The electrification of vehicular transport is coming. France, the UK and now India have set target dates for the demise of petrol engines. (Diesels will be banished even sooner). But are electric cars really all they are cracked up to be? Are they really that environmentally friendly? And will the economics of electrification really be that favourable?
A new landscape
When I first started to write about electric and self-driving cars in these pages it all sounded a bit like science fiction. Now that a number of leading governments have declared target dates for the demise of petrol and diesel powered cars, it is becoming reality.
On 03 June, a few days after the Trump administration announced that America would walk away from the Paris climate accords, the Indian government made a bold vow to sell only electric vehicles by 2030 – meaning that petrol cars would still be allowed on the roads but that all new cars would be electric[i]. In July. President Macron of France announced that French roads would carry only electric cars in 2040. Shortly thereafter, the British government followed France’s target.
Much has been written about both the desirability and feasibility of these targets over the summer. Some commentators believe that India’s initiative is more of a gesture to stimulate the renewables sector in that country. The French, who produce more than 90 percent of their electricity using nuclear power have a stated aim of being the European leader in electric cars – Renault SA (EPA:RNO) is already one of the leading producers of electric cars globally. Yet the announcement by the British government was greeted with a barrage of derision.
In the meantime, the largest electric only manufacturer, Elon Musk’s Tesla (NASDAQ:TSLA), continues to hit stratospheric valuations. As Jim Mellon observed in these pages on Tuesday, Tesla, which has never made a profit, has a larger market capitalisation than General Motors (NTSE:GM). Jim noted that the current Tesla stock price (around $347 as I write) attributes a market cap for each car Tesla sold in 2016 of $880,000; while GM’s stock price (currently around $35.50) equates to $5,000 per car sold last year.
Now I wrote in the lead article for the April edition of the MI magazine: After more than a century of reliance on fossil fuels the electrification of vehicular transport is going to be huge. I unsay none of that. But the obstacles ahead of us in making electric cars universal are daunting. And it is by no means a foregone conclusion that the early entrants into this sector will make huge returns.
Electric cars – their limitations
Electric cars face four intractable problems.
The first is that, at present, their range is much more limited than that of petrol cars and, even with the prospect of advances in battery technology, that is likely to remain the case.
A Nissan Leaf can manage 124 miles on a fully charged battery after which it would have to be plugged in for a minimum of four hours if you install (at extra cost) a special recharging point in your garage. If you plug it into a conventional UK power socket the charge will take 12 hours. But if you can find a rapid recharging point of the type that Ecotricity (private) is rolling out around the M25 motorway and elsewhere, you could get an 80 percent recharge in just 30 minutes.
The 124 mile range, however, is only in ideal conditions and numerous car magazines have claimed that, in practice, the range of various electric cars is often somewhat less that their manufacturers advertise. Moreover, just as with mobile phones, the charging capacity of an electric car battery declines with age. According to one website, a Nissan Leaf which had done 52,000 miles had a range of 45 miles – and one which had clocked up 90,000 miles had a range of just 30-35 miles.
It is by no means a foregone conclusion that the early entrants into this sector will make huge returns.
Tesla’s Model 3 has a stated range of 215 miles between recharges but, reportedly, the owner of a four-year-old predecessor model claimed that his Tesla could not do more than 150 miles without a recharge. Tesla’s competitive advantage to date has been in battery technology.
What’s more, the range of electric cars, unlike that of petrol cars, is sure to be reduced in cold weather. Electric cars are much more efficient than petrol and diesel cars. In fact the engineers tell us that electric motors can be 80 percent plus efficient while petrol engines are only about 25-30 percent efficient. Why? Because a lot of the energy consumed in the internal combustion engine is released as heat and noise. But the petrol car has one advantage. The cabin can be heated by waste heat collected from the engine cooling system (which would otherwise be dissipated by the radiator – without which the engine would overheat and catch fire).
In short, in-car heating is free for a petrol-powered car. But for an electric car the cabin heat would have to be produced by the battery, thus reducing the driving range further. As well as powering the electric motor, the battery would have to power the equivalent of a two-bar electric fire which consumes about 1-2 kW!
The second problem is the cost of batteries. The Nissan Leaf is currently the world’s best-selling electric car. Nissan’s website quotes a list price for the basic model of £16,680 – without the batteries. You can either rent the batteries from Nissan at a cost of about £90 a month (depending on your estimated mileage) or you can buy them outright for about £5,000. So the real cost of the car is nearer £22,000. (The on-the-road cash price with finance as I write is £24,190).
As for the cost of the batteries, the £5,000 price tag is only possible because the government is offering a subsidy of about £4,500 per car. Without that subsidy the market price of the batteries would be nearer to £10,000 and that of the on-the-road car would be over £26,000. The nearest petrol equivalent car in Nissan’s range is the Micra which retails at around £12,000. So, very approximately, one can say that currently an electric car costs twice that of its petrol analogue.
The third problem is the shortage of charging points. Norway, where 29 percent of new cars sold last year were electric, has nearly ten times the number of charging points per head of population than the UK. Certainly, new charging stations are being rolled out in UK cities and on motorways by the oil majors and by niche players like Ecotricity. But, given the range issue, we really need to have about four times as many charging stations as there are currently conventional petrol filling stations. One can imagine the hard shoulders of Britain’s motorways clogged with discarded vehicles, the drivers of which have miscalculated their journeys and run out of juice…
There is a fourth issue which has been little discussed thus far. The disposal of used electric car batteries will be a major challenge as the risk of environmental contamination is high. This will also be costly – and someone will have to pay for it. What’s more, we are already running into a shortage of lithium – the essential material in these batteries – which means that battery prices will be under upward pressure, despite increased economies of scale.
Electric cars – advantages
The cost of running an electric car is currently far cheaper than the cost of running a petrol or a diesel car. Nissan suggests that the electricity cost for the Leaf works out at two pence per mile as compared with a petrol cost of over ten pence per mile for an equivalent petrol car.
Sceptics will point out that much of this disparity arises through tax. As we know, about 67 percent of the cost of a litre of petrol in the UK is tax. That is about 79 pence on a litre of fuel at the current pump price in London of £1.18 per litre.
This raises another interesting problem. If the tax revenue on petrol in the form of fuel duty and VAT were to dry up completely – as the government foresees it will – the government will have to raise equivalent revenue elsewhere. Tax revenue on fuel duties last year, not including VAT, amounted to a massive £27.6 billion according to the IFS. In their wisdom the politicians may determine that they have no choice but to tax the electricity used by motorists to charge their cars. The cost advantage of electric transport might thus evaporate overnight.
The cost advantage of electric transport might evaporate overnight.
In any case, the environmental advantages of electric cars (fewer carbon emissions) will only come about if we produce the electricity used to power them via renewable energy (wind turbines, solar panels etc.). In 2016 only 9 percent of the UK’s electricity output was from renewables. That will clearly have to increase. Yet we know that electricity produced by renewables will be more expensive than that currently produced by fossil fuels. Therefore, as electric cars become standard, the cost of electricity is likely to rise anyway.
So by the time we get to 2040 we may find that the cost of running an electric car is comparable to that of running a petrol-powered car today.
Electricity demand
If we were really to ban all petrol cars and run only electric cars, by how much would demand for electricity increase in a country such as the UK? This depends on a number of assumptions.
The first is that owners of electric cars would choose to recharge them off-peak – that is, at night. That is reasonable if we assume that motorists will use their cars for short journeys – the school run, shopping, short commutes – and then return home and recharge them overnight. This also begs the question, much debated of late, of whether we could use other high-demand household electrical items (such as kettles, oven and immersion heaters) without tripping the household main fuse – and being plunged into darkness.
But if people (and truckers) are making long journeys they would have to recharge at charging stations during the daytime.
There are also assumptions to be made about the overall impact of electrification on behaviour. Some have argued that electrification could incentivise the migration of rail freight to the roads. This, together with the prospect of cheaper self-driving convoys of lorries on motorways (much reported over the Bank Holiday weekend[ii]), may increase the overall volume of traffic on our roads.
Therese Coffey MP, the UK Environment Minister, claimed in a letter to the Daily Telegraph on 24 August that the all-electric future will entail an increase on today’s peak demand of just eight percent.
It turns out that Ms Coffey’s is the most optimistic scenario outlined in The National Grid’s Future Energy Scenarios 2017 which sets out five scenarios for energy production and use in the UK. (Readers can download this document by clicking the hyperlink). The fifth scenario -tucked away on page 93 – envisages that the increase in peak demand will be in the order of 30 GW as against the total existing peak capacity of 60GW – that is an increase of 50 percent.
As far as I am aware, there are no plans to expand electricity generation in the UK by 50 percent by 2040. This opens the real possibility that when, in 2040, you arrive at your motorway charge point, say half way between London and Leeds, there will be no power available. You will just have to wait until the power comes back on. Maybe a new affectionate name for electric cars will emerge: snooze pods.
Economic impact of electrification
One recent report by the Green Alliance argued that the 2040 target was not good enough: a 2030 target could halve oil imports into the UK within ten years. But Wood MacKenzie reckons that the dramatic fall in fuel consumption by cars will be partially offset by a rise in consumption by commercial vehicles and aviation, and that the net demand for oil will fall by only 20 percent.
Since 01 April when tax breaks were removed Tesla’s Hong Kong sales have been as follows. April: zero; May: five.
Overall, if demand for oil is going to fall significantly worldwide, one should assume that the price of oil will fall also – thus narrowing the differential between the costs of electric and petrol motoring. The Petroleum Industry Association which represents the interests of Britain’s six major oil refineries insists that oil will remain a major part of the UK economy.
The subsidy circus
In markets such as Denmark and Hong Kong where subsidies to buy electric vehicles have been removed, sales of electric cars have fallen dramatically. 3,700 Tesla models were sold in Hong Kong in the first quarter of this year. Since 01 April when tax breaks were removed Tesla’s Hong Kong sales have been as follows. April: zero; May: five.
Tesla’s share price has been sustained by its order book of over 400,000 vehicles – many of them in California where the subsidy regime on car batteries is generous. Sooner or later those subsidies will be reduced and the company’s sales may go the way of Hong Kong.
Just around the corner?
Twenty years from now technology may have solved the problems I foresee. Battery technology may be such that sturdy electric cars have a range of 700 miles and the widespread use of nuclear fusion reactors may have made electricity cheap and plentiful. On the other hand, it may be that there are physical limits to battery technology and nuclear fusion, which has been just around the corner for the last 50 years, will probably still elude us. I don’t know – and neither does the government.
Moreover, some of us might have appreciated the right to run around in efficient petrol cars if we wanted, especially for long journeys. I can’t imagine that the electric version of the Paris-Dakar rally will be quite the same.
Just on the basis of the precautionary principle it might have been better to have made 2040 an aspirational target for the triumph of electric cars rather than the twilight of the petrol heads. There is certainly a lot of politics going on. Was it coincidence that DEFRA announced the British target in the same week that BMW (ETR:BMW) announced plans to build the electric version of the Mini in Britain (with German motors, of course)?
As electric cars become mainstream so batteries will get cheaper to produce and may become somewhat more efficient – but the gradual removal of government subsidies will cancel out any cost reductions. In the same way, as electric cars become ubiquitous the cost of electricity will surely rise with more of it generated by costly renewables and then taxed to make up the government’s short-fall in tax revenue.
No doubt we shall all own electric cars in 2040. But it is just as well that we shall be practically unable to undertake long journeys in them – because most of us will be unable to afford to anyway. Thank you once again, Mr Musk.
[i] See: http://money.cnn.com/2017/06/03/technology/future/india-electric-cars/index.html
[ii] See Driverless lorries to hit UK roads, The Daily Telegraph, 25 August 2017.