Goehring & Rozencwajg's first-quarter commentary focuses extensively on the electric vehicle.
The future of the EV looks bright, but we urge investors to exercise extreme caution in this space and to view the hype skeptically.
Manufacturers that took a more conservative approach toward the adoption of the electric vehicle will benefit. Those that went all-in (Tesla) will not.
Goehring & Rozencwajg (G&R) is a small New York-based boutique firm specializing in resource and energy investment, and earlier this quarter they released their Q1 resource investment summary. In this article, we summarize their research findings and provide our own additional commentary on how energetics will impact a slower shift to EVs than expected, negatively impacting manufacturers that have taken an aggressive approach to EV adoption (Tesla (NASDAQ:TSLA)) and benefiting those that have taken a more conservative approach to their adoption (General Motors (NYSE:GM), Ford (NYSE:F), et al.). Typically, G&R’s quarterly research focuses on the specifics of natural resource markets such as oil, natural gas, copper, etc. However, of interest to investors interested in electric vehicles (EVs) - such as those researching investments in Tesla Motors, Ford, or General Motors - G&R’s quarterly research discusses the energetics of electric vehicles. Readers seeking to dive deeper into G&R’s research can find their Q1 commentary here: 1Q 2018 Goehring & Rozencwajg Commentary.
Return on Energy
To underlie their exploration into the modern electric vehicle, G&R turned to the Czech-Canadian scientist and policy analyst Vaclav Smil. Smil’s seminal work, Energy and Civilization: A History, examines the way human beings have used energy throughout history. Smil’s book reveals a critical concept to readers: energy returned on energy invested, or EROEI. Simply stated, EROEI is the bookkeeping of how much energy is returned by an energy source vs. how much energy is invested in harnessing it for use as a usable energy source. Much like a functional business, a useful energy source must return more energy than is spent recovering/processing/producing the resource to be viable on a large scale. Additionally, participants in an economy will seek out not only an efficient energy source, but the most efficient energy source (G&R Q1 Commentary - Page 7). Following this principle, Smil reveals that at no point in history have humans realized a large-scale energy revolution by replacing an existing energy source with a less efficient energy source in terms of EROEI. Investors will find this concept intuitive - as they generally seek to invest their hard-earned dollars in sources that provide the highest return.
EROEI: Energy Returned on Energy Invested
Given the EROEI framework proposed by Smil, G&R explores the EROEI properties of electric vehicles. They note that this is a field that is extensively studied by academics. Investors should note that calculating accurate EROEI values is a complicated and laborious task and can involve many assumptions, especially when calculating EROEI values of renewable energy sources. These calculations can be a hotly contested issue even at the highest levels of academia; proceed with caution. Nonetheless, G&R present their findings from the latest academic research.
The EROEI of the average gasoline-powered sedan is fairly well known. One gallon of gasoline provides 120 megajoules of energy. The average sedan, operating at an efficiency of 35 MPG, requires 3.4 megajoules of energy (120 megajoules/35 MPG) to travel one mile. Adjusting for crude oil refining and transportation, this number bumps to 4.1 megajoules of energy investment required per mile travelled. Further adjusting this figure for crude oil exploration, drilling, and well completion results in an energy investment requirement of 200 kilojoules per a mile travelled (G&R Q1 Commentary - Page 8).
The EROEI of today’s electric vehicles - at the vehicle level - is also well known. The Tesla Model 3, containing a 75 kWh battery, provides a 310-mile range. This translates to an efficient 0.9 megajoules of energy required to travel one mile (over 75% less energy required than the average competing 35 MPG sedan). At the vehicle level, electric vehicles achieve far higher efficiency converting electricity stored in the lithium-ion battery to mechanical power over the gasoline-powered sedan converting energy stored in gasoline to mechanical power. Adjusting for losses in charging and transmission along electrical lines bumps up energy required to only 1.1 megajoules - still requiring far less energy than the average gasoline-powered sedan and providing superior EROEI (G&R Q1 Commentary - Page 8).
At the vehicle level, today’s electric cars - in terms of EROEI - far exceed the average sedan achieving 35 MPG.
Manufacturing modern lithium-ion batteries is an extremely energy-intensive process. Just how much energy is required is the subject of debate. Considerable energy is required to both manufacture the battery and mine for the raw materials required to produce it. Although estimates vary widely, G&R state that the research community is beginning to form a consensus of 900-1,800 megajoules per kWh of energy required to mine for materials and manufacture a modern lithium-ion battery. For the Tesla Model 3, this yields between 65 and 134 gigajoules of energy required to mine the materials necessary and manufacture each battery. Over 140,000 miles (the expected life of a Model 3 battery), this adds an additional 0.5 to 1.0 megajoules per mile travelled. Adjusting for battery energy costs, the EV’s energy investment bumps up to 1.6 to 2.1 megajoules per mile, still beating the average gasoline sedan by 50% (G&R Q1 Commentary - Pages 8-9).
Note here that more efficient (45 MPG) gasoline cars, requiring ~3 megajoules per mile at the vehicle level, are beginning to approach the efficiency of the EV after adjusting for the production of batteries. The case for the electric vehicles becomes murkier after this adjustment. Those driving an efficient, gasoline-powered car are being offered a vehicle with a far lower purchase price, longer range, far less time required to refuel (vs. recharge), and a far longer-lasting power plant (140,000 miles vs. 250,000+ miles). This creates some serious economic concerns for the average American who is not looking to make a statement or participate as an enthusiast.
The Electric Vehicle and Renewables
The story of the electric vehicle proposes a compelling, environmentally friendly message boasting zero emissions. This is both a compelling and powerful message - one that we here at Studio E14 support overall. At the vehicle level, electric vehicles do offer a zero-emission platform; however, the electricity required to charge the battery of an electric vehicle must be generated somewhere. Typically, the electric vehicle story includes energy generated from the renewable energy sources of wind and solar. When accounting for the EROEI of renewable energy sources, the reality of this part of the electric vehicle story becomes highly questionable.
Like lithium-ion batteries, the energy required to manufacture and construct solar panels is a topic of great debate. Consensus estimates peg the EROEI of solar at approximately 7:1 (compared to 20:1 for oil production). This number does not include any grid-level battery storage that is required to store electricity generated during the day for consumption at night or for cloudy days. Adding the extra energy cost of batteries to the system reduces the EROEI of solar to less than 4:1 (G&R Q1 Commentary - Page 9).
Wind power also presents a similarly murky picture. Wind is variable, and wind turbines are extremely heavy and expensive. Transporting a 2MWh wind turbine is an extremely energy-intensive task. Longevity of wind turbines is up for debate, with reports of lifespans ranging from 15-25 years. Similar to solar, wind turbines require storage batteries in a grid-level power system. Given these variables, G&R estimates the EROEI of wind at 15:1 without battery storage and 9:1 with battery storage (G&R Q1 Commentary - Page 9).
Given the low EROEI figures of renewable solar and wind power, the total energy cost of driving an EV one mile rises considerably to 305 kilojoules, 40-45% more than the competing 35 MPG gasoline-powered sedan. This fact poses a significant blow to the environmental narrative of the electric vehicle. Renewable sources simply cannot compete with traditional non-renewables. Upstream power generation presents a significant hurdle to realizing the future envisioned by electric car enthusiasts.
Tesla, the First Actor
Over the past 15 years, Tesla has dedicated itself completely to the narrative of an emission-free electric car. During this time, Tesla and associates (SolarCity) have attempted to solve the problem of upstream electrical generation with products such as the Solar Roof and Power Wall. The products have mainly flopped, with Tesla Energy making up a very small percentage of Tesla’s revenues and SolarCity requiring a questionable buyout/bailout to save the company. We believe that without the narrative of a completely emission-free electrical supply chain, the EV narrative mostly falls apart and the EV must stand by itself on the weight of its own energetics/economics.
As discussed above, G&R’s research shows that the EV is a solid platform that greatly exceeds the efficiency of the average 35 MPG sedan, and even squeaks out slightly greater efficiency than a competing high-efficiency hybrid such as the Toyota (NYSE:TM) Prius. However, EVs still face considerable headwinds in their adoption due to high initial cost, range issues, long recharge/refuel times, and questionable battery life. Due to these ownership issues, and lack of a truly “green” environmental narrative, we believe that the electric car will be far slower in terms of mass adoption than proponents of aggressive EV adoption, such as Tesla, claim. We believe that more established manufacturers that have taken a more conservative approach toward developing hybrid-electric and electric technology, such as GM and Ford, will eventually take the day. Tesla has made an all-in bet that the energetics are decidedly in their favor and that consumers will be quick to adopt all the hurdles that EV ownership presents. In our opinion, this is an imprudent bet. Traditional manufacturers have taken a more diversified approach and placed themselves in a situation that allows them to respond to how well mass consumers take to the modern EV. These manufacturers don't have to be 100% right in this complex and speculative frontier; Tesla does not have that luxury.
At the individual vehicle level, electric cars provide an extremely energy-efficient platform of individual transport. However - on a macro level - electric vehicles powered by renewable energy sources, unfortunately, do not offer an energy-efficient solution in terms of EROEI. After reviewing G&R’s analysis, we thought this might pose an interesting future. Due to their higher energy efficiency, EVs may very well take the day over ICE vehicles one day. These vehicles may be powered, ultimately, by non-renewable but cleaner natural gas (UNG) and supplemented by renewables and even nuclear power. We reached out to G&R for their thoughts on this. They also found this idea interesting, but cited considerable infrastructure buildout issues that will serve as a headwind for realizing this future.
We believe that investors should exercise considerable caution when operating in the EV space, especially when making large investments in Tesla. ICE vehicles still offer considerable upfront cost benefits: convenience (in refueling and range) and longevity. Large automakers have likely been aware of the difficulties of electric vehicles for years, which is why they have - prudently - exercised caution in entering the space. We believe that investors should exercise similar caution. The future is coming - but it will not be realized overnight.
Disclosure: I am/we are short TSLA. 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.
Additional disclosure: We are short TSLA via long-dated put options.