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Best estimates are that by 2022 electric cars will cost the same to purchase as petrol cars, but with 20 per cent lower costs over a five-year ownership period.
By Dr Michael Naylor
Electric car maker Tesla, which produced 85,000 cars last year and lost money in nearly every quarter, is now worth $56 billion on the US stock market. That’s more than General Motors or Ford, which produce more than nine million cars annually and earn large profits. What this valuation implies is the markets expect electric cars to dominate the car industry faster in the not too distant future, probably sooner than most people realise.
Tesla is potentially a game changer. It hopes to produce 500,000 vehicles annually by the end of 2018, growing to between five to ten million by 2025. Volvo recently announced it will only produce electric cars or hybrids by 2019, and Volkswagen aims to do the same by 2025. Germany plans to ban the sale of new cars with internal combustion engines after 2030 and the United Kingdom and France have announced they will follow suit by 2040, with other European Union countries likely to follow.
Electric vehicle sales are currently constrained by inadequate battery performance, which has limited their appeal to less than one per cent of buyers. But recent advances in technology mean the issue has largely been solved. Tesla’s model S has a range of 500km, which is enough for most vacation trips. Recharge times have dropped to near 15 minutes, with batteries in development promising a five-minute recharge rate. Given that 95 per cent of charging typically occurs in the evenings at home, this will only occasionally be an issue for drivers.
The recharge decay rate has also been largely fixed, with Tesla battery packs now able to handle over 500,000 km – more than the average internal combustion engine car. By 2022 battery engine vehicles are expected to have a range closer to 1000 kilometres and over one million kilometres of life or, alternatively, a smaller, cheaper, lighter battery pack can be installed. Battery packs will outlive the vehicle, allowing them to be reconditioned and on-sold. This will give older electric vehicles value, reducing the cost of a new car. While internal combustion engines have limited potential for improvement, electric battery technology is improving rapidly.
Electric car engines are also far simpler to manufacture and maintain. Tesla has found that they can solve 80 per cent of maintenance issues remotely via their data links. In most countries the cost of charging via electricity is 50 per cent less than the price of petrol. Best estimates are that by 2022 electric cars will cost the same to purchase, but with 20 per cent lower costs over a five-year ownership period.
This means that sometime between 2020 and 2025, in most countries, buying a new internal combustion engine car will no longer make financial sense. Why pay a premium price for an inferior product? Electric buses and trucks are expected to be widely used by 2022, and the switch over rate here is expected to be fairly rapid. The health benefits from reduced local pollution will mean petrol cars could be banned from many inner-city areas.
The main constraining factor to switching will be supply or, more specifically, the supply of lithium-ion battery packs needed for electric cars. Tesla is building the world’s largest factory (by floor area), its Gigafactory 1, which will more than double the world’s current production of lithium-ion batteries, as well as using scale to drastically reduce cost. This factory will produce enough batteries annually for 500,000 cars. While Tesla has plans for three to six more factories over the next decade, no other automaker has battery factories, or plans to build them. Volvo, it seems, will initially mainly produce hybrids, with small battery packs. Unless these firms build factories, there could be severe supply constraints until at least 2040, unless Chinese manufacturers rapidly ramp up output.
The likely future global player is probably China. China has been very aggressive in pushing electric cars, partly as a bid to reduce its appalling pollution issues, but mainly because it is an opportunity to take over global auto production. China currently produces most of the world’s lithium ion batteries and is the world’s largest market for electric vehicles. China is thus likely to ban the sale of new cars with internal combustion engines once its automakers can supply its domestic market.
Another factor to consider is the speed at which existing second-hand internal combustion engines are phased out. Countries like China may choose to export their used internal combustion engine stock at cut-prices and reduced demand for petrol may lead to drastic price reductions as oil producers try to sell while they can.
What is clear is that by 2040 internal combustion engine vehicles will be nearly museum pieces. Supply constraints may mean that not all the world’s consumers will be able to switch. The question for New Zealand is, how fast will the changes take place? We need to develop a clear understanding of likely future dynamics if we don’t want to be left lagging behind.
If we are not careful, we will become the dumping ground for the world’s surplus second-hand internal combustion engine vehicles. The more attractive option would be to set targets and inducements to encourage the importation of second hand electric cards once these start to enter the world market in volume around 2025.
Dr Michael Naylor is with Massey University’s School of Economics and Finance.
Created: 08/08/2017 | Last updated: 08/08/2017
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