Worth to keep in mind some awkward fundamentals…
More controversial comments have been delivered by Audi’s contentious North American president
Audi of America President Johan de Nysschen isn’t impressed with electric vehicles despite flirtations with the battery-driven cars by other German automakers and even designers at his own company. He has vocally called out the electric vehicle industry, which he sees as a sham, in the past. He once famously remarked that those buying GM’s 2011 Chevrolet Volt are “idiots”.
Mr. Nysschen, who prefers clean diesels, delivered a speech at the National Press Club on Monday blasting the U.S. government’s decision to back electric vehicles by funding EV research and offering EV makers loans according to the Detroit News. Ignoring the profitability of Tesla Motors, he insists that electric vehicles cannot be viable in the near terms and accused the U.S. government of “falling in love” with electric vehicles at its citizens’ expense.
States Mr. Nysschen, “The 50 percent or so price increase that the Volt represents over a similar gasoline car cannot be offset through the savings from reduced fuel compensation. The only way to offset the extreme premium is through taxpayer-funded subsidies.”
He’s referring to the $7,500 tax credit the U.S. government is offering citizens who buy electric vehicles. The credit essentially brings down the price of ownership for the Volt from an estimated $40,000 USD to a more manageable $32,500 USD. He complains, “Paying customers to drive your cars is not sustainable.”
He prefers for the government to avoid intervention, a scenario in which he envisions clean diesel vehicles reigning victorious. He opines, “I understand why political leaders have fallen in love with hybrids and electrics. But this may be the one time you’ll hear someone in Washington say it shouldn’t be a monogamous relationship.”
He points out that America could cut off all its oil importation from Saudi Arabia if only a third of Americans switched to diesel vehicles. He describes, “America would save 1.5 million barrels of oil a day. I make no apologies for being the world’s biggest diesel advocate.”
U.S. President Barrack Obama, however, remains a firm supporter of electric vehicles and hybrids as the route to reducing greenhouse gas emissions and foreign oil consumption. He argues that the issue is of importance to national security and points out that many groundbreaking technologies in the U.S. — such as the railroad system — came at a steep initial cost to the U.S. government in terms of land or grant money.
As for Audi, the company as a whole is looking at electric vehicles. However, half of the company’s lineup sold in Europe is diesel-driven, so it’s clear where the automaker’s sympathies lie. In the States, the Audi A3 TDI is one of two clean diesels sold by the company. The A3 TDI won green car of the year honors at the 2009 LA Auto Show.
One thing that President Obama and Mr. Nysschen agree on is the need to improve fleet efficiencies to combat climate change and reduce fuel costs for customers. Automakers are currently struggling to meet incoming fuel economy mandates that will require fleetwide fuel economy of 34.1 mpg by 2016.
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And he’s not alone:
Last Tuesday a reader sent me a copy of “Ending the ICE Age,” a new industry overview from Bank of America Merrill Lynch analyst Steven Milunovich on the future of plug-in vehicles, which the newly organized Electrification Coalition has christened grid enabled vehicles, or GEVs. After spending several hours studying the report I concluded that Mr. Milunovich has found the true religion of the new millennium while I’m still an unwashed pagan, or worse yet a heretic.
The grim reality is that when you look at American energy policy as a faith-based initiative, a new religion with its own rigid doctrine, dogma and ritual, it begins to make sense. It explains why our Secretary of Energy feels comfortable with a public comment that he’s agnostic about natural gas. It also explains why the coastal waters of California and Florida together with huge swaths of Alaska have been forever consecrated as holy ground. It even explains why climatologists, eco-clerics and the fanatic faithful feel justified suppressing facts and ostracizing skeptics that call their world-view into question.
It’s a 21st century version of the Spanish Inquisition and I have a front row seat. What fun!
The Milunovich report is the third bullish analysis of GEVs that I’ve reviewed since the beginning of October. The other two came from Credit Suisse and HSBC. All three reports wax poetic on the fuel savings and CO2 reduction potential of GEVs, all three assume that battery pack costs will fall from current levels of roughly $1,200 per kWh to something on the order of $500 per kWh over the next five to ten years, and all three warn that the GEV industry will not bear fruit unless lithium-ion battery developers can deliver on their promises to make cheap, powerful, durable and safe products. The fundamental problem with all three reports is they don’t ask whether the premise of GEVs is reality, or blue smoke and mirrors. The only way to answer that question is with a spreadsheet that presents a side-by-side comparison of the alternatives. I’ll try to keep it simple.
Reality vs. Blue Smoke and Mirrors
The best information I’ve been able to lay my hands on indicates that the capital cost of a new lithium ion battery plant is on the order of $1,000 per kWh of annual capacity. The following table provides a simplified analysis of the economic impact of a hypothetical $500 million plant. It provides a baseline column for conventional internal combustion vehicles, together with additional columns that allocate 100% of plant capacity to battery packs for Leaf class BEVs, Volt class PHEVs and Prius class HEVs. To minimize controversy, I’ve assumed that the batteries will cost $500 per kWh; every vehicle will travel 12,000 miles per year; every GEV will get 4 miles of electric-only range for each kWh of charge; and all GEVs will use electricity from utilities that emit the national average of 585 grams of C02 per kWh.
|Economic Impact of $500 Million Lithium Ion Battery Plant|
|Production Capacity 500,000 kWh Per Year|
|Battery Pack Requirement||24 kWh||16 kWh||1.3 kWh|
|Vehicles enabled per year||20,833||31,250||384,615|
|Vehicle cost without batteries||$20,000||$19,500||$21,600||$21,800|
|Battery Cost at $500 per kWh||$12,000||$8,000||$650|
|Total vehicle sales price||$20,000||$31,500||$29,600||$22,450|
|Annual Gasoline Use (gallons)||400||0||0||240|
|Annual Electricity Use (kWh)||3,000
|Annual CO2 Emissions (metric tons)||3.7||1.8||1.8||2.2|
|Annual economic impact|
|Battery sales (000s)||$250,000||$250,000||$250,000|
|Non-battery vehicle sales (000s)||$406,250||$675,000||$8,384,615|
|Tax credits to purchasers||-$156,250||-$234,375|
|Net economic impact||$500,000||$690,625||$8,634,615|
|Annual Gasoline Savings (000s)||8,333||12,500||61,538|
|Annual CO2 Reduction (metric tons)||40,425||60,638||568,062|
While the HEV values in the table are very attractive in the context of a gasoline fueled car, they get downright gorgeous if you take the analysis a step further and factor in the potential use of CNG as a substitute fuel in conventional HEVs.
Think about it – a CNG fueled HEV uses no imported oil and its carbon footprint is lower than a BEV that uses electricity from an average utility. The only significant drawback is an underdeveloped retail CNG distribution system but that impediment is relatively easy to solve since America’s natural gas distribution backbone is pervasive, robust and far more modern than the electric grid.
When you calculate gasoline savings and C02 emission reductions per dollar of capital investment, no technology fares better than advanced lead-carbon batteries for start-stop micro-hybrids. To put things in perspective, a $500 million investment in plant and equipment for micro-hybrid batteries would permit the production of 7.5 million vehicles per year, generate roughly $1.9 billion in battery sales, slash gasoline consumption by 180 million gallons and reduce C02 emission by 1.7 million metric tons. In other words it is very likely that the $68 million in ARRA battery manufacturing grants that went to lead-carbon battery manufacturers will generate greater gasoline savings and C02 emission reductions than the $1.2 billion in ARRA grants that went to lithium-ion battery companies. This is not a question of faith. The numbers cannot lie and the magnitude of the differences is too big to ignore. If you really want to make a difference, you take the baby steps and harvest the low-hanging fruit first.
Nobody with a spreadsheet and a rudimentary understanding of mathematics can honestly argue that subsidizing batteries for GEVs will hold a votive candle to using the same funds to subsidize batteries for Prius class HEVs. Adding the cost of GEV charging stations to the abysmal economics results in a picture that nobody but the blindly faithful could love. I have no doubt that a variety of GEVs will be introduced over the next couple of years because that’s what the new religion demands. For obvious reasons, I expect the phenomenon to be a flash in the pan.
The Hype Cycle
While I was doing my background research for this article, I came across a wonderfully informative graph titled “Hype Cycle of Emerging Technology” that TIAX LLC adapted from a Gartner Group concept and presented at the Plug-in 2008 conference. The graph is particularly useful for investors because in addition to showing how public perceptions of technologies develop over time, it shows how early stage markets for equity securities develop.
While TIAX suggested that PHEVs were approaching their peak visibility level in May 2008, I don’t think we’ll reach the peak until 2012 at the earliest. By 2015, when significant numbers of GEVs have been sold to consumers who discover to their chagrin that their oh so sexy GEV is little more than a 20 foot power cord connected to an expensive, temperamental and inflexible automotive supermodel that doesn’t like heat, cold or hills, and has a nasty habit of taking several hours to recharge and refresh just when you need it most, we should be well into the trough of disillusionment.
I can almost hear the phone conversations now, “I understand that Johnny Jr. needs to see a doctor for that projectile vomiting thing but I just plugged my GEV into the charging station and I won’t be able to get to the school for another four hours. Could you do your best to keep him comfortable, give him a book or maybe an aspirin and tell him that daddy will be there soon?”
I’m a big fan of hard-core economics. I have no fundamental problem with Government subsidies to manufacturers that support critical infrastructure and have a reasonable chance of accomplishing their stated goals. It’s an entirely different matter when taxpayer money is used to subsidize luxury consumption. New factories make the economy richer if the fundamental business premise is sound. Eco-bling subsidies to the new faithful have no justification in sound public policy. We deserve better.
The supermodels of the energy storage sector including A123 Systems (AONE), Ener1 (HEV) and Valence Technologies (VLNC) are well up the hype cycle curve and approaching the Peak of Inflated Expectations. In contrast the stalwarts of the battery business including Exide Technologies (XIDE) and Johnson Controls (JCI), together with new technology entrants like Maxwell Technologies (MXWL) and Axion Power International (AXPW.OB) that are developing disruptive enhancements to established battery technologies, are just approaching their technology trigger point. As stop-start and mild hybrid technologies become standard equipment on internal combustion engines over the next few years, I believe these overlooked low-priced companies with sustainable business models that work in the real world of pagans and heretics will sparkle.
DISCLOSURE: Author is a former director and executive officer of Axion Power International and holds a large long position in its stock. He also holds a small long position in Exide Technologies.