Death of the Electric Car: Li-ion Batteries Too Valuable for Plug-In Vehicles

by: John Petersen

In November 2006, a slick issue-oriented documentary asked the provocative question "Who Killed the Electric Car" and argued that General Motors' EV1 project was terminated because of collusion between the auto and oil industries. The truth is nobody killed the electric car. It died in infancy from congenital birth defects and the same flaws that killed the EV1 will probably kill Tesla Motors, Fisker Automotive, Nissan's (OTCPK:NSANY) Leaf and GM's Volt. This is not a question of cost, performance, abuse tolerance or cycle-life. It's a fundamental flaw in the economics of using batteries to replace a fuel tank; a flaw that will cost investors billions before the current round of electric car hype fades and the rotting corpse of an idea only Hollywood could love is buried with a silver stake through its undead heart.

The electric car died for two simple reasons. First, the batteries are too valuable to waste. Second, it takes a couple hundred pounds of batteries to store the useful energy found in a gallon of gas that weighs 6.4 pounds. In the end you get an obscenely expensive vehicle that virtually guarantees substandard performance if you stray outside your reliable recharge radius.

Batteries of all types are marvels of chemistry and automated manufacturing, but they're made from natural resources that are orders of magnitude more scarce than oil. To put things in perspective, the world produces about 4,500 million tons of oil annually, which is second only to 6,800 million tons of coal. The closest metal is steel at 1,400 million tons. When you start looking at the less plentiful metals that are used to make batteries, annual production rates plummet to 39.7 million tons of aluminum, 15.7 million tons of copper, 3.8 million tons of lead, 1.6 million tons of nickel, 0.124 million tons of rare earth elements and 0.027 million tons of lithium. When you consider that global demand for all of these metals has been climbing for years and the situation can only get worse as several billion people transition from subsistence farming to industrialized society, the time-honored American tradition of planning for unlimited resource availability is more than a little short-sighted.

Simply put, the world produces plenty of oil that can be burned in engines but it only produces tiny amounts of metals that can be used to make batteries. Spending billions of dollars on new mining infrastructure can significantly increase global supplies of most battery metals, but the gains won't be rapid and they won't amount to a rounding error in comparison to global oil production. While Toyota (NYSE:TM) just spent over $100 million to protect its lithium supply chain by buying an interest in a new mine; everyone else in the industry seems to be relying on the natural resource fairy. Since it violates the fundamental laws of economics to use scarce and expensive natural resources as substitutes for plentiful and cheap natural resources, business plans based on the illusion that you can use batteries to replace gasoline must fail.

Electric vehicle advocates led by the recently organized Electrification Coalition have done a masterful job of positioning the grid-enabled vehicle, or GEV, as a miracle cure for a variety of ills including mounting oil prices, climate change, terrorism and war. While their comparisons with internal combustion engines have tremendous emotional appeal, the claimed benefits disappear in a cloud of blue smoke when you consider the macro-economic picture. A couple weeks ago I wrote an article titled "Plug-in Vehicles, Unconscionable Waste and Pollution Masquerading as Conservation." While I can't criticize a business for putting the best possible spin on a planned product, somebody needs to stand up and shout balderdash when spin crosses the line and morphs into a lie so colossal that investors and taxpayers are likely to lose billions.

There are two basic ways to use batteries in transportation.

  • The first uses a relatively small battery to minimize gasoline waste by eliminating idling and capturing some portion of energy that would otherwise be lost in braking for use in the next acceleration cycle. The generic term for vehicles in this class is hybrid electric vehicle, or HEV, and the best example is the efficient and reliable Prius from Toyota (TM).
  • The second uses a plug, a power cord and a much larger battery to replace some portion of the fuel tank with electrical energy storage. The generic term for vehicles in this class is grid-enabled vehicle, or GEV, and examples include the Tesla Roadster, the Fisker Karma, the Nissan Leaf and the GM Volt.

While HEVs and GEVs occupy different positions on a common technological continuum, the differences are as stark as night and day, which coincidentally occupy different positions on a common time continuum. HEVs are masters of fuel efficiency that have proven themselves over the course of a decade in over a million vehicles worldwide. GEVs use fuel substitution techniques that have no meaningful track record in the real world, promise more than they can hope to deliver, and are a shameful waste of limited and expensive natural resources. The sooner the public comes to understand the differences between black and white, the sooner we can get to work finding relevant scale solutions to our energy and air quality problems.

Lithium-ion batteries were developed for use in portable electronics and have become mainstays in cellular phones, MP3 players, laptop computers and a host of consumer, medical and industrial products. Last year, the lithium-ion battery industry sold $7 billion of products into these markets. Most consumer applications use somewhere between one and ten cells and the cost of the battery is an insignificant sliver of the purchase price. A Tesla Roadster, on the other hand, uses 6,800 cells and the battery pack represents somewhere between 1/3 and 1/2 of the purchase price. I don't worry about battery cost when I need five watt-hours for my cell phone or 40 watt-hours for my laptop. When you start talking about 20,000 watt-hours for a vehicle, however, it's an entirely different ballgame.

If we wanted to create a hierarchy of possible lithium-ion battery applications going from the highest value per watt-hour to the lowest value per watt-hour, the list would look something like this:

Device Battery
Type Capacity
Cellphones and MP3 players 5 watt-hours
Portable Medical Devices 10 to 50 watt-hours
Laptop Computers 10 to 50 watt-hours
Electric bicycles and scooters 500 to 1,000 watt-hours
Hybrid electric vehicles 1,000 to 1,500 watt-hours
Plug-in hybrid vehicles 10,000 to 16,000 watt-hours
Pure electric vehicles 24,000 to 50,000 watt-hours
Grid-connected utility applications 500,000+ watt-hours

In a normal free market, production capacity is allocated first to high value applications and then to successively lower value applications. In cases where supply is constrained by resource availability, manufacturing capacity or a host of other reasons, high value applications that only need a little battery capacity will always be able to outbid lower value applications that need a lot of battery capacity. The end result is that GEVs and grid-connected utility applications will always end up at the bottom of the food chain with the weakest bargaining position and the only batteries available to them will be the surplus that nobody else needs or wants. Once again, lithium-ion batteries are simply too valuable to waste on plug-in vehicles. The economics may work for the eco-religious crowd who will pay any price for the right status symbol, but it's insanity to believe that electric vehicles have any future in the real world of paychecks, monthly budgets and cost-conscious consumers.

Historically I've been fairly sanguine about the survival prospects for lithium-ion battery developers including A123 Systems (AONE) and Ener1 (NASDAQ:HEV) because I've been convinced that they'd be able to sell all the batteries they could produce for use in HEVs and new small-scale energy storage applications that are certain to emerge as better batteries become available. Over the last couple months, however, I've seen an ominous trend where Ener1 used almost all of its available working capital to rescue Th!nk Global from bankruptcy and A123 invested $23 million in Fisker Automotive so that Fisker could satisfy the 20% matching funds requirement for a $529 million DOE loan. In my experience, the first round of rescue financing for a key customer is rarely the last. While I think it fair to ask why development stage battery manufacturers are using critical capital resources to support other businesses that the capital markets seem reluctant to finance, I'll refrain from further comment except to remind everyone of the famous Rodney Dangerfield quip, "As a baby I was so ugly that my parents had to tie a pork chop around my neck so the dog would play with me."

In closing for today, I'll share a quote from Ardour Capital's 2009 Year-in-review, 2010 Look-Ahead:

As for energy storage players, while lithium ion is receiving stimulus, we look for lead acid to still be the preferred technology for large scale applications for the foreseeable future. We believe that the $2.4b stimulus is an important step toward launching a US lithium-ion battery industry which has been largely non-existent. In addition, the 2009 IPO of lithium-ion battery maker A123 Systems has stirred significant interest in larger scale lithium ion applications. However, we look for the cheap and reliable lead-acid battery to be the mainstay of industrial battery applications. To those ends, we expect lead acid sales to see recovery in 2010 thanks to improving economic conditions and stronger trends in the automotive markets, primarily for replacement batteries.

In my next article I'll revisit earlier discussions of the start-stop, micro-hybrid and full hybrid technologies that are certain to become mainstays of the global automotive industry over the next decade.

Disclosure: Author is a former director of Axion Power International (AXPW.OB), a developer of advanced lead-carbon batteries, and holds a large long position in its stock. He also holds small long positions in lead-acid battery producers Exide Technologies (XIDE) and C&D Technologies (CHP), and zinc-bromine flow battery developer ZBB Energy (ZBB).