of Russia’s invasion of Ukraine has been the jump in oil and gas prices. The result is basically a global Putin carbon tax. Albeit with the proceeds going to Russia and OPEC rather than to national governments. When you add the re-realisation of commodity supply chain instability, there is now an increasing incentive for an express transition away from coal and gas. To a lesser extent, oil is affected. 

The cost of Putin’s carbon tax

Coal, gas, oil. All have economics based on a scarcity curve: the more we use, the deeper we need to dig and more expensive to extract. Solar and battery power is on a technology curve. The more the world produces, the cheaper it becomes:

Levelised Energy Costs Over Time LCOE

This leaves us with an energy parity where the technology curve becomes an upper bound for the scarcity curve. i.e. the price of energy will trend towards the cost of Solar+Batteries. 

Solar+Batteries are the “killer app” – extremely scalable once they reach an acceptable cost. 

The issue is that gas-fired electricity is extremely sensitive to fuel cost. Even more so than other technologies. At current, elevated European gas prices, renewables + batteries are far cheaper than gas. 
Levelised Energy Costs comparison

What about hydrogen?

Think of hydrogen as a battery. Energy is needed to create hydrogen, which can then deliver energy in the future. The problem is that the roundtrip losses are high. Whatever power you start with, you will lose 55-85% in creating and then burning the hydrogen. Existing batteries lose less than 20%, and the newest technology batteries lose around 5%.

On the other hand, hydrogen storage is much cheaper than batteries. If you double battery storage, then you roughly double the price. For hydrogen, that is not the case. My rough estimate is that hydrogen becomes attractive if you want to store energy for more than three days. Most electricity grid applications do not need to keep energy for that long:

Hydrogen Storage Cost

How fast can Europe transition to renewables?

Not particularly quickly. There simply isn’t the capacity to produce solar panels or batteries at the scale needed. If world production grew incredibly quickly, say 30%+ per annum, solar would still only be around 15% of world production by 2030. Even if Europe took half of the increased solar production each year, it would take about five years to be weaned off Russian gas.   

With more gas imports from the US, maybe that could be two or three years.     

The net effect: Even with Putin’s effective carbon tax and considerable political incentive, renewables are probably a decade away from capping energy costs. The economics with current European prices favour a rapid transition. But the capacity is not there.

The effect of Putin’s carbon tax on the economics of electric vehicles

Oil has a similar cap to electricity. Electric vehicles. However, while solar+batteries are at price parity, electric cars are more questionable without subsidies. Especially in Europe and Australia.

The economics are similar: pay for a battery up front and then pay far less in fuel. And costs are showing the same technology curve:

EV Battery Costs

Then the problem becomes more complicated:

  • Both electricity and oil costs can change. If you thought electricity prices would rise and oil prices would fall, the equation is very different from electricity prices falling and oil prices rising.
  • There are meaningful taxes and subsidies for both. Government policy changes the equation from country to country.
  • Range anxiety dominates the equation. Electric cars are more economical today for most consumers who are happy to charge every few days. But range anxiety means consumers want a bigger battery that is effectively a wasted investment.    

I find the most useful way to look at the equation is in terms of payback. For example, if a battery with a range of 300km costs $6,000 and saves $2,000 per year in fuel costs, the payback is three years.  

US electric vehicle EV payback China electric vehicle EV payback Europe electric vehicle EV payback   

Australia electric vehicle EV payback

Note the charts above use retail electricity prices. If consumers use their spare solar power, the economics are dramatically better. For example, Australia would look more like the US: 

Australia solar electric vehicle EV payback

And finally, at $100 oil, commercial vehicles are no-brainers to switch to electric. In all the above countries, the payback period is slightly more than a year.   

US Commercial electric vehicle payback

Range anxiety calculation aside.

Most cars drive less than 33km per day (12,000km per year). Say consumers were happy with 100km of range, i.e. charging 3-4 times a week. Then, the economics of electric cars stack up today

But consumers clearly aren’t happy with so little range. Basically, consumers want to buy a larger battery to:

  1. make the occasional longer trip 
  2. ease their range anxiety. 

The extra battery capacity is effectively “wasted”. i.e. consumers are paying for much larger batteries and rarely ever using the excess capacity.  

The question is whether consumers need twice the capacity, five times as much or ten times to be happy. So far, as battery costs come down, electric vehicle manufacturers mostly keep the car’s price unchanged and extend the battery range. Which means the economics are not materially changing.

Renewable energy & electric vehicle costs will fall.

Both are on technology curves and have years of further price declines. But, supply chain issues and commodity costs will probably mean not much change for prices in 2022. So, while the above charts will look much better in five years, they may not be measurably different over the next year.

How fast can Europe transition to electric vehicles?

Slowly. First, there isn’t the capacity to produce batteries (or cars) at the scale needed. Second, most cars last more than ten years. With electricity, there is an economic imperative for energy companies to switch. Consumers don’t have the same imperative. And some of the economic imperative might be absorbed by lower prices in the second-hand car market.

If electric vehicle takeup is substantial, won’t that create massive electricity demand which will delay the transition away from gas? 

 A little. But at the speed we are talking about, it won’t make that much difference. Also, car engines are not efficient. Less than 20% of the energy content of oil ends up as mechanical energy. i.e. losses are more than 80%. Losses from batteries are typically less than 10%. 

Investment implications

There are no quick fixes for energy. Putin’s carbon tax will help accelerate the transition to renewables. Solar+batteries are economically the best option for Europe to transition away from Russian gas, but the capacity to do so quickly is not available.   

It is a similar story for electric vehicles. However, the economic pressure is much lower for typical consumers. 

Without a rapid expansion of batteries, solar power and electric vehicles, a reliance on Russian gas will continue.

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Damien Klassen is Head of Investments at the Macrobusiness Fund, which is powered by Nucleus Wealth.

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The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an Authorised Representative of Nucleus Advice Pty Limited, Australian Financial Services Licensee 515796. And Nucleus Wealth is a Corporate Authorised Representative of Nucleus Advice Pty Ltd.

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Comments

  1. Very good article on EVs and more. However, in Australia the biggest issue is the amount and quality of charging stations. Not in the city but on the highways. Having just bought an EV I can say that its an unbelievable vehicle around the city but I also need to travel distances. 200Kms around the city is plenty but not on the highway. There are just not enough ultra fast charges to make the long trips I need viable. Its not just the number of chargers its also the speed of charge. That just has to change for there to be a big take up of EVs in Australia

    • Agree, the sweet spot for EV’s is the short runs. ICE are not efficient, pollute more and fail faster without sufficient time to warm up and cycle engine oil. On long trips in Australia, ICE still wins because of the charging issue. Even if charging stations are everywhere, you need to wait quite a bit of time to complete the process and it also destroys the battery faster.

      Fast charging is to EV’s what short trips are to ICE vehicles.

    • Jumping jack flash

      Cost vs utility is still the biggest factor for me. A very small EV for driving to work is still around 50K, and it can’t really do much else except go to work and back again.

      EVs are still very expensive compared to the equivalent ICV, even when considering fuel costs and the [proposed?] EV taxes. EVs that can tow are horrendously expensive and low rated. While prices may come down a bit, EVs will be generally more expensive and have less utility than ICEs for quite some time.

      For now I am happy with my electric scooter and catching the train, which costs me about $3k a year, give or take.

      Hydrogen must be adopted to compete with fossil fuels. I can’t really see any other long-term solution to maintain cost vs utility. Electric motors to replace fossil fuel powered engines are a good first step because electric motors are well understood and ubiquitous.

  2. Very good, V2G tech should probably feature in this analysis. That additional “wasted” car battery can become useful to the grid.

  3. Diogenes the CynicMEMBER

    One of the big costs not mentioned here is servicing where electric cars have a distinct advantage as with 80-90% less parts they don’t need regular oil changes, filter replacements etc. Their regenerative braking system means their brakes last much longer than those in normal ICE cars. This is a considerable saving on top of fuel costs. If the car has V2G capability then there would be additional savings. I’ve been driving our aged Honda Accord (2007) into the ground as we are approaching 200k on its clock and ready to buy an electric car but pricing is still crazy. A new ICE hatchback is around mid $20k compared to >$50k for a similar electric vehicle in size with 300km range so a 100% premium to ICE. It would take a long time (>10 yrs) for savings to accrue this $25-30k difference. I’d be willing to pay a premium of 30-40% for an electric car which would bring my payback down to 5-6 years but 100+% is steep. The economics may be better for those who drive more than we do especially if you can scab free charging at some points like your work.

    • Worth noting is that since EVs are still considered a relatively luxury item, their fitouts tend to be a bit higher spec as well, which explains some of the price difference.

      Best comparisons I think are when the manufacturer has the same vehicle available in ICE and EV forms. Unfortunately there’s not a lot of them, but you do have the Hyundai Kona:
      ICE: $35,700 (Elite), $42,300 (Highlander) – add 5 years servicing for $1,600
      EV: $58,400 (Elite), $62,000 (Highlander) – add 5 years servicing for $1,400

      And the Ioniq:
      ICE Hybrid: $45,500 – add 5 years servicing for $1,525
      PHEV: $52,250 – add 5 years servicing for $1,525
      EV: $59,000 – add 5 years servicing for $1,400

      Few other examples that are reasonably close to like-for-like:
      Volvo XC40 Momentum ICE: $53,750
      Volvo XC40 EV: $76,000

      MG ZS ICE: $22,500
      MG ZS EV: $45,000

      MINI ICE: $43,000
      MINI Cooper ICE: $51,500
      MINI EV: $61,500

      Looks like the premium is on the order of $20k, rather than a percentage.

      I agree the biggest barrier to EV takeup is price.

      We recently went through buying a new family car, and ended up with a Tiguan Allspace. The biggest reason for that in the end was because we wanted an occasional 7-seater, but up until that point I’d done a far bit of comparisons across the 5-seater midsize SUV and station wagon market and also looked pretty closely at PHEVs (ie: can run entirely off electric if possible and charge from the wall). Probably 90-95% of the driving we do would fit within the typical PHEVs ~70km all-electric range, but even assuming that I couldn’t work out a payback for the PHEV in anything under 5 years, which is longer than we are intending to keep this car.

      Hopefully by the time we come around to replace it in ~2 years there will be a lot more EV options available.

      • Damien KlassenMEMBER

        I agree EVs are targetted to the luxury market.

        Even in China. China’s largest selling EV costs $4k and gives you 120km range, but a max speed of only 100km/h. It is effectively a souped up golf cart. The 3rd is Tesla Y at $60k. That’s a big price gap! And the more expensive Tesla Y outsells the Tesla 3.

        Given car manufacturing shortages, this is likely to continue. It far more profitable to sell a few cars at inflated prices than it is to do a mass-market cheap car with limited range.

  4. If the EU devoted half as much brainpower to rapid energy transition, as they do to fake UN Net Zero Emissions, and fake EU Emissions Trading Scheme, not to mention good old fashioned virtue signalling, they would be much further ahead.

    One amusing effect of the Putin War is exposing the gas underside of the German plan to exit coal by 2038.

  5. One issue always ignored in the EV narrative is the deterioration of the battery and the fact that EV builders intentionally make them almost impossible to replace. I own a popular EV and after 90,000km the battery was down to 70%. Now at 170,000km it only has 30% capacity left. A petrol car can keep going for far longer and at cheaper cost. Only replaceable battery options are a viable solution without lock-in to vendors.

    • Charging your own batteries is dumb. You should be able to rock up at a fuel station change your battery acid and electrodes and be gone in no more than 10 mins with a full tank. Used acids and electrodes get recycled, potentially on site. If my knowledge of batteries is a bit out of date and this isn’t feasible with an acceptable safety level, have a swapping out the batteries system as an easier to handle solution.

  6. “Most cars drive less than 33km per day (12,000km per year)”

    I’m willing to bet this is a mean value. It’s potenitally misleading. What you need to know is the median journey distance and the median distance per week.

    • It is an average (of an average). But even if you take that and work it out on a weekly basis (ie: assuming the representative punter does all their driving one day a week) it’s only 230km/week, which is well within the range of most EVs.

  7. good article, thanks.

    It’s probably been done elsewhere but…this should take into account any savings on grid draw, but also mechanical servicing costs for ICE.

    Saul Griffith in the Sat Paper made it clear the other day – don’t buy a home battery for your PV (yet). The Tesla 3 with it’s 60kWh battery is better bang for buck AND you get a free Tesla. I don’t view the capacity as wasted. You can run your house off it. We have 4 people in our large house we are at about 12kWh a day, with induction stove, fridge, lighting, lots of vampire draw from night lights and sensors, cables plugged in etc etc

    • Jumping jack flash

      Very interested in this.
      60kWh is certainly enough for a standard home. Roughly 10 days of capacity.

      You’d need at least a 15kW solar system though, probably 20 to make sure it could be charged in a single cycle.

    • Only problem is that everyone has to be out of the house when you drive the Tesla. I guess you could leave the kids sitting in the dark until mum and dad get home.

  8. I’ve been weighing up getting a Nissan Leaf only 120km range (2013) model. But around $14k used.

    I can keep my Nissan Stagea for longer trips / range. But 90% of our driving is currently local enough to use the Leaf.

    I’m also contemplating getting 3 phase power at home. So that any future electric vehicle will be able to charge faster coupled with Solar Panels.

    I love my ICE cars but I also hate war and human suffering and the shyte regimes that are often sitting behind those oil rich nations.

    • Jumping jack flash

      Fairly sure that multiple phases only helps you to connect your inverters to the grid.
      Theoretically can have 3x more inverter capacity on a 3-phase system.

      In QLD we are currently capped to 10kW total connected inverter capacity (including the battery’s “inverter”) for single phase. I guess for 3-phase you can go up to 30kW of inverter and still be connected to the grid, so having a battery like a powerwall which has an inbuilt 5kW inverter would be possible with a 10kW solar inverter and still keeping the grid connection. (something I wasn’t able to do with single phase)

      Don’t think phase makes any difference to charging batteries or solar panels. Batteries and solar panels are DC.

      Also need to be careful with phase balancing and power factor with multiple phases, and that would probably make the 3-phase inverters much more expensive.

  9. I went to the Minich motor show last year – it was moved from Frankfurt where its usually held – and then on to a hotel in the Bavarian Alps. The excitement was completely on EV cars. Huge numbers crowded fhe new Audi and BMW EVs and later at my hotel they had fhe launch for, i think the new 4 series EV.

    It may not be that economically viable yet to shift, but i can tell you, Europe, and the German Big 3 car makers are going electric super fast. Putin will omly accelerate this trend.

  10. I love how they don’t include coal @ $0 tax in the comparison. (like the Germans and Japanese are embracing)
    I’m also assuming they are using the fake nameplate capacity comparison that fails to take into account that wind only operates 10-15% of the time, or solar max 25%.
    And latrobe valley was producing electricity at 14c/per KWH not that long ago due to its extremely accessible coal supply.
    Victoria should be installing 2 high efficiency turbines at Loy Yang B with ready to go infrastructure then close down the inefficient and coal depleted sites. You could even set them up for CO2 harvesting to feed into algal biofuel production with the looming problems with oil availability. (although hopefully we crack the hydrogen carrier for fuel cells and get thorium reactors working which would be potentially cheaper again)

    • Have you lived in the La Trobe valley to enjoy the emmissions from all that free coal that goes into corporate dredges then powerstations.

      If the pollution was taxed as it should, the economics would be very difficult.

      They are still trying to work out how to fill the gap between the restoration bond of $50mill for the old Hazelwood plant and the $0.5 bill estimated cost.

      Just to fill the hole, it will take three years of all the water from the adjoining Morwell river.

      They should rename it the J Kennett valley to remind people of who created the horrible human and environmental mess left behind.

      And this is only a small hole compared to many left around Australian by miners after they have taken the profits. Check the Hunter Valley or Moura in Qld on google maps.

  11. My supervisor for my engineering masters at RMIT had a great approach to lessen the cost of storing hydrogen. Rather than trying to stop this small pesky molecule from leaking just accept hydrogen leaks and store it for short periods less than a few weeks. As long as you dispersed any slow leakage to keep things safe then if you used the stored hydrogen at a rate that meant the percentage of that lost through leakage didn’t matter then you could use all sorts of storage including plastic containers.