Sunday, September 18, 2011

Tesla And The Future Of The Electric Car

Tesla And The Future Of The Electric Car guest post by Clean Energy Intel

A debate has once again been raised with regard to the future ofclean technology and in particular the electric car. Whilst many ofthe issues on which this debate is based are genuine, they in factfail to get to the heart of the matter. It therefore seemsworthwhile to address some of central issues directly.

The Global Problem of Oil’s Monopoly in the Transport Sector

At the heart of the matter is the simple fact that a number of threatening global issues cannot be dealt with unless we end theeffective monopoly of petroleum products in the transportation sector:

Economic security – the monopoly position currently enjoyed by oil leaves the global economic cycle very exposed to the gyrations of both the oil price and political instability in the Arab world – an arena which continues to be very volatile. It is no co-incidence that the recession and financial calamity of2008 was preceded by a sharp rise in the price of oil or that the same has been true of the softening of the recovery this year.

Oil is the only strategic commodity capable of having such a disruptive impact on the economic cycle and frankly the world’s oil reserves are largely concentrated in hands which don’t necessarily appear to act in favor of stability.National Security – oil’s monopoly position ensures a continued flow of funds into the national economies of nations who are not particularly friendly to the interests of the US or western democracy as a whole.Global warming and associated abnormal weather patterns. I have no wish to get embroiled in the current debate over climate science.

However, the risks are clearly there whether or not we fully understand the processes at work. Most importantly,climate science predicts not just a warming of the planet overtime but more importantly a proliferation of abnormal weather patterns – more frequent occurrence of droughts and floods etc.That is exactly what we are seeing.

If climate science is correct these disruptions will continue to get worse. I don’t believe that the precise interactions at work here can be definitively proven. Only time will tell. However, all the risk is that this is another factor likely to increasingly influence both policy-makers and consumers.

I don’t feel the need to argue the precise detail related to each of these points. The fact of the matter is simply that, taken together,they represent inordinate risks to the global policy environment –risks which we largely face because we accept the monopoly position enjoyed by oil in the transportation sector.

No matter which way you look at it, one or other of these issues will keep rearing their head until we address them. As we have seen this year, developments on a global scale will simply keep bringing us back to the essential dilemma that oil’s monopoly needs to be dealt with.

That will continue to influence both policy-makers and consumers.The pressure on these issues may die down for a while – but only until the next oil shock or some other calamity. Consequently, time and again we will be brought back to the fact that we have to allow and encourage a free market in alternatives to oil in the transportation sector.

The essential point to understand is simply that these issues will keep coming to the forefront of the policy agenda until dealt with –and that both policy-makers and consumers will increasingly move towards solutions.

Resource Scarcity and Replacing Oil as a Strategic Commodity

The problem is of course that given the all-pervasive use of oil in the transport sector, it is extremely difficult to find a single technology or commodity capable of replacing it on its own. This is particularly true in the face of the growing demands on the earth’s limited resources which are rising relentlessly due to both population growth and the shift in global incomes towards poorer populations. Whilst the later factor is of course desirable, it produces an inexorable rise in global demand.

These factors have of course been prominent in creating the very need for clean technology and the related need for an end to oil’s monopoly in the transport sector. However, they also suggest that we are likely to face supply constraints across a range of commodities going forward – particularly those related to new demand for high-tech solutions.

These issues are extremely important and point to a number of conclusions:

It would be a grave mistake for anyone in the green community to see the electric vehicle or any other single technology as a simple solution to the problem of the way in which we fuel the transport sector.It would be an equally grave major mistake for governments totry to pick winners or force a single solution to these problems. The end result would likely be alternative supply constraints and difficulties.We need to let the free market do its job.
And this brings us to the heart of the matter. The problem with oilis not simply that it is a limited natural resource with anassociated highly volatile price. Many other commodities face thesame problems. What makes the problem with oil significantlydifferent is that it is in a monopoly position as the sole strategiccommodity in the transport sector.

Where the free market is allowed to function properly, the pricing mechanism creates proper resource allocation and usage, alters the pattern of demand and generates demand for alternatives, stimulating investment and innovation. It’s not perfect but it works. It gets the private sector moving on the deliverance of solutions.

Conversely, there are massive barriers to entry in terms of refueling the transport sector and this does not allow the market to flexibly adjust to supply constraints and use a multiplicity of solutions in order to spread demand across a range of resources.

The bottom line is that governments get themselves into trouble when they pour money speculatively into specific solutions. It’s not the government’s role to pick winners. However, it is the government’s job to act against monopolistic barriers to entry and to ensure afree market. That’s what needs to be done with regard to oil’s monopoly role in the transport sector.

The electric car has a role here. Not as the single solution to the problem but rather as one of a range of potential solutions. The most rational path forward is to break down the barriers to entry,allow free competition and let the market do the rest. A few steps forward seem appropriate:

Greater use of natural gas in the trucking sector. The Natural Gas Act would aid the roll-out of natural gas filling stations across specific trucking corridors.The Open Fuel Standard Act. For the cost of merely $100 per vehicle, new cars can be produced with the capacity to take ethanol, methanol and other biofuels as they are developed.Again, simple free competition. Open the market, innovation will do the rest.The role of the electric vehicle is clear. It is certainly notto entirely replace oil. However, it can add an alternative source of power. This is the only way we can spread demand in the transportation sector across a range of finite natural resources. Plug-in hybrid electric vehicles (PHEVs) in particular when combined with the Open Fuel Standard will allow competition between various forms of liquid fuels and electricity. Let the consumer decide.Greater use of electricty as a clean energy solution also requires that we move towards cleaner technologies in power generation itself. Increased use of natural gas to meet base load requirements, combined with a33% Renewable Energy Standard such as that in place in California would seem like a reasonable step forward.
What is clear is that the issues of population growth, the spread of income growth to the world’s poorer nations and the resultant demand growth, mean that oil simply cannot continue to play its current role for the rest of this century. The solution is not to force the march on any one single alternative. It is to break down the barriers to entry and allow the free market to provide a range of solutions. This is the only way to deal with the very real problems of resource scarcity that we face in the years ahead.

The Forces Behind Electrification Are Already in Play

Most importantly, it appears that the factors behind the increasingdevelopment of various forms of EV alternatives are already in play.The single most important factor has probably been the new CAFEstandards here in the States. These will help produce morefuel-efficient vehicles based on the internal combustion engine(ICE). However, automakers appear to have realized that in order tomake the grade they will have to innovate and adopt a greater use ofEV technology across their respective model ranges.

This has, for example, led recently to a number of announcements inthe EV field from General Motors (GM), clearly pointing to thecompany’s commitment to moving forward:

The announcement of a battery pack deal with A123 Systems –see hereThe announcement of a plug-in hybrid Cadillac ELR, based onthe Converj.The announcement late last week of a broadening of thecompany’s collaboration with LG – see here.

What is becoming clear is that we are likely to see a range ofapproaches and battery sizes. The most interesting is probablyToyota’s (TM) approach with the plug-in Prius, which will have asmall Lithium battery capable of covering some 13 miles or so.Nevertheless, it is competition at the fuel pump. Combined with anOpen Fuel Standard, this has the potential to be the car of thefuture. Or certainly one of them.

Battery Efficiencies and Cost Reduction

Opponents of clean energy and the electric vehicle for some peculiarreason like to show charts of the improvement in disk capacity orCPU speed in the IT industry compared to, for example, batteryenergy density. The purpose is no doubt to illustrate the point thatthe laws of chemistry do not allow electric batteries to provide thekind of exponential improvements in efficiency as seen in the ITindustry and described by Moore’s Law. Whilst this is true, it isalso entirely irrelevant. There is absolutely no reason to expectbattery technology to replicate the efficiency gains of the ITworld. Most importantly, such efficiency gains are not exhibited bythe internal combustion engine nor in any other technology thatelectric batteries or clean technology actually competes with in thereal world. So let’s leave the wonders of the IT industry aside andfocus on the realities of energy and the transport sector.

It is nevertheless true that the electric batteries currently inproduction are certainly expensive and have not in general managedto breach the question of range anxiety without significant cost ora back-up generator. So where will the improvements come from? Letme focus on a few significant points:

Any analysis based on the reputed cost structure faced by A123Systems (AONE),which puts at battery costs at $1,000 per kWh, is notparticularly insightful in a discussion of the future of the EVmarket as a whole. Developments in the overall EV market willclearly be driven by the more efficient producers, of which A123Systems is currently not one.Tesla’s (TSLA)Model S appears to have significant potential to alter themetrics in the EV market. The company has of course not releasedcost details of its new battery packs. However, the company hasprovided literature suggestingthat on a $ per kWh basis the battery pack of the Model S isdown to 42% of the cost of the original battery pack for thefirst version of the Roadster. The Roadster Sport had alreadygotten those costs down to 69%, so the gains continue to beimpressive. The further expected gains are no doubt based on theCustom 18650 automotive cell in development with Panasonic.That is why Tesla appears to be able to suggest that when the300 mile version of the Model S is released next year it willcost somewherearound $75,000. There appears to be a demand forsuch a luxury EV and those metrics start to offer an interestingoption in the luxury car market.Efficiency gains that have been made elsewhere should also berecognized. For example, the new Ford Focus BEV has a 70-milesingle-charge range, similar to that offered by the Nissan Leaf.However, the company claims that its 23 kwh battery pack can becharged with a Level 2, 240-volt charger in 3-4 hours - almosttwice as fast as the Leaf.Looking forward on a more medium-term basis, potentialadvances will no doubt come from new innovation related toalternative battery technologies – particularly related toVanadium for example. Again, it is not necessary to try and pickwinners. It’s simply the case that competition will spurinnovation. These new technologies are of course a threat tolithium battery specialists such as A123 Systems. However, theyare nothing but a potential boon to a company such as Tesla, whois not tied to a particular battery system and who could workwith whatever a Panasonic or alternative can provide in thefuture most cost effectively.Perhaps the most significant point is that further gains,particularly in lower end commuter-orientated EVs and PHEVs, arelikely to come from other production advances outside of batterytechnology. A critical issue is likely to be weight-shedding andrelated new materials for example. This is no doubt the key toGM’s expanded relationship with LG Group. GM had previously beencollaborating with LG Chem on the battery packs for the Volt andthe Ampera. However, the company has recently announced that therelationship between the two companies will be expanded toinvolve LG Group as a whole. This will allow the Korean companyto offer its expertise in other areas, particularly related to'vehicle structures and architectures'. See more detail here. AndTesla of course is already working with aluminum in order to getthe weight of the Model S down.Finally, the introduction of Level 3, 480-volt chargers isalso significant to the potential growth of the EV market. Thiswill be particularly true once they are installed where they aremost needed, across the nation's Interstate highways - as is forexample planned with regard to the PacificCoast Green Highway. These Level 3, 480-volt rapidchargers can provide a 19 kwh charge to a Leaf for example in 30minutes. Some other EVs can be charged more rapidly. Drving fromLA to the Canadian border in a Tesla will be a breeze.
All of this suggests that in fact there is no slow crawl ahead whenit comes to overall efficiencies for EV vehicles. Most importantly,such efficiencies in terms of the performance of the cars as a wholewill not be limited to efficiencies in battery technology.

What to Invest in: TeslaAs discussed above, Tesla (TSLA)is a low cost player in terms of the company's battery powertrain technology - despite being well placed in the luxurymarket.The company has developed a significant brand name.When the Model S is first produced in 2012, sales appearlikely to go well. The company already has customer orders forsome 5,550 units.The company's target of 20,000 unit sales infull year 2013 seems reasonable.Tesla has an ongoing relationship with Toyota and seems likelyto play a significant role in the roll-out of Toyota's EVprogram. The suggestion is that the two companies are currentlynegotiating over a $1bn deal - more detail here.In my disclosure below, I have stated that I own no stock in any ofthe companies discussed. This is simply because, having hada reasonable month in difficult conditions, I decidedto use Friday's rally to lock in profits on my clean technologyportfolio. I intend to use any weakness into September to buy backmy positions in stocks such as Tesla.

Finally, the bottom line is that the global issues discussed abovewill keep bringing both policy-makers and consumers back to the samequestions. There is only one answer. It's time to break oil'smonopoly in the transportation sector - and to put our trust in thefree market and American innovation.

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