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Tesla And The Future Of The Electric Car

Model S in Red, Side Shot
Tesla Model S: Image used with permission from Tesla.

A debate has once again been raised with regard to the future of clean technology and in particular the electric car. Whilst many of the issues on which this debate is based are genuine, they in fact fail to get to the heart of the matter. It therefore seems worthwhile 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 the effective 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 of 2008 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 over time 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 to try 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 oil is not simply that it is a limited natural resource with an associated highly volatile price. Many other commodities face the same problems. What makes the problem with oil significantly different is that it is in a monopoly position as the sole strategic commodity 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 a free 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 not to 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 a 33% 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 increasing development of various forms of EV alternatives are already in play. The single most important factor has probably been the new CAFE standards here in the States. These will help produce more fuel-efficient vehicles based on the internal combustion engine (ICE). However, automakers appear to have realized that in order to make the grade they will have to innovate and adopt a greater use of EV technology across their respective model ranges.

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

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

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

Battery Efficiencies and Cost Reduction

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

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

  • Any analysis based on the reputed cost structure faced by A123 Systems (AONE), which puts at battery costs at $1,000 per kWh, is not particularly insightful in a discussion of the future of the EV market as a whole. Developments in the overall EV market will clearly be driven by the more efficient producers, of which A123 Systems is currently not one.
  • Tesla’s Model S appears to have significant potential to alter the metrics in the EV market. The company has of course not released cost details of its new battery packs. However, the company has provided literature suggesting that on a $ per kWh basis the battery pack of the Model S is down to 42% of the cost of the original battery pack for the first version of the Roadster. The Roadster Sport had already gotten those costs down to 69%, so the gains continue to be impressive. The further expected gains are no doubt based on the Custom 18650 automotive cell in development with Panasonic.
  • That is why Tesla appears to be able to suggest that when the 300 mile version of the Model S is released next year it will cost somewhere around $75,000. There appears to be a demand for such a luxury EV and those metrics start to offer an interesting option in the luxury car market.
  • Efficiency gains that have been made elsewhere should also be recognized. For example, the new Ford Focus BEV has a 70-mile single-charge range, similar to that offered by the Nissan Leaf. However, the company claims that its 23 kwh battery pack can be charged with a Level 2, 240-volt charger in 3-4 hours – almost twice as fast as the Leaf.
  • Looking forward on a more medium-term basis, potential advances will no doubt come from new innovation related to alternative battery technologies – particularly related to Vanadium for example. Again, it is not necessary to try and pick winners. It’s simply the case that competition will spur innovation. These new technologies are of course a threat to lithium battery specialists such as A123 Systems. However, they are nothing but a potential boon to a company such as Tesla, who is not tied to a particular battery system and who could work with whatever a Panasonic or alternative can provide in the future most cost effectively.
  • Perhaps the most significant point is that further gains, particularly in lower end commuter-orientated EVs and PHEVs, are likely to come from other production advances outside of battery technology. A critical issue is likely to be weight-shedding and related new materials for example. This is no doubt the key to GM’s expanded relationship with LG Group. GM had previously been collaborating with LG Chem on the battery packs for the Volt and the Ampera. However, the company has recently announced that the relationship between the two companies will be expanded to involve LG Group as a whole. This will allow the Korean company to offer its expertise in other areas, particularly related to ‘vehicle structures and architectures’. See more detail here. And Tesla of course is already working with aluminum in order to get the weight of the Model S down.
  • Finally, the introduction of Level 3, 480-volt chargers is also significant to the potential growth of the EV market. This will be particularly true once they are installed where they are most needed, across the nation’s Interstate highways – as is for example planned with regard to the Pacific Coast Green Highway. These Level 3, 480-volt rapid chargers can provide a 19 kwh charge to a Leaf for example in 30 minutes. Some other EVs can be charged more rapidly. Driving from LA to the Canadian border in a Tesla will be a breeze.

All of this suggests that in fact there is no slow crawl ahead when it comes to overall efficiencies for EV vehicles. Most importantly, such efficiencies in terms of the performance of the cars as a whole will not be limited to efficiencies in battery technology.

What to Invest in: Tesla
  • As discussed above, Tesla is a low cost player in terms of the company’s battery power train technology – despite being well placed in the luxury market.
  • The company has developed a significant brand name.
  • When the Model S is first produced in 2012, sales appear likely to go well. The company already has customer orders for some 5,550 units.The company’s target of 20,000 unit sales in full year 2013 seems reasonable.
  • Tesla has an ongoing relationship with Toyota and seems likely to play a significant role in the roll-out of Toyota’s EV program. The suggestion is that the two companies are currently negotiating over a $1bn deal – more detail here.
In my disclosure below, I have stated that I own no stock in any of the companies discussed. This is simply because, having had a reasonable month in difficult conditions, I decided to use Friday’s rally to lock in profits on my clean technology portfolio. I intend to use any weakness into September to buy back my positions in stocks such as Tesla.
Finally, the bottom line is that the global issues discussed above will keep bringing both policy-makers and consumers back to the same questions. There is only one answer. It’s time to break oil’s monopoly in the transportation sector – and to put our trust in the free market and American innovation.

Disclosure: I have no positions in the stocks discussed.