Electric Drive - Still Crazy After Five More Years

by: John Petersen

The sunshine, lollipops and rainbows electric car press was at it again in mid-March. This time they were gushing over a $3,800 report from Pike Research predicting that automotive johlithium-ion battery prices will fall by more than one-third by 2017. According to Pike, the market for Li-ion batteries for transportation will grow from $2.0 billion annually in 2011 to more than $14.6 billion for 28 million kWh of batteries by 2017. For those without a calculator handy, the figures work out to a future industry average price of $520 per kWh in 2017 versus a current industry average price of $780 per kWh.

At the outset it's probably worth observing that the Pike forecast of 28 million kWh of annual battery sales by 2017 is a good deal more aggressive than last summer's forecast from Lux Research that estimated 2017 lithium-ion battery demand at 12 million kWh in their $200 oil price scenario, 3 million kWh in their $140 oil price scenario and under 2 million kWh in their $70 oil price scenario.

3.25.12 Lux Graph.pngClick to enlarge

Where Lux is forecasting a massive glut of lithium-ion battery manufacturing capacity for at least a decade, Pike apparently believes the capacity glut will only punish manufacturers for five years. Neither scenario strikes me as particularly attractive for investors in battery manufacturers like A123 Systems (AONE) which is struggling to find customers for 645,800 kWh of government financed battery manufacturing capacity and suffered $45 million in unabsorbed manufacturing costs last year.

Regardless of whether you prefer the Pike or the Lux forecast, electric drive will remain hopelessly uneconomic because small batteries are beautiful when it comes to transportation economics but large batteries are aggressively ugly.

To prove the point again, I'm going to assume that Pike's numbers are correct. I'm also going to assume an annual average fuel consumption of 330 gallons per year in a 37.8 mpg CAFE compliant 2017 model year passenger car and:

  • A $10 gasoline price;
  • A $1,000 per kWh pack level price for high power HEV batteries;
  • A $500 per kWh pack level price for automotive grade EV batteries;
  • A $300 per kWh pack level price for the lower quality batteries used by Tesla Motors (NASDAQ:TSLA); and
  • Fuel savings of 27% for a Prius, 75% for a Volt and 100% for an EV.

I don't believe for a minute that these assumptions are reasonable, but they do align well with the happy talk forecasts one encounters regularly in the mainstream media, political speeches and industry puff releases.

My first table summarizes the battery specifications for six electric vehicles, the cost of the battery pack and the annual fuel savings based on incremental fuel efficiency. The vehicles include the Prius HEV from Toyota Motors (NYSE:TM), the Volt PHEV from General Motors (NYSE:GM), the Leaf EV from Nissan Motors (OTCPK:NSANY) and three levels of the Tesla Model S.

Vehicle Capacity Per kWh Pack Cost Fuel Savings
Prius 1.3 kWh $1,000.00 $1,300 $897
Volt 16 kWh $500.00 $8,000 $2,475
Leaf 24 kWh $500.00 $12,000 $3,300
Model S-160 40 kWh $300.00 $12,000 $3,300
Model S-240 60 kWh $300.00 $18,000 $3,300
Model S-300 85 kWh $300.00 $25,500 $3,300
Click to enlarge

My second table summarizes the incremental battery investment, or IBI, and incremental fuel savings, or IFS, for each step up the electrification ladder from a conventional vehicle to a Prius, from a Prius to a Volt, from a Volt to a Leaf and from a Leaf to three levels of Tesla Model S. It then calculates incremental fuel savings as a percentage return on the incremental battery investment, or ROIBI.

Prius $1,300 $897 69%
Volt $6,700 $1,578 24%
Leaf $4,000 $825 21%
Model S-160 0%
Model S-240 $6,000 0%
Model S-300 $7,500 0%
Click to enlarge

The first thing that caught my attention was that a Tesla Model S, regardless of battery pack size, won't save the average user any more fuel than a Nissan Leaf. So the incremental battery investment of $6,000 to $13,500 has nothing to do with saving fuel and simply represents the incremental cost of range anxiety. There are a lot of folks who know they can't live with the range limitations of a Leaf, so they'll have to pay through the nose if they want electric drive and a car that suits their needs with the same set of tires.

The second thing that caught my attention was that even with $10 gasoline and sunshine, lollipops and roses battery cost figures, the ROIBI falls a cliff as soon you move beyond the Prius. I guess that's why Bill Reinert, Toyota’s US manager for advanced technology is frequently quoted for gems like these:

“That’s the first law of Disney — wishing will make it so. I see it all the time from those Palo Alto types. They think the whole world is like a computer company, and they’re always trying to recreate the dot-com economy.”

“I used to be a big 100-miles-per-gallon guy. But I realized that we’re above the level of diminishing returns at 50 miles per gallon. So why not make a whole bunch of 50-miles-per-gallon cars and put people who are driving 20-miles-per-gallon cars into them?”

"The expectations have always been too high for electric cars. The realities have always been clouded by the dreams. I like to say it’s the first law of thermodynamics versus the first law of Disney."

No matter how you analyze the facts, the economic realities of electric drive do not and cannot match the hype. Vehicle electrification that goes beyond the minimalist approach of a Toyota Prius is inherently expensive and wasteful. The only consumers that will ever buy the absurdity are the philosophically committed or the mathematically challenged. Tying a pink bow around the EV pig's neck does not change the fact that it's a pig and investors who hurry to invest their money in response to the hype will almost certainly lose that money when reality sinks in.

Start-ups and brash entrepreneurs like Elon Musk are always exciting. Experienced investors understand the grim reality underlying Paul Graham's Startup Curve.

3.25.12 Startup Curve.pngClick to enlarge

It won't be long before a new generation of Tesla investors learns the same lessons that prior generations of investors learned in the thrilling panacea energy solutions of yesteryear including Ballard Power (NASDAQ:BLDP), Pacific Ethanol (NASDAQ:PEIX), Vestas Wind Power (OTCPK:VWDRY), First Solar (NASDAQ:FSLR) and, of course, A123 Systems.

Disclosure: None