24 04 2015

Is this the turning point for fossil energy (4)?

As oil prices have plummeted, they have overshadowed the other important reality: renewable energy prices are also falling. And contrary to oil prices, the fall will continue in the future. So renewables are becoming a viable and profitable alternative for electricity generation, helping the world to get off its dependency on fossil fuels. But what about cars? They are intimately linked to fossil fuels, or – if need be – biofuels, to make the internal combustion engine work. Worldwide, transport is actually responsible for around 27% of all energy consumption, and 63% of oil consumption. So is there any future for renewables here?

Some years ago the rage was all about fuel cells and hydrogen (Toyota still believes this is the future). But presently, most believe the alternative – if it exists at all – is the electric vehicle (EV). Presently, the EV penetration is minimal. It is estimated that as of December 2014, 712,000 plug-in electric cars have been sold worldwide since 2003, which represent about 0.06% of the world's stock of motor vehicles, estimated at 1.2 billion vehicles by mid 2014. Hence, we are not even talking about percentages. So it would be easy to just shrug it off as irrelevant. But that would be too easy. Actually, things have changed the last two years, and may start changing rapidly in the future.

According to a report from the German Centre for Solar Energy and Hydrogen Research, 320,000 of all the full-electric plug-in cars have been registered in 2014 alone (not including the hybrids as the Toyota Prius).The main market is the US where 117,000 EVs were registered in 2014, followed by China with 54,000. Still small numbers, but they are growing fast. So something seems to be going on.

As is often the case, much depends on China. China has the world's biggest market for cars, and the pollution problems in the larger cities are now forcing the government to act. One problem is the dependency on coal for heating and electric production – China wants to lessen its dependency on coal, moving to natural gas, nuclear power and renewable energy. The other problem is the pollution from cars - the Chinese government had planned to move to EVs, with a target of 500,000 EVs by the end of this five-year plan (2011-2015) and 5 million EVs in 2020 (including the hybrids and fuel cells). They are very far from the 2015 goal – they will perhaps reach 20% of it by the end of 2015. This is despite a government subsidy of up to 60,000 Yuan (almost 10,000 USD) per car, exemption from sales tax and free licence plates (which otherwise are very costly in the larger cities). It seems, the Government has overseen a lot of barriers to EV adoption. The single most important is charging – a big majority of Chinese families lives in flats, and there is a lack of charging facilities so the car can be charged at night. And at the workplace there is the same problem. To this comes that building administratorstend to have a negative attitude to charging, as they think it constitutes a fire risk.

However, it seems the Chinese government will insist on EVs. A big investment (16 bn USD) in charging stations has been announced, new government vehicle procurement has to be at least 30% EVs and many cities are giving incentives to EVs – as an example, Beijing has exempted EVs from its road space rationing scheme. These different initiatives seem finally to be working, with swiftly increasing production and sales of EVs in the first quarter of 2015. China is now set to be the world's largest producer of EVs in the coming years, which will help it to reach economies of scale and drive down costs – and by the way permit the Chinese to leap-frog the traditional car-makers and perhaps establish themselves as leaders in EVs.

Even if the EV is quite new on the market, it is rapidly becoming a mature product. Apart from the battery, the motor and the transmission system, the EV shares the technology with conventional cars. The motor and the transmission system are much simpler than for the conventional car. The performance is also good: it is faster than conventional cars, it is cheaper in maintenance and of course much cheaper in fuel. Nissan is the company which has most experience in the production of EVs. 165,000 Nissan Leaf have been produced and sold worldwide since 2010, and it has proved to be extremely reliable, including the batteries.

Another important step for the EVs has come from outside the vehicle industry. A newcomer to the carindustry, Tesla, started in 2012 the production of a luxury EV (“model S”), which has helped to change the public image of the EV. An EV is not necessarily an odd looking, extremely compact car for city use. Tesla has showed that the EV can compete with conventional cars also on performance and convenience and has with this set a new standard for EVs.

The most important bottleneck of the EV industry is the battery pack. One problem is price – the price of the battery pack alone is probably adding 5,500 USD to the price of a Nissan Leaf (and 15-20,000 USD to the price of a “Model S”). The quality and price of the battery are the main determinants of he competition – whoever can put in the cheapest reliable battery with the longest lifespan, will win on the market for EVs. The other problem is production capacity. If the production of EVs takes off, there is a need to dramatically increase the production of batteries. Presently it is Japan that is leading, particularly Panasonic, but China is catching up. The newcomer, Tesla, has ambitious plans to expand EV production and to address this bottleneck. Together with Panasonic, it is setting up what they call a “Gigafactory”, presently under construction in Nevada at a cost of around 5 bn USD, which will have an annual capacity of 50 gigawatt-hour (GWh) – more than the whole existing worldwide capacity. The expectation is that this will drive down costs with at least 30 % due to economies of scale. Less noticed is that the Chinese battery producer BYD, mostly known for their electric buses, but now also with big ambitions in the EV market, already has a production capacity of 4 GWh and plans to add 6 GWh annually in the coming years, thus rivalling Tesla's “Gigafactory”.

As the batteries are the main competitive parameter for EVs, and the market potentially is very big, the whole issue is shrouded in a cloud of secrecy. VW has announced that they soon will come up with a much better solid state battery. Nissan, the present market leader, has hinted that its upcoming models will have double range. And then of course there are the continuous stream of reports on “breakthroughs” in battery technology (charging in one minute, increasing the energy density five- or tenfold, doubling the lifespan etc.), thus changing the whole market. And then there is Toyota insisting that they will revolutionise the whole market with hydrogen and fuel cells, driving EVs out of the market. At least it is not boring.

It does really look as if things will change rapidly and that EVs will become mainstream in a couple of years. Regarding adoption, it will be China leading the race with Europe as the laggard (except for Norway). This will imply a great boon for air quality in the cities. However, the contribution to the environment will not be substantial, unless the electricity generation is greening as well (which happily seems to be the case). And it will do nothing for the congestion problems. But that is another story.

1. First article on the future of renewable energy - click here.

2. Second article on the future of renewable energy - click here.

3. Third acrticle on the future of renewable energy - click here.


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Thorbjorn Waagstein

Thorbjørn Waagstein, Economist, PhD, since 1999 working as international Development Consultant in Latin America, Africa and Asia.

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