Diminishing Marginal Utility of Batteries
Since 2011, I’ve repeatedly observed that the Law of Diminishing Marginal Utility, which holds that the first unit of consumption of a good or service yields more utility than the second and subsequent units, doesn't include a loophole for plug-in vehicles. Since I haven’t discussed the point recently, I think it’s time to revisit some flawed assumptions underlying all plans to transition passenger vehicles from gasoline to electricity.
Let's start with some basic facts and a quick historical overview.
According to the US Department of Energy’s Alternative Fuels Data Center, the average US passenger car is driven 11,244 miles a year, or 30.8 miles per car day. According to Electrek, Tesla’s (TSLA) global fleet of 500,000 EVs passed the 10 billion mile mark in November 2018. That figure works out to roughly 32.2 miles per car day, or 11,747 miles a year. Since the two reported values are close, I’ll split the difference and use an assumed value of 11,500 miles a year in this article.
According to the US Environmental Protection Agency’s Automotive Trends Report, the average real-world fuel economy of 2018 model year passenger cars was 29.9 MPG, which works out to an annual gasoline consumption of 385 gallons for a passenger car that will be driven 11,500 miles a year.
In 2000, Toyota Motor Corporation (TM) introduced the iconic Prius, the world’s most popular hybrid electric vehicle, or HEV. In a radical break from automotive tradition, the Prius paired a small combustion engine with a parallel electric drivetrain that improved acceleration, recycled braking energy that would otherwise be wasted, and delivered unheard of fuel economy. While the original Prius used a 1.5-kWh NiMH battery to offer fuel economy of 52 MPG, the current Prius L-Eco uses a 1-kWh lithium-ion battery to deliver fuel economy of 56 MPG. For an average driver, a Prius L-eco will reduce his gasoline use by almost 50%.
In 2016, Toyota introduced the Prius Prime, a second-generation plug-in hybrid electric vehicle, or PHEV, that uses an 8.8-kWh battery pack to provide 25 miles of electric-only range before its gasoline-powered engine takes over. For an average driver, a Prius Prime will slash his gasoline use by almost 90%.
In 2010, Nissan Motor Co., Ltd. (OTCPK:NSANY) introduced the Leaf, a battery electric vehicle, or BEV. While the original Leaf used a 24-kWh battery pack to provide 80 miles of electric driving range, potential buyers were frequently paralyzed by range anxiety. So the latest version of the Leaf uses a 40-kWh battery to provide 150 miles of electric driving range. For an average driver, a Leaf will substantially eliminate gasoline use unless the motorist drives a conventional car for occasional road trips.
In 2012, Tesla launched the Model S, a luxury BEV that used an 85-kWh battery pack to offer 300 miles of electric driving range and stunning electric muscle car performance. The current Model S-100 uses a 100-kWh battery to offer faster acceleration and 370 miles of electric driving range. While driving a Model S won't eliminate more gasoline use than driving a Leaf, the extra 60 kWh of batteries will accommodate occasional road trips.
The following table summarizes the critical data from the preceding paragraphs and shows you all you need to know about the diminishing marginal utility of EV batteries:
- Calculated based on data from www.fueleconomy.gov
- Calculated by dividing electricity use per year by battery pack capacity.
As you study the table, pay particular attention to the difference between the Prius L-eco and the three plug-in vehicles. While the Prius L-eco does a great job of conserving fuel with a small engine and a small battery, the plug-ins are all about energy substitution. For every gallon of fuel they don't burn, they use 6.7 to 9.0 kWh of electricity.
As you compare the plug-ins, notice how the values for fuel savings per kWh of battery capacity plummets as pack size increases. While ultra gently cycling of large battery packs does wonders for anticipated battery life, the waste is obvious.
The diminishing marginal utility of batteries becomes blazingly self evident the moment you understand that:
- 1 kWh of battery capacity in a Prius L-Eco cuts fuel consumption by almost 50%;
- 7.8 kWh of additional batteries can eliminate the next 40% with a Prius Prime;
- 31.2 kWh of additional batteries can eliminate the last 10% with a Leaf; and
- 60 kWh of additional batteries can accommodate road trips in a Model S.
The ugly reality becomes morally offensive when the analysis moves to a societal level where long-range EVs actually undermine efforts to cut CO2 emissions.
If you have 100 kWh of lithium-ion batteries, you can build one Model S and save one driver 385 gallons of fuel a year, or 600 gallons per year if you assume that Model S buyers would invariably buy gas-guzzlers if they couldn't drive electric. That same 100 kWh of lithium-ion batteries also could be used to build a 100-unit fleet of Prius L-Ecos that would each save 180 gallons of fuel per year. When I learned arithmetic, saving 18,000 gallons of fuel with 100 kWh of batteries was far more efficient than saving 385 to 600 gallons of fuel with the same 100 kWh of batteries.
Limited Capacity to Produce Battery Materials
I’ve been a vocal critic of electric vehicles for almost a decade because our planet can’t produce enough technology metals to accommodate a widespread transition to electric drive. Making a few hundred thousand or even a few million EVs a year isn't a major problem, but a global transition to an all-electric future is a pipe-dream, a quantum leap from the possible to the absurd, a fairy castle in the sky.
Just last week a team of eight British scientists led by Professor Richard Herrington, the Head of Earth Sciences at Britain’s Natural History Museum, delivered a stunning letter to the UK’s Committee on Climate Change that neatly summarized the technology metal supply challenges inherent the UK’s planned transition to a carbon-free economy.
It explained that meeting the UK’s EV targets for 2050 would require:
- 207,900 tonnes of cobalt;
- 7,200 tonnes of dysprosium and neodymium;
- 264,600 tonnes of lithium; and
- 2,362,500 tonnes of copper.
I would have included 1,770,000 tonnes of battery-grade nickel.
While the numbers don’t seem overwhelming if you’re only concerned with electrifying 31.5 million cars in the UK, they become patently absurd if you want to electrify:
- 240 million cars in China; and or
- 264 million cars in the US; and or
- 1.2 billion cars in the world today; and or
- 2 billion cars that are expected by 2050.
Since the primary environmental benefits of vehicle electrification can’t be realized without near-universal implementation, Bernstein Research analyzed the incremental technology metal requirements for an ~88% transition from ICE to EV. This table summarizes their conclusions and compares those requirements with the current global production base for each technology metal:
While aluminum doesn’t present insurmountable issues and increasing graphite and lithium production from modest current levels is theoretically possible, doubling nickel production over a period of 17 years would require herculean effort and doubling copper production would be almost impossible. Since cobalt is a byproduct of copper mining in the Congo and nickel mining in other parts of the world, the only path I’ve seen that has a chance of growing to meet anticipated demand is sub-sea mining. While extensive work in the 1970s proved that sub-sea mining was technically feasible, the only commercial sub-sea operations are diamond mines in offshore Africa.
Since all of the technology metals used in EVs have a variety of uses that are far more important to humanity than energy substitution, a realistic timeline could easily run to centuries.
Ask yourself, which is more important:
- The cobalt in EV batteries or the cobalt in superalloys, machine tools and catalysts?
- The neodymium in EV motors or the neodymium in wind turbines and other motors?
- The copper in EV components or the copper in electrical equipment and wiring?
- The nickel in EV batteries or the nickel in stainless steel and superalloys?
I’ve been writing about the energy storage and alternative energy space for over a decade and that experience has taught me that facts rarely matter to optimistic ideologues who eschew nitty gritty detail to focus on the big picture. The alluring vision of cheap EVs transporting humanity with free power from the sun is almost irresistible.
It’s also a bit like watching somebody build a house of cards or a string of dominoes. You know the structure must ultimately collapse, but it’s impossible to predict when the first destabilizing tough will come along.
Based on the realities as I see them, and a firm conviction that the game is nowhere near over, I’ve concluded that the best investment opportunities are companies that focus on producing essential raw materials for the battery industry. My theory is based on the fact that merchants who sold picks and shovels to prospectors during the California Gold Rush had better business models than the average prospector.
Since Seeking Alpha contributor Matt Bohlsen does a good job of covering individual nickel, lithium, graphite and cobalt miners, I’ll refrain from duplicating his efforts.
Additional Disclosures: I currently serve as a non-executive director of Giyani Metals Corp (OTC:CATPF) and as a member of the index committee for the EQM Battery Metals and Materials Index (BATTIDX). My personal portfolio includes Giyani Metals, Katanga Mining Limited (OTCPK:KATFF) and the Amplify Advanced Battery Metals and Materials ETF (BATT). I’m also short Tesla through long-dated out of the money put options.
Disclosure: I am/we are short TSLA THROUGH LONG-DATED OUT-OF-THE-MONEY PUT OPTIONS. 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.