The 3 Phases Of The EV Revolution

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Includes: FSLR, GM, TSLA
by: Energy Solutions Partners

Summary

We are currently at the beginning of EV 1.0, where we have just one functional EV that is affordable.

The cost reductions for EVs will follow the cost reductions in the solar module industry.

General Motors, and Tesla are the current leaders in EV 1.0.

This is the first article of a 3 part series where we discuss the scenarios and timing of automotive adoption of the electric drivetrain.

I believe the EV adoption will occur far faster than most analyst predict. We could see almost all new vehicles have electric drivetrains by 2025.

Currently, we have one affordable, fully functional EV on the market - the Chevy Bolt. My parameters are a cost of under $40,000 and a driving range of over 200 miles. The Tesla (TSLA) model 3 will be widely available in 2018. In baseball terms the first batter has entered the batting box in the top of the first inning - EV 1.0.

EV trends following the same trends in solar

So, EV 1.0 is a state where we are beyond a proof of concept, and actually have a product that can be widely deployed to mass markets. This occurred in the solar industry around 2013, when affordable 250 watt solar modules were first available at distributors for under $1 a watt. My firm started buying Canadian Solar's (CSIQ) modules then for 90 cents a watt by the pallet.

As described in my last article about First Solar (FSLR), solar will evolve thru 3 phases:

As discussed at the First Solar investor presentation, we are currently just at the beginning of solar 2.0, so 4-5 years in solar 1.0. During the five years of solar 1.0, we saw other manufacturers sell modules for under $1 a watt. This began fierce competition for market share and continues lower and lower costs:

So in from 2007 to 2012 we saw a 75% reduction in the cost to produce solar modules - 24% compounded yearly cost reduction - could this continue? As we near the end of 2017, the new cost per watt is down to 30 cents, this is another 20+% compounded yearly cost reduction.

By 2020, the cost per watt from First Solar (FSLR) will be around 18 cents, another 40% cost reduction, again maintaining that 20% yearly cost decline. Notice a pattern? This is very similar to Moore's law of semiconductors, where increased scale of production, technology advances, and free market competition force a continuing cost decline every year. Solar manufacturers are most analogous to semiconductor firms like Intel (INTC) and Micron (MU).

The founder of SunPower (SPWR), Richard Swanson is credited with solar's version of Moore's law , where cost drop 20% with a doubling of capacity. As shown above, for the past decade we are seeing a 20% yearly decline in cost.

EV 1.0

As stated above, we just entered EV 1.0. This phase will last about 4-5 years, just as solar 1.0 did. So, by 2020/2022 we will have over 10 affordable EVs with 200+ mile ranges. During this time, as manufacturers develop Li-ion giga factories, the cost of these autos will drop below that of internal combustion vehicles. How is this possible?

Just like the PV module is the most important component to a solar energy system, the Li-ion battery is the key component to the electric vehicle. We noticed a 75% reduction in the cost to manufacture solar modules in solar 1.0, with no significant technological changes. Mainly just increased capacity - more units over the same fixed cost base - this is manufacturing 101.

Let's see if the historical trends for Li-ion are similar to the trends for solar modules. Cost trends for Li-ion batteries:

So during the years 2009 to 2014, we see a close to 60% decline in costs. In 2017, the cost has dropped well below $200 a kwh.

"The price of large orders for mainstream lithium ion battery cells has fallen to $139/kWh", Sam Jaffe, Managing Director of Cairn Energy Research Advisors explained to institutional investors on the Benchmark World Tour 2017 in New York.

Also, General Motors (GM) has joined Tesla with costs below $200, with an impressive $145 a kwh.

This represents another 60% decline in cost, but this time in just three years. Based on this data, and the continuing current trends, this is the 10 years cost road-map for Li-ion batteries for EVs:

esp llc - 20% yearly cost decline

So, within five years the cost of Li-ion batteries will drop below $50 a kwh, making EVs cheaper then ICE autos. This will mark the end of EV 1.0 and the start of phase 2 of the EV revolution - EV 2.0. By 2027 the cost will drop below $20 a kwh.

Thoughts for investors

While Tesla provided the market with a proof of concept, General Motors was first to market with the first widely available, affordable EV. This does not mean long term success, as we saw in the solar industry. Yingli Green Energy (YGE), was a market leader at the beginning of solar 1.0 and now has defaulted and is heading for bankruptcy.

I view Tesla as a new economy technology company and not just an auto manufacturer. General Motors will continue to be an auto firm, so we have two equities for different investors.

For investors who look at current profits, solid EPS road-map, and first to market in the EV space, General Motors is the investment vehicle for you. My favorite of the two is currently General Motors based mainly on valuation.

While Tesla is over-valued by all common financial metrics, I would warn against shorting this company. I view Tesla as a long term speculative buy. An investor needs to believe in Elon Musk and his ambitious vision. Elon is a visionary leader, whereas Mary Barra is a solid manager - again different styles for different investors.

I owned put options of both Amazon (AMZN) and Google (GOOG) back when they appeared terribly over-hyped and over-valued. Could Tesla mirror these equities? Time will tell...

EV 2.0

In my next article, I will describe my vision of EV 2.0. This is the phase where economic, political, free market economics and incentives will all align. Range anxiety will be mostly eliminated as well during this phase. We will start to explore the various market, political, scenarios for full EV adoption. The EV revolution will not be about compounded growth, but about market, political, events and scenarios.

Disclosure: I am/we are long GM.

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.