Although there are many electric vehicle (EV) manufacturers, Tesla (NASDAQ:TSLA) is probably the company more exposed to the EV sector, being its production 100% electric cars.
The main rationale for acquiring an electric vehicle is not price, nor range, but the abatement of greenhouse gas (GHG) emissions. EVs, supposedly, provide low-rate, if not zero, CO2 emissions, being the best technology in that respect.
We disagree with that reasoning, defending the thesis that EV emissions are in fact similar or higher than hybrid vehicles. This article presents a GHG emission comparison between a set of vehicles with different technologies and manufacturers.
Even if EVs present a great advantage with respect to conventional cars in terms of GHC release, EVs not only are not zero-emission cars, but also their emissions remain high, as the electricity sector is an intensive CO2 producer.
The power generation mix determines the EV CO2 emissions since, literary, the smoke from the car exhausts is translated to the central power station chimneys, which emit CO2 and other pollutants. This fact, together with others, is a serious disadvantage for pure EV manufacturers like Tesla.
II. US Power Generation Mix
The US power generation mix relays in three types of fuel: coal, natural gas and nuclear fuel, representing more than 80% of the total production.
Coal and natural gas when burned emit CO2. Therefore, any consumption of electricity contributes to the greenhouse effect. On the other hand, nuclear power stations, instead of GHG, produce nuclear waste.
An EV when charging consumes electricity from the grid, consequently, emits GHGs and produces nuclear waste.
The average CO2 emission per kWh has been calculated using the power production mix of December: 505 grams of CO2 are produced, on average, per kWh consumed. This value will be used later for the comparison of several EV vehicles with conventional and hybrid cars.
III. EV CO2 Generation
Let's analyze with the previous CO2 emission data what the real emission of six electric cars would be: Tesla S AWD P90D, P60D and Model X P100D, BMW i3 BEV (OTCPK:BMWYY), Hyundai Ioniq Electric (OTC:HYMLF) and Chevrolet Bolt (NYSE:GM).
The gasoline emissions are estimated at 8,887 gram/gas gallon - data obtained from the Environmental Protection Agency.
As it can be seen, the best performer is the Hyundai Ioniq Electric, followed by the BMW and the Chevrolet, and in fourth position appears a hybrid car, the Hyundai Ioniq Blue.
The worst performers are the gasoline cars: the Audi 7, the Ford Fiesta and the Taurus.
Source: Fuel Economy and author's calculations
As we can see, even if low emitters, the EVs have similar numbers to the hybrids. Tesla's EVs are not only behind the other three EVs, but also behind the Toyota and Hyundai hybrid cars.
But before arriving at a realistic comparison, three points need to be addressed:
- Neither the conventional cars nor the hybrids use energy produced by nuclear power stations. The nuclear waste's ecological impact is lacking on the previous comparison.
- Moreover, the electricity transmission and distribution losses should be quantified and added to the EV emissions.
- Finally, the intrinsic battery losses and the heating losses need to be computed too.
The next sections are dedicated to quantify these effects.
IV. EV Losses
The analysis presented in the former section uses the consumption data from the US Environmental Protection Agency. The tests performed, as specified by the J1634 SAE BEV, already add the AC/DC losses to the result. Even then, the emission estimation should take into account the following number of losses:
- Losses in transmission and distribution. These losses comprise the electricity losses from the output of the power station to the consumer plug. The losses in the US range between 5% and 6% depending on the source. We will use a value of 5%.
- Losses in the battery charger. Batteries store energy in DC and the grid uses AC. Before loading the battery, the AC energy of the grid needs to be converted to DC. Usual conversion losses for AC/DC range between 8% and 12%. These losses, as explained before, are taken into account in the J1634 SAE procedure, so they will not be added.
- Self-discharge losses. All kinds of batteries discharge when not used. This is an intrinsic effect to batteries. Ion-lithium batteries have a fast decay after the load, quantified at 5% loss in the first 24 hours by some experts. Then, it decays around 1-2% in the first month. The self discharge of the ion-lithium batteries is one of the best available technology; nickel-based batteries, for instance, have 10% to 15% of losses the first 24 hours and then 10% to 15% per month. We will use a value of 2%.
- Ion-lithium battery safety circuit losses. Ion-lithium batteries add an electronic safety circuit including solid-state switchers to disconnect the cell when needed. Some experts fix this consumption at 3%. It adds an extra consumption we estimate at 0.5% per month. Self-discharge losses and the safety circuit consumption would occur at any time, including when the car is stopped and parked.
- Heating losses. Conventional and hybrid cars have available engine residual heat. In the case of EV, the residual heat is on the electric power station, too far to heat the cabin or the batteries. Some tests have quantified the heating losses more than 100%. Some users have reported losses up to 31% due to the heater. For our study, we estimate the total heating losses, yearly averaged, at 4%.
The total estimated losses are 11.5%.
V. Nuclear Waste
GHG is not the only pollutant generated in the production of electricity. A typical nuclear power station of 1 GW produces 30 tonnes of high-level solid waste per year - 27 to 30 tons for a typical reactor. If we take into account that the facility is operating 90% of the time, then the nuclear power station generates 3.81 mg of nuclear waste per kWh produced. As the nuclear power accounts for a 20% of the mix, the same percentage will apply to the EV kWh: 0.76 mg of high-level nuclear waste per kWh.
Although it seems a tiny quantity, it is quite dangerous and needs to be kept under control. Only the amount of Cs-137 produced, 0.05 mg, will irradiate a dose of 11.19 uSv/h at 1 meter. If it is just at 1 cm, the dose received in 10 hours will be lethal. The irradiation dose calculations have been done here.
Source: Author's calculations
Fortunately, the nuclear waste is safely stored in the nuclear power stations until its final disposal, where it must be kept "forever."
Source: World Nuclear Association
It is interesting to note that a solution for its definitive disposal is not available yet. Most of the waste is stored at nuclear power stations.
Until it was banned in 1993 by international treaties, some countries launched their nuclear waste to the deep sea. The shielding protecting the nuclear waste, in many cases, corroded, and therefore, exposing the waste to the oceanic environment.
Until now, the only solution being considered seriously is the storage in stable geological facilities deep in the ground. In the case of US, the Yucca Mountain repository is the geological emplacement where nuclear waste could go, but, although it was decided 30 years ago that a high-level waste repository should be built, the Nuclear Regulatory Commission has not given any the operative license and the Yucca Mountain adjudicatory proceeding remains suspended.
VI. Summing Up
Once all these considerations have been analyzed, we can make a more realistic comparison between the different car models. The table below includes both the electric losses and the nuclear waste generated per EV, together with a range and approximate price. Obviously the hybrids - if they are not connected to the grid - and the conventional cars do not add any nuclear waste.
Source: Author's calculations
The worst performers in terms of CO2 emissions, by far, are the gasoline cars.
But the EVs and the hybrids are mixed. The Hyundai Ioniq Electric, followed by its hybrid cousin, the Ioniq Blue, is the best rated in terms of CO2 emissions. Then follows the BMW EV, then the Bolt and the Toyota, almost tied. But remember, the hybrids do not have nuclear waste in their account.
Tesla, even being the only pure EV manufacturer, lags in what was supposed to be its competitive advantage, CO2 emissions, with its Model XP100D the worst performer between the hybrids and EVs. It is still to be seen what would be the consumption of the coming Model 3.
If hybrids and EVs have similar CO2 emissions - in terms of range and price, there is no color - the hybrids excel in both cases. Just note the prices of the Bolt and especially of the Ioniq Electric are quite competitive. Again, for Tesla, we should wait to see the final price of the Model 3 that at the moment is expected to be around the $35,000.
So summing up our conclusions:
- In ecological terms - CO2 emissions and nuclear waste - hybrid cars are equal, if not better, than EVs, with the current power generation mix
- In economic terms, hybrid cars are better than EVs
- In range terms, hybrid cars are better than EVs
- Even in the EV sector, Tesla cars lag in terms of CO2 abatement
Transportation accounts for 27.6% of the primary energy consumption in the US, and petroleum signifies 92% of the sector.
To introduce EVs, it massively implies an increase of the electric power sector, which, in the US case, is carbon intensive. If the same power grid mix continues, the abatement of CO2 is not going to be significant while at the same time the electric power sector needs to expand with the associated costs it implies. A significant increase of the installed power and the transportation and distribution network of the electricity sector will be required - a major and expensive transformation not trivial to achieve.
As an example, to transfer only one percent of the transportation consumption to the electric power sector will imply the building of more than three nuclear power stations with an estimated cost of more than $15 billion. Moreover, building a nuclear power station takes several years.
As the goal is to reduce CO2 emissions, it seems more intelligent to "clean" the current power production mix before entering in a not-clean expansion of the electricity sector.
In the meantime, the use of hybrid cars will provide the same improvement in the abatement of CO2, but without the side effects of EVs (the increase of the electric power sector).
VIII. Costs of Electricity
Another important point to address is the cost of the electricity generated. As we said before, the increase of the power generation mix is expensive and not trivial.
Let's have a look at the electricity costs estimated by the EIA for the new plants entering service in 2020:
There are several relevant points to stress from the cost estimation presented in the previous table:
- The costs (Levelized Cost Of Electricity (LCOE)) of renewable energy (solar and wind energy) are on average lower than coal new power station costs, but still are more expensive than natural gas power stations.
- If we look at solar thermal and wind offshore, the costs are even higher than coal before and after the expected tax credit. Exemptions that are not granted as they depend in policy makers.
- The costs of nuclear power stations are also higher than natural gas costs. In addition, as we have shown before, even if nuclear power does not emit CO2, it produces nuclear waste.
- A great number of already built power stations cannot be closed at will, at least until their operation period ends, unless the government enters in an expensive program of compensations.
In addition to the previous points, we should mention that renewable energies are non-dispatchable technologies. What that means is, it is not possible to choose when to use them for producing electricity; winds blows erratically and the sun shines at some hours of the day and it can be covered by clouds.
On top of that, these are data for plant production. In lower-scale systems (solar roofs, small wind turbines, etc.), the LCOE will be greater as the benefits of the economy of scale are not present. If a battery is included, then the LCOE cost would even be higher (at current prices, the LCOE of a Tesla Powerwall is more than 45$/MWh for a 5kWp typical PV roof installation, 20 years' operation and 5.5 KWh/m2/day irradiance).
IX. Tesla: From CO2 Emissions to the Investing Case
We think the points already mentioned in the article could affect the sector of EVs in general, and Tesla, as the most exposed company to EVs, in particular, in the following manner:
- Government aids I: There is a risk that the government modifies the $7,500 federal tax exemption, relating it to the real CO2 abatement. Moreover, the real EV CO2 emission can be a strong point for those policymakers desiring the advance of the EV aid phase-out.
- Government aids II: The EV manufacturers with low-price EVs (i.e. Hyundai, GM or BMW) will take advantage of the tax exemption before the phase out of the federal tax exemption takes place. The more Tesla delays the production of Model 3, the more it will lose from the tax exemption program.
- Technological competitiveness I: The hybrid technology is a clear competitor to EVs in terms of emission abatement, range and price. What was supposed to be the major competitive advantage of EVs - CO2 abatement - is challenged by the hybrid low-cost technology. Possible customers of EV, interested in clean vehicles, can shift to hybrid vehicles instead of EVs. This would also affect the complete sector of EVs, but especially Tesla, as the company is committed completely to EVs.
- Technological competitiveness II: Even in the EV sector, Tesla faces serious competition. Major automakers have presented EVs with higher rates of CO2 abatement and lower prices than the current EV models of Tesla. The available Tesla EVs have one of the worst efficiency rates in the EV market. That is a competitive disadvantage for Tesla. It is still to see what the consumption of the Model 3 will be. If the consumption rates were somewhere below 25 kWh/100 mi, Tesla would be in a good position with respect the rest of EVs. But, if it lags behind, Tesla will be in a serious disadvantage.
- Price: In terms of price, Tesla also is at a disadvantage, especially with respect the hybrids, but also when compared with the rest of EVs. Again, it will depend on the final price of the Model 3 if Tesla can recover in this aspect.
- Range: Tesla excels in the EV segment where it has an advantage with respect to the rest of manufacturers, but still lags behind when compared with hybrid cars.
- Diversification: Tesla is betting only on EVs - we think this is a risky approach. Manufacturers like Chevrolet or Hyundai have a more diversified offer, with vehicles using the two available low-emissions technologies. They have diversified the risk and can balance from one technology to the other in case the market shifts in one direction or another. Tesla cannot do it; if the hybrid is the winning technology, Tesla will not be able to adapt. And, if on the contrary, the winner is the EV technology, then Tesla will still have strong competition from the other manufacturers, which will adapt to the needs of the market. This is for us a major drawback for Tesla.
- Emission control: EV CO2 emissions do not depend on the EV manufacturer or the EV customer, as many factors outside their control affect the electricity policy. This would explain Tesla's decision to merge with SolarCity. If the electricity is not clean, then let's produce clean electricity. However, in our opinion, it is a major challenge for Tesla to make its solution for producing solar electricity cost efficient. And it also faces the problem that, mainly in major cities, it is difficult to find space for installing a PV system.
X. Tesla's Valuation & Capex Funding and Insiders
If we look at the trading price of Tesla and compare its valuation with other car manufacturers, we can see that it is, in our opinion, overvalued.
Tesla's price to book ratio is more than six times the average of the BMW, Volkswagen, General Motors, Hyundai and Toyota ratios. Its price to sales is 10 times higher. The price to earnings is not calculated as Tesla does not have the benefits at the moment which all the other car manufacturers have.
Source: Author's calculations
Moreover, the operating capex of Tesla in 2016 has been minus $667 million, a deviation from the strategic plan set in 2008, which was to use the money from the benefits - or the operating cash flows - to fund an "even more affordable car." In reality, the funds for the Model 3 have being obtained from the issuance of stock and debt, instead from operating funds.
In addition, the last insider operation registers show that, at market prices, there are only sells. Some of the insiders have bought shares at reduced prices, probably via options, and it seems that they are selling them at market prices at the very same time. This is, for us, another sign that the stock is overvalued.
The factors already mentioned in the article would imply major challenges for Tesla. In our opinion, the principal milestones for Tesla would be to:
- Reduce the consumption in the next Model 3. Somewhere below 25 kWh/100 mi would be a major success making Tesla the lead in the EV segment in emission abatement.
- Start Model 3 production by the middle 2017.
- Reduce the Model 3 costs for reducing the price and make it more affordable than competing EVs and to widen the operation and net margins.
- Reduce the costs of the Powerwall. An important reduction in the costs of the Powerwall would make the solar roof generation affordable in economic terms and will help to have zero emissions when driving an EV.
If Tesla succeeds in achieving these challenging milestones, it would be in a condition to lead the EV segment and be a profitable company.
XII. Our Final Case
The direct link between EV CO2 emissions and the carbon-intensive US power generation mix; what could lead to a reduction or even a phase out of the tax exemption program for EVs or/and a shift in consumers preferences to other clean technologies; the strong competition EVs are facing, and therefore Tesla, from the hybrid technology in terms of CO2 emission abatement, range and price, together with the stock price valuation -P/B of 8.4 and P/S 5.4, and the fact that TSLA's earnings and operative cash flows are negative incline us to recommend to stay away from the stock, or even, for those more adventurous investors, to short it.
Disclaimer: To short Tesla is not a Ben Graham's widow-and-orphan investment.
Disclosure: I am/we are long BMWYY, HYMLF.
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.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.