A decade ago, renewable energy and electric cars were for treehuggers. No utility company worthy of the name was considering significant investments in wind or solar power. Grid-scale battery storage didn’t even exist. And few major car companies were offering EVs.
Renewables Win On Price
Today, renewable energy is sweeping aside coal, gas, and nuclear in the energy sector while electric cars are still but a tiny fraction of new car sales. Why? To paraphrase James Cargill, “It’s the money, stupid!” Over the past decade, the cost of renewables has fallen so far, so fast, they are simply the least expensive option for generating electricity.
That point was driven home recently by a report by Deloitte, an internationally recognized consulting firm. That report leads off with this statement: “Technological innovation, cost efficiencies, and increasing consumer demand are driving renewables — particularly wind and solar — to be preferred energy sources. We examine seven trends that are driving this transformation.”
The report is packed with great charts and deep insights and makes for very interesting reading, but it comes down in the end to the single most important factor in all human interactions — cost. Electricity is electricity. There are no brands attached to it that cloud people’s thinking, no BMW 3 Series versus Tesla Model 3 competition. Whoever can make and deliver electrons reliably at the lowest cost wins. It’s as simple as that.
EVs Losing The Pricing Battle
On the EV side of the picture, the rapid drop in costs that has propelled renewables to the forefront of the utility industry has simply not happened. Electric cars with enough range to meet the needs of ordinary drivers were expensive then and they are still expensive today. Sure, the cost per kWh of batteries has declined, but the sticker price for an electric or even a plug-in hybrid car equipped the way people want is $40,000 and up — way up if you are talking about a Tesla, Jaguar, Audi, or Mercedes.
Another big report from a global consulting firm — AlixPartners — puts the challenge of building electric cars profitably in stark terms, according to Reuters. It calculates electric cars still cost 7,800 Euros more to produce than conventional cars. Plug-in hybrids cost 5,000 more Euros. Everyone who drives an electric car likes electric cars. In a recent study conducted in the United States, AlixPartners found more than 20% of Americans say they want to buy a car with a plug — if they can afford one.
There is a very detailed study by researchers at Munich Technical University published by ResearchGate entitled “An Overview of Costs for Vehicle Components, Fuels and Greenhouse Gas Emissions” that includes a helpful graphic describing what it costs to manufacture a car with an internal combustion engine and transmission as opposed to a car with an electric powertrain. In general, the report says the parts that make an electric car go cost about twice as much as the parts that make a conventional car go.
And there’s the rub. Whipsawed by pressure from Tesla and demands for lower emissions from regulators in most world markets (except, of course, in the US), auto makers are looking at selling their electric cars at or below cost. You don’t have to be John Maynard Keynes to know that model is unsustainable. You can’t buy apples for a quarter, sell them 5 for dollar, and hope to make it up in volume. Market share is nice but profits are what make the world go round.
“Industry players are sort of caught between a rock and a hard place,” Shiv Shivaraman of AlixPartners tells Green Car Reports. “If they don’t participate in some way in the ‘new mobility’ revolution that’s coming, they stand to lose out on what might be the biggest thing ever in this industry. If they do participate, as so many are, they have the chance of benefiting from first-mover advantages, but they also face the possibility of going broke in the process.” Carlos Tavares, CEO of PSA, tells Reuters. “What everyone needs to realize is that clean mobility is like organic food — it’s more expensive.”
It Gets Worse
The good news for renewable energy is that it is now cost competitive with other methods of generating electricity even without government subsidies. That’s not the case for electric cars. To offset the higher prices of EVs, governments around the world for years have offered generous incentives to help prime the pump. But the trend for such incentives is on a downward slope. In many countries, the emphasis is moving away from cash incentives toward more government mandates.
China is reducing or eliminating its EV incentives in favor of a new quota system set to go into effect at the beginning of next year. The UK government has just announced it doesn’t have the money to continue funding its EV incentives program. It intends to scale back the amount of money it offers buyers of battery electric cars and eliminate incentives for plug-in hybrid cars completely. In addition, electric car incentives will be restricted to cars with a sticker price of less than £60,000.
Meanwhile, regulators in the EU are pushing ahead with plans to further tighten emissions standards beginning in 2021. The new standard will make it very difficult for manufacturers to sell diesel-powered cars at all. While that is actually good news for people, who have to breath in the crud that spews out of the tailpipes of diesel cars, it is awful news for the millions of people who rely on the European automotive industry for their jobs.
What we have is a perfect storm that is threatening the very existence of the automotive industry, which is investing well over $200 billion to develop electric car technology. In recent weeks, top executives at Mercedes, BMW, and Volkswagen have all issued warnings to their stockholders that they should expect profits at those companies to take a beating in the near term.
It’s The Money, Stupid
People who read CleanTechnica tend to be strong supporters of policies that limit carbon emissions. “Climate change” is not a dirty word around here as it is in some parts of society. We all are wishing and hoping for the electric car revolution to gather steam and drive fossil fuel companies out of business, but human nature does not respond to wishes and hopes. Economics may be an abstruse field packed with densely worded monographs on obscure topics, but the core of economics is brutally simple. People tend to make choices based on cost. In other words, “It’s the money, stupid!” How else can you explain that perfectly dreadful automobiles like the Yugo, the Hyundai Excel, and the cars from Daewoo actually sold quite well at one time?
The EV revolution can’t expect to be propped up by governments forever. What the world needs is electric cars that are price competitive with conventional cars and it needs them now. EVs won’t dominate the highways and byways until they can compete head to head with the competition and win. In essence, when it comes time for us to open our wallets, we aren’t thinking about melting ice caps or particulates in the atmosphere. We are focused on one thing and one thing only — how much is this car going to cost?
End Fossil Fuel Subsidies
While everyone is banging their head against a wall trying to make electric cars cheaper, a critical factor gets constantly overlooked. Fossil fuels enjoy an economic advantage that amounts to nearly $5 trillion in direct and indirect subsidies worldwide every year, according to the International Monetary Fund. The problem, in purely economic terms, is that fossil fuel companies pay nothing for the damage they do to people and the environment. That is ridiculous, or course, but it’s true. Perhaps the best explanation of how this happens was given by Elon Musk at a presentation in Paris in 2015. It’s worth reposting it here and every person reading this is encouraged to watch the video of his presentation. It’s a classic, one that should be watched again and again until the message gets indelibly etched into our brains.
Cost Of Cars Versus Cost Of Fuel
The issue is not the cost of cars, it’s the cost of fuel. If the price of a gallon of gasoline included the cost of the damage done by burning it — including the price of all wars fought to obtain it and the cost of maintaining a military presence to guarantee access to it — the price at the pump would be over $10 a gallon.
Can you imagine how the competition between conventional cars and electric cars would change if that were the case? People would be lining up outside dealerships at 6 o’clock in the morning pounding on the doors and demanding they be allowed to buy an electric car. The changeover from molecules to electrons would take years, not decades.
Conservatives who favor market based solutions would get their wish — a level playing field where the market picks winners and losers, not governments. No more debates about junk science or whether humans can really have an effect on the environment. Set the rules of competition fairly and let the market decide. What could be simpler than that?
Of course, those same conservatives don’t really want a level playing field. They prefer it when some corporations are allowed to foist the cost of cleaning up their waste products off onto the shoulders of others. Run this proposal by the Heritage Foundation, the US Chamber of Commerce, the American Enterprise Institute, the Federalist Society, or any one of the dozens of other pressure groups funded by the Koch Brothers and listen to the screams of protest.
The Hanley Plan
My proposal is simple. Forget cap and trade systems, tax rebates, carbon taxes, and all those other convoluted schemes. In the US, make the federal tax on all fossil fuels equivalent to $1 a gallon as of January 1, 2019. The money would go into a trust fund to be used to repair America’s crumbling infrastructure and for no other purpose. Ratchet it up by 50 cents a gallon every year thereafter. Then stand back and let the economic imperative of the free market work its magic. The demand for electric cars would soon drive down their cost thanks to economies of scale. Problem solved in one swell foop!
Note: If drafted I will run and if elected I will serve. Oh, and you’re welcome.