John Petersen has been a breath of fresh air among Tesla analysts, offering insightful commentary on the machinations of Tesla's management. His article, "Tesla's Non-GAAP Fairy Tale" is a must-read for anyone interested in Tesla. So it was with some dismay that I read his recent post declaring that long-range battery electric vehicles, of which Tesla (NASDAQ:TSLA) is the prime example, to be an "economic, energy and emissions abomination." This statement is simply untrue.
Modeling Life Cycle Costs
His post was based on research performed by a group at UCLA for the California Air Resources Board which compared total energy consumption, CO2 and pollution generation, and dollar cost over the vehicle life cycle for three types of cars, a gasoline powered economy sub-compact (modeled after the Nissan (OTCPK:NSANF) Versa), a battery powered electric sub-compact (modeled after the Nissan Leaf), and a hybrid sub-compact (modeled after the Toyota (NYSE:TM) Prius). The life-cycle costs (either in terms of energy, dollars, or emissions) included all parts manufacturing, propulsion system manufacturing, transportation, operation of the vehicles, and final disposal.
Perhaps the most important finding of the study was that a hybrid EV like the Prius provided the most cost effective (in dollars) way to achieve lower energy cost and CO2 emissions. Something that those of us who can't afford a Tesla can take to heart. But the Leaf EV type achieved the absolute lowest life cycle energy cost and CO2 emissions of the three types modeled in the study.
Another important finding of the study was that the cost to manufacture the battery pack of the EV was a large part of the overall energy and pollution cost of the EV, partially offsetting the benefits of running the car purely on electricity. In the chart below, I summarize the study results for total energy cost for the three study vehicles types, as well as provide extrapolations for a gasoline powered Mercedes E350 sedan and the two currently available models of Tesla Model S sedans.
In the chart, I also include the difference between my own and Petersen's total energy cost estimates, labeled the "Petersen Surplus." Although one could argue that the differences are not large and merely the result of differing estimation approaches, Petersen's result for the Nissan Leaf case (which he calls BEV-73) should have agreed with the study result, as my plot does.
My scaling for the Mercedes E350 and the two Tesla models is straightforward and sufficient for this type of life cycle cost study. Manufacturing and transportation energy costs are scaled by the ratio of the weight of the E350 relative to the Versa, a factor of 1.22, and for the Tesla, by its weight ratio relative to the Nissan Leaf, a factor of 1.41.
The Usage energy cost for the E350 is scaled by the ratio of EPA city mileages, 31 for the Versa, and 21 for the E350. For the Tesla, usage cost is scaled by the ratio of the curb weight of the car relative to the Leaf.
Propulsion system manufacturing energy cost for the E350 is scaled by weight ratio compared to the Versa. EV Propulsion system energy cost for the Tesla is scaled by ratio of single charge range, 75 miles for the Leaf and 225 and 300 miles for the Tesla models.
The Petersen "surplus" becomes even greater for the life cycle CO2 emissions, as the chart below shows.
For CO2 emissions, I adopted exactly the same scaling approach as for energy cost.
Even without the Petersen "surplus" my own results support his observation that the large battery packs of the long range electric vehicles can push the life cycle energy cost and CO2 emissions into levels comparable to a gas powered sub-compact. Does this make cars like the Tesla environmental abominations? Of course not.
Unfair to the Point of Absurdity
The comparison between an $80 K Tesla sedan and the Versa is unfair to the point of absurdity, which is why I include the Mercedes E350 for comparison. People wealthy enough to afford a Tesla are not usually going to opt to buy a Versa just to minimize their carbon footprint, even if some environmentalists think they should. Even Petersen's results show that the Tesla does a good job of reducing the carbon footprint, especially compared to more expensive gas guzzlers that don't even get the mileage of the relatively thrifty V6 powered E350.
Petersen also ignores trends that will make battery EVs even more advantageous in the future. One of these is discussed and analyzed in the UCLA report, which is the requirement under AB32 to increase the contribution to 33% of renewable energy (mostly wind and solar) to the state's total electrical energy generation by 2020. In this scenario, carbon footprint of BEVs is reduced by 20%.
Another trend is improvement in Li ion battery capacity which will enable lighter and more compact battery packs for a given vehicle range. This is an extremely active area of research, and although it's difficult to predict the pace of progress, continuing improvements in this area are inevitable.
Transforming the User Experience
Most importantly, Petersen ignores the disruptive character of electric propulsion in transforming the user experience of the driver. Electric propulsion transforms noisy, dirty, horseless carriages into smoothly whirring electronic appliances. Realizing when a technology can transform user experience for the better, and thereby create demand where it didn't exist, is a key attribute of "visionary" technologists such as the late Steve Jobs. Elon Musk has demonstrated this attribute as well with the Tesla automobile.
Whatever the deficiencies of the Tesla Motors business, as described by writers such as Petersen, we should not be blinded to the fundamental sea change that has occurred in personal transportation as a result of the Tesla Model S.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.