By Salman Ghouri and Andreas de Vries
The recent launch of the Tesla Model 3 has proven a massive global demand for electric vehicles. Thus, it is no longer the question if the electrification of transport will take place, but rather when exactly.
In an earlier article, "Wake up call for oil companies: electric vehicles will deflate oil demand", we assessed how the oil industry could be impacted by such a development. The article concluded that even under the most pessimistic of assumptions, electric vehicles will substantially reduce crude oil demand in the medium term (2021 - 2030). This article looks at the implications of the electrification of transport for the electricity market.
The journey from internal combustion to electric
The Alternative Energy Outlook that we developed looks at the implications of the electrification of transport under three different sets of assumptions.
The reference case assumes a continuation of the current 50% annual growth rate in electric vehicle (EV) sales until the end of the decade, after which it slows down first to 30% per annum (until 2030) and then 15% per annum (until 2040). This would increase the number of electric vehicles on the road from 1 million today, to 8 million by 2020, 105 million by 2030, and 424 million by 2040.
The growth projections for electric vehicles in the low case are 42% until 2020, 25% until 2030 and 12% until 2040, which would increase the number of electric vehicles on the road from 1 million today, to 6 million by 2020, 54 million by 2030, and 167 million by 2040.
The high case, lastly, assumes a 60% per annum growth in electric vehicle sales until 2020, 36% thereafter until 2030 and 18% thereafter until 2040, which would result in to 10 million electric vehicles by 2020, 227 million by 2030, and 1,188 million by 2040.
The implications for electricity demand
The Alternative Energy Outlook assesses the number of barrels lost from global crude oil demand due to electric vehicle penetration for each of three given scenarios, through assuming that every electric vehicle will take the place of a vehicle powered by an internal combustion engine. It also calculates what this penetration by electric vehicles of transport would mean for electricity demand.
In the reference case, 8 million electric cars will have taken the place of an internal combustion powered vehicle by 2020. By 2030 this will be 108 million. And by 2040 it will be 424 million. This would reduce growth in crude oil demand by 0.3 million barrels per day by 2020, 3.4 million barrels per day by 2030 and 13.8 million barrels per day by 2040.
As the energy content of a typical barrel of crude oil is some 5.5 million British thermal units (Btu), the energy value equivalent of these barrels can be calculated: 2,220 billion Btu per day by 2020, 18,874 billion Btu per day by 2030 and 76,608 billion Btu per day by 2040.
The electrification of transport will not increase electricity energy demand by the same amounts, however, as electric vehicles are some three times more energy efficient than vehicles with internal combustion engines. The increase in electricity demand would therefore be a third of the decrease in crude oil demand, meaning that the additional demand of power generation capacity in the reference case is 11 GW by 2020, 93 GW by 2030 and 378 GW by 2040. (Assuming 90% availability of power generation plants and 10% losses during transmission and distribution).
The same calculation under the assumptions of the low case results in an additional demand on power generation capacity of 8 GW by 2020, 47 GW by 2030 and 148 GW by 2040. In the high case the numbers are 11 GW by 2020, 203 GW by 2030 and 1,065 GW by 2040.
To put these numbers in to context, total global installed power generation capacity currently stands at around 5,600 GW.
Who will benefit?
In 2014, coal was responsible for some 39% of global electricity generation capacity, natural gas for 22%, hydro for 17%, nuclear for 11%, renewables for 7%, and oil for 5%.
Since electric vehicles tend to be charged overnight, it is highly likely that the electrification of transport will not require any additional investment in electricity generation capacity in the short- and medium-term. Electricity generation capacity is determined based on expected peak load, namely, which tends to be early morning when people leave home for school or work or early evening when they come home. At night a typical electricity network operates significantly below capacity, meaning that an increase in the number of electric cars on the road would increase demand during off-peak hours and thus lower the difference between demand during peak hours and off-peak hours. In other words, it would lead to a higher average utilization of the existing electricity generation capacity, rather than an increase in this capacity, which is a scenario that especially utilities companies would benefit from.
Were things to remain the way they are in the power generation industry, therefore, coal would win from the electrification of transport. However, the mix of fuels used for electricity generation is changing, with the share of coal under substantial pressure at least in part due to environmental concerns associated with coal based electricity generation, in particular its CO2 emissions. For this reason we do not expect an increase in electricity demand to trigger a large uptick in coal demand - while the global pool of electric vehicles will increase, coal's share in power generation capacity will decrease.
Natural gas' share of global electricity generation capacity has increased from 16% in 2000 to 27% at the end of 2013. The big oil companies are betting this trend will continue, as indicated by Exxon Mobil's (NYSE:XOM) and BP's (NYSE:BP) recent energy outlooks, as well as Shell's (NYSE:RDS.A) acquisition of British Gas. If these companies are right, the additional electricity demand resulting from the electrification of transport would be met by natural gas. In the reference case of the Alternative Energy Outlook this would add 5.6 million metric tons per annum (MMTA) to global LNG demand by 2020, 47.2 MMTA by 2030 and 191.5 MMTA by 2040 - a 2%, 20% and 79% increase from the current global demand of approximately 241 MMTA. In the low case the increase in LNG demand would be 4.2 MMTA (2%) by 2020, 23.6 MMTA (10%) by 2030 and 191.5 MMTA (31%) by 2040, while in the high case it would be 5.6 MMTA (2%) by 2020, 102.7 MMTA (43%) by 2030 and 539.7 MMTA (224%) by 2040.
The electrification of transport could thus be the savior of the LNG industry, which at present is substantially oversupplied and is facing a further 130 MMTA (40%) increase in supply by 2022. The additional LNG demand from electric vehicles could absorb a substantial amount of this additional supply and remove some of the downward pressure on the LNG price.
Lastly, if the electrification of transport is to be fueled by renewable energy, then substantial additional investment in wind and solar power generation capacity will be required. Since the running cost of renewable power generation is essentially zero, these capacities tend to be part of base capacity, meaning they are fully used during the day (gas turbines make up the bulk of back-up generation capacity). In the case of renewables, therefore, additional demand will require additional investment in capacity. At present wind turbines contribute 432 GW to global electricity generation capacity, with solar accounting for some 200 GW. Thus, in the reference case wind capacity would have to be increases by 25% by 2030, and solar by 50%.
All this means that coal and - especially - LNG stand to benefit most from electrification of transport. They would namely be the lowest cost solution for the additional power demand, since they could meet it with established capacity while renewables would require further investment.
Disclosure: I/we 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.