Electrification 2030 – 10 years to re-engineer the automotive sector

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Electrification 2030 – 10 years to re-engineer the automotive sector

It’s official. Sales of new petrol and diesel cars will be banned in 2030 and hybrid cars in 2035. Electrification of vehicular transport will happen – but at what cost to the economy? And will it be so very advantageous to the environment? Victor Hill inquires.

Green tidings

This week Mr Johnson unveiled his plan “to reset” his flagging government, exhausted by ten months of the coronavirus pandemic. The prime minister wants Britain to become a world leader in green technology. As part of this agenda it was confirmed on Tuesday (18 November) that the ban on the sale of petrol and diesel cars would be brought forward by ten years from 2040 to 2030.

Britain, under Mrs May, pledged to become a net carbon neutral economy by 2050 and the acceleration of the phase-out of internal combustion engine (ICE) powered vehicles was not unexpected. Only Germany, the Netherlands and Ireland have imposed a similar target of 2030, while Norway has set a target for this of 2025. But Ireland and Norway are not home to volume car production as Germany and Britain are. Britain is, after Germany, the second largest car market in Europe with over two million new cars sold last year, of which just eight percent or so were electric.

The AA (LON:AA) has called for a means-tested scrappage scheme to help drivers to make the transition to electric cars. Presumably, there will continue to be an active second-hand car market for ICE-powered cars after 2030, and indeed there will be some enthusiasts who refuse to go electric just as there are people who like to drive vintage cars today. Many people (this writer might be one of them) will just postpone the decision to buy a new car at all in the late 2020s – so as to see what happens after 2030 and ride around in their ageing gas-guzzlers for longer. It is likely that if home-working takes hold, as now seems likely, total miles driven may be much reduced and that could have as much of an impact in terms of reducing CO2 emissions as going electric.

Part of the problem is that electrification might put new cars beyond the reach of the average motorist. Last week the CEO of BMW (ETR:BMW)Oliver Zipse, warned that banning the sale of new petrol and diesel cars would render many drivers unable to afford a new car. He said that BMW would continue to sell a full range of electric vehicles but indicated that consumer demand would not be fulfilled without new petrol and diesel-powered cars. BMW has just launched its new flagship electric vehicle, the i-X, which is designed to compete with the Jaguar I-Pace and the Audi e-tron which sell new at around the £65,000 price point. BMW sells cars in over 140 countries and territories, only a handful of which will ban conventional cars in the 2030s – or even the 2040s.

Even with government subsidies the cheapest electric car will be pricy. The most popular electric car, the Nissan Leaf, comes in at just under £30,000 and the Vauxhall Corsa-e at around £26,500. Electric car advocates claim that purchase costs will fall as the number of new models expands and the second-hand market for electric vehicles deepens. Further, motorists will quickly appreciate that the running costs of electric cars are substantially less than those of petrol or diesel-powered cars, making the lifetime costs of electric cars arguably cheaper than their ICE-powered analogues.

While the ban will be popular amongst green-inclined metropolitan types, it may not go down so well amongst those who live in rural areas, self-employed tradesmen and indeed the Red Wall stroke Blue Wall voters that Boris Johnson won over in Northern England just one year ago. (White Van Man’s revenge is nigh.) On the other hand, most people who use public transport will welcome all-electric busses such as those manufactured by Optare, based in Leeds, which is owned by the billionaire Hinduja brothers. 

From the government’s point of view, however, one issue will be how to cover the tax shortfall of about £40 billion annually of revenue from fuel duty once the transition to electric is complete. One possible solution, mooted this week, is a general road pricing scheme which the AA has already dubbed a poll tax on wheels. Another idea is to open road names to sponsorship deals. I look forward to driving up the Manchester United M6 and down the British Airways M3to Gatwick.

If the large remaining UK automotive manufacturers – Nissan, Jaguar Land-Rover, Toyota – are not permitted to sell ICE-powered cars in the UK after 2030 then they may think twice about manufacturing their legacy ICE-powered vehicles for export here too. There are still 19 plants in the UK which produce passenger cars which account for about 168,000 jobs according to SMMT – plus another 800,000 jobs in local supply chains. It is notable that the French, who have a keen sense of their own self-interest, have stuck with a target for the ban on new ICE-powered vehicles of 2040.

One wonders if automotive manufacturers resident in the UK will be able to achieve the economies of scale in the production of electric vehicles which they have achieved for conventional vehicles. Nissan produced 487,000 cars at its Sunderland plant in 2018. Production is likely to be well down this year given the pandemic and the shrinkage of the economy as a whole. But even if the economy is buoyant in 2030, will Nissan really be able to sell 500,000 new electric vehicles? To put sales into perspective, JLR has managed to sell just 16,000 units of its I-Pace model over the last year.

Andy Palmer, the former CEO of Aston Martin, now chairman of Optare and vice-chairman of Slovakian battery firm InoBat, has warned that if Britain is to have a viable electric car industry in the future then we need to build up large-scale battery production capacity. Battery production needs to be located alongside car production so as to keep the supply chain as short as possible – as Nissan has demonstrated in Sunderland. Sweden, Germany and France are all building giga-factories to deliver lithium-ion batteries. The UK has not yet attracted any battery producer such as LG ChemCATL, Panasonic or Tesla. This year China has announced 38 new battery plants, Europe has announced two and the US three. The UK has announced none.

As things stand, we risk becoming even more strategically dependent on China at a time of increasing geopolitical risk. Alas, Mr Johnson’s ten-point green deal does not address this. But then it is largely an attempt to outgreen the greens and long-term industrial strategy does not really come into it. That is why former Chancellor Lord Lawson described it on Tuesday as “economically illiterate”.

Bottlenecks

Notoriously, one bottleneck for the expansion of electric cars is the limited number of charge-points. Enthusiasts for electrification argue that the number of charge points in the UK is growing faster than the number of electric vehicles. On current trends, by 2030 there will be six charge points for every electric car – compared with one petrol pump for every 600 petrol and diesel-powered cars today.

The UK Department of Transport has doubled funding this year for public charging points which have risen five-fold since 2015. Yet, according to the AA, just one in six councils has installed on-street charging and 14 percent of all councils have no plans to install new charging points. 

On the other hand, the nation will have to increase its power generation capacity substantially in order to charge all those electric cars. There are currently 38 million cars on Britain’s roads. If all of these were electric, assuming average annual mileage of about 12,000 miles and average battery sizes, electric cars alone would consume 10-17 percent of the National Grid’s current electricity supply. To meet that demand Britain would need to build the equivalent of 10 new nuclear power stations with the output of Sizewell C, construction of which is about to begin in Suffolk.

That is why the prime minister is keen to roll out more wind-power arrays and why he is keen on new modular nuclear reactors which can be switched on and off relatively easily. Much of Britain’s existing nuclear power infrastructure will be decommissioned between now and 2035, so management of power capacity will become a major concern. But, even if all of this is well managed (I’m not too confident it will be) the likelihood that electricity prices will rise is high – thus reducing the cost advantage of electric motoring.

News from Tesla

I last wrote at length about Tesla back in August when its share price had gone stratospheric. From the beginning of the year to the end of August Tesla’s share price increased five-fold. This was partly due to the boom in tech stocks brought on by the coronavirus lockdowns; yet over the same period Apple rose by 76 percent and Facebook by 43 percent so there were clearly other factors in play. The most significant factor was that Tesla finally started to make money in tangible accounting terms. On 08 September, however, Tesla’s shares tumbled by 21 percent in one day. The notion that Tesla could be worth more than the rest of the global automotive industry combined came into question – to put it mildly.

But the Tesla short-sellers – amongst whom our very own national treasure, Evil Knievil – did not have things their way. As I write (Thursday) Tesla’s shares are back to their all-time high at around $500. All of September’s losses have been recouped. (OK, it has an interstellar P/E ratio of 990.) This is a good moment then to reconsider why Tesla holds such a unique place in the electric vehicle universe.

Firstly, Tesla has no ICE legacy – it only makes electric cars, pure and simple. And they are stylish and alluring with a potent brand. Secondly, it has the edge in battery technology. Third, it seems to have resolved its supply chain problems and has a manufacturing base that can be ramped up to meet increasing demand, including a giga-factory in China which will serve that potentially enormous market for electric cars. A fourth factor is that the stock is supercharged by the Musk magic – the backstory of SpaceX, which is also going from strength to strength, being now the first company to ferry astronauts to the International Space Station. That encourages the perception that there is much more technological wizardry to come, not least in terms of AI and self-driving cars.

Consequences

According to Bjorn Lomborg, President of the Copenhagen Consensus Center, a Danish environmental think-tank, the transition from ICE-powered cars to electric ones will deliver only marginal cuts in CO2 emissions and at a very high price. Motorists are still generally not keen on electric cars because of their short range and the time it takes to recharge them. They also resent that electric cars are more expensive that ICE-powered cars. As a result, governments have had to subsidise electric cars to bribe motorists to buy them.

Before Mr Trump in the USA, where less than one half of one percent of the nation’s cars are battery electric, the Federal government was offering a grant of $10,000 for each new electric car sold. But since most purchasers of electric cars are well-off and already have at least one ICE-powered car, this looks like a subsidy for the rich. The suspicion is that many well-healed people buy electric cars to signal how green and virtuous they are.

Many countries have also given electric cars a cost advantage by exempting them from various forms of road tax. In Norway, this exemption is now costing the Kingdom’s government over €1 billion a year and has been challenged in some quarters. In the UK there will be no car tax on corporate fleets of fully electric vehicles in 2020-21, but the levy will rise to one percent and then two percent in subsequent years. Some advocates of electrification argue that VAT should be reduced on electric cars to give them a price advantage. I can foresee political difficulties with that proposal.

According to the International Energy Agency (IEA) by 2030, if all countries stick to their targets, the world will have 140 million electric cars on the road out of well over one billion. That will not make much impact on total carbon emissions, Mr Lomborg argues, for two main reasons. Firstly, most large batteries for electric cars will continue to be manufactured in China where a large part of the energy mix is still derived from coal-burning power stations. Secondly, in most countries electric cars will continue to be powered with electricity generated using fossil fuels. As a result, the IEA reckons that those 140 million electric cars will result in a cut in global CO2 emissions of just 0.4 percent.

But at the end of the day, one must go with the flow. Daimler-Benz has announced that it will never develop another ICE. Volkswagen has invested billions in electrification. Personally, I would have preferred the politicians to let the markets determine the speed of vehicular electrification rather than imposing an artificial deadline. But the direction of travel is clear. The internal combustion engine, which powered the second industrial revolution, is dead. Almost.

***

Just a reminder to regular readers to sign up for the digital-only Master Investor Show 2020 which you can watch online on Friday, 04 December and Saturday, 05 December. I’ll be on a panel discussion chaired by James Faulkner on the Saturday. The line-up of speakers and exhibitors is, if anything, more impressive than our sell-out physical show last year. I hope I’ll be treading the boards once again at the 2021 Master Investor Show and that you will be there in Islington too – one can but dream… Meanwhile, the Show must go on.

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Comments (1)

  • Victor Janulaitis says:

    Another valuable contribution from Victor Hill. Clearly EV’s will do more for Industrial retooling, revival and employment than for control of climate change. The chosen pace for the switch to EV’s is reassuring, as it allows research and development to continue with step by step improvements to battery efficiency and safety, while also allowing more time for the same work into the Hydrogen potential to continue. This could well emerge as the ‘Wild Card’ we are looking for. As for the threat of CO2, a great deal more can be done by achieving more efficient generation of electrical power ( nuclear and wind) and the provision of storage facilities with an updated system of distribution. Several of these elements are linked and will, to a degree, affect the performance of the others. Electrical power and EV’s are only one step in a complex equation and in several ways not the most important one. Would we really need all these EV’s, if we had an efficient 21st Century Railway System ? How much new generating capacity do we require if most of the peak usage could be satisfied from some form of storage, or a significant reduction of peaks through higher building specifications? This is a subject which will remain with us for many decades to come, especially as it becomes overtaken by the scale of change required and the empty pockets to do it with!…

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