On Tuesday I attended a Webinar produced by Lux Research entitled “Risk and Reward in the Over-hyped Electric Vehicle Market”. The program was well done, but largely rehashed an argument, which has been widely made over the past several months: That for the foreseeable future the supply of large format lithium-ion batteries will substantially exceed the demand for such batteries in automotive applications. The negative assessment by Lux and other lithium-ion skeptics is overly pessimistic, however, because it misidentifies the primary driver of the large format lithium-ion battery market.
Lux makes two arguments in support of its assessment. First, Lux suggests that adoption of heavy PHEV’s (i.e., PHEV-40’s, such as the Chevy Volt) and EV’s (pure electric vehicles, such as the Nissan LEAF) will be driven by the “payback period” for those vehicles (i.e., fuel cost savings over EV/PHEV purchase price differential). In the Webinar, Lux presented a slide showing the purported sensitivity of PHEV/EV sales to petroleum prices. At $70 per barrel, Lux anticipates some impact on HEV (hybrid-electric vehicles, such as the Toyota Prius) sales but virtually no impact on sales of EV’s or heavy PHEV’s. At $140 per barrel, Lux anticipates a more profound impact on HEV sales, but virtually no impact on EV sales and only a mild increase in heavy PHEV sales starting sometime around 2017. At $200 per barrel, Lux anticipates a somewhat more rapid increase in heavy PHEV sales starting at about 2015, but only a small increase in EV sales beginning at about the same time.
Lux’s second argument, also illustrated on a slide, overlaid the foregoing oil price sensitivity analysis on top of the announced manufacturing capacity of all Tier 1 (e.g., GS Yuasa, Sanyo), Tier 2 (e.g., LG Chem, Hitachi) and Tier 3 (e.g., A123, Ener1) large format lithium-ion battery suppliers through 2020. The slide showed, in somewhat dramatic fashion, that even in the most optimistic scenario (i.e., oil at $200 per barrel) total demand for EV/PHEV batteries by 2020 would not exceed the manufacturing capacity of even just the Tier 1 battery suppliers.
In conclusion, the Lux analyst making the presentation politely suggested that advanced battery companies need to be more “flexible” in their approach to the market. Properly understood, the message of the Webinar was to forget about the advanced automotive battery producers and invest, perhaps, in oil futures.
Although thorough and sobering, Lux’s analysis of the large format lithium-ion battery market is fundamentally flawed because it misidentifies the primary driver of EV/PHEV market: Vehicle electrification is not driven by oil prices; it is driven by government policy. Predicting consumer adoption of fuel efficient vehicles based on oil prices is unsound. The number of EV’s and heavy PHEV’s that American consumers will purchase between now and 2020 will have far less to do with the price of petroleum than with the nature of the government incentives and mandates that will drive consumers to make such purchases.
The tenuous relationship between gasoline prices and consumer demand for fuel economy is no secret. If the relationship was more certain, there would be no need for CAFE standards. The affection of American consumers for large automobiles has never been entirely rational. Moreover, petroleum producers have long demonstrated a willingness and an ability to manipulate oil prices in the short term in order to thwart serious progress on the problems of fuel economy and petroleum dependence. As a consequence, the more accurate predictor of consumer purchases of EV’s and heavy PHEV’s--and the volume of the large format lithium-ion battery market--is the nature of government mandates, not the price of petroleum.
A more important point, however, is that policies intended to incent consumers to purchase EV’s and heavy PHEV’s are not primarily about improving fuel economy. Adding EV’s and heavy PHEV’s to the national vehicle fleet would improve the overall fuel efficiency of the fleet, but they are almost certainly not the most cost-effective way to do so. Vehicle electrification is but one of many strategies that auto makers can use to improve the fuel efficiency of their fleets. Reducing the weight of vehicles, improving the efficiency of the internal combustion engine and adding start-stop batteries are other strategies and are, by most estimates, more cost effective. This is the point that Lux and other lithium-ion skeptics, such as John Petersen of Seeking Alpha, keep harping on ad nauseum.
But they miss the point. The need for heavy vehicle electrification (i.e., for adding large numbers of EV’s and heavy PHEV’s to the national vehicle fleet) is driven by the need for fuel diversity, not fuel economy. Fuel economy and fuel diversity are different and not necessarily related concepts. Reducing total petroleum usage is an economic objective driven by concerns about the impact of high energy prices on the U.S. economy and the transfer of wealth to overseas producers. Reducing petroleum dependence of the U.S. vehicle fleet by diversifying its sources of fuel is a strategic objective driven by the need to protect the country against a catastrophic Oil Shock event and to reduce the huge political, economic and strategic costs that the United States pays on an ongoing basis to guard against it.
Heavy vehicle electrification is critical to the important national objective of fuel diversity. While there may be better ways to achieve fuel economy than heavy vehicle electrification, EV’s and PHEV’s are indispensible in any effort to diversify the fuel sources of the national vehicle fleet and to protect the U.S. against an Oil Shock event. There simply are no other practical, near term alternatives to vehicle electrification if meaningful fuel diversity is to be achieved.
This, of course, leads us back to that primary driver of fuel economy and fuel diversity in the vehicle fleet: government policy. It is notoriously difficult to predict what government policy will be, particularly in the long term. Moreover, there is cause for pessimism that U.S. government policy will really support heavy vehicle electrification. The concepts of fuel economy and fuel diversity are regularly confused and this confusion leads to muddled policy towards both fuel economy standards and electrification initiatives. The current debate within the environmental community about the treatment of electric vehicles in CAFE standards is a case in point.
But clearer thinking may yet prevail. The almost complete reliance of the entire U.S. vehicle fleet on a single source of fuel is one of the great challenges of our time. Reducing the amount of petroleum consumed—so that we can use less gasoline and pay more for it—without breaking our absolute dependence on oil is a very poor energy policy and, undoubtedly, the wildest dream of every petroleum producer.
The U.S. government will support vehicle electrification long term and will do what it needs to do to make sure that EV’s and PHEV’s become a significant part of the national vehicle fleet. It will not do this because oil prices rise to $140 or $200 per barrel. It will do this because the United States needs to do it in order to avoid a national disaster and because not all national leaders are fools.
Don’t sell your lithium-ion battery producer stocks just yet.
Jim Greenberger is the Executive Director of NAATBatt, a trade association of companies in the advanced battery industry working to grow the market for advanced batteries in the United States, primarily in automotive and grid-connected energy storage applications.