29Apr 2016

Tesla Motors presold over 400,000 Model 3 electric vehicles (EVs) in the course of a couple of weeks. Should the traditional carmakers with conventional internal combustion engines (ICE) be concerned? …the answer is probably not before 2025 or beyond.

In one of my earlier posts from 6 March of this year, I explained how gasoline prices had to rise substantially before they become economically competitive with ICE cars. Goldman Sachs just published a report this week predicting that EVs will not be a threat to conventional cars before 2025. Based on their models of GDP growth, gasoline prices and other factors, they predict that EVs will reach, in a best case scenario, no more than 10% of all new cars sold in the US, itself about 1/4 of all global car sales. Their more reasonable base model calls for only 381,000 EVs sold in the US in 2025, or 3% of all US car sales, hardly a threat to ICE carmakers. The chart below predicts instead an increasing penetration of hybrid vehicles beginning in the 2018-2019 timeframe.

Global-sales

Neglecting the issues of driving range and charging infrastructure, I will examine here 3 key assumptions that impact the decision of consumers as they ponder EVs vs. ICE cars: i) the gradual decline of the cost of EVs over the coming years, ii) the price of gasoline, and iii) the price of electricity over this time period. Collectively, these 3 points impact whether EVs will be cost competitive taking into consideration the upfront cost differential between EVs and ICE cars, as well as the cost of operating these vehicles.

The cost of buying an EV is primarily driven by the cost of the lithium ion battery. Standing today near $150/kWh, it is projected to decline to $100/kWh by 2021. For a 200-mile range car using a 60-kWh battery, that translates to a present battery cost (excluding the electronics) of $9,000 dropping to $6,000 over the next 5 years. This is a significant reduction but an EV will most likely remain more expensive than an equivalent ICE car by $5,000 to $10,000.

Gasoline prices are primarily impacted by crude oil. The next chart shows that, based on past historical records from 1990 to 2015, crude oil needs to reach $110 per barrel before gasoline hits an average US national  price of $4.00 per gallon. In March 2016, North Sea Brent crude oil stood at an average price of $38 per barrel; the US Energy Information Administration is forecasting that it will rise to $41 per barrel in 2017. That is certain to keep average US gasoline prices near $2.00 per gallon for the foreseeable future.

oil-vs-gas

What about the price of electricity? Will it rise? and what has impacted it? It turns out that the real (i.e. adjusted for inflation) average price of residential electricity in the US has remained rather constant over the past decades, hovering near $0.12 /kWh in today’s dollars. The oscillations in electricity pricing are due to seasonality.

electricity

At $4.00 per gallon and near constant electricity prices, the cost of operating an ICE car is $0.16 per mile vs. $0.03 per mile for an EV. If the EV’s price tag is $10,000 higher than the comparable ICE car, then it will take on average $10,000/$0.13 = 77,000 miles, or about 6.5 years to breakeven. This is naturally an oversimplified analysis but provides sufficient insight to appreciate the hurdles.  Clearly, the industry has to continue chipping away at the battery expense; governments will continue to provide incentives; oil prices will fluctuate as they have in the past…put altogether, it will take several years before EVs become a threat to the carmakers, possibly 2025 or beyond. The silver lining is that the discussion is no longer whether EVs will make it as mainstream cars, but rather its timing.