Thursday, October 21, 2010

Are EV Incentives Justified?

The Wall St. Journal has been running an interesting series of articles on electric vehicles this week, coinciding with the mounting excitement surrounding the arrival of the first truly mass-market EVs in the US within a month or two. The articles cover a wide range of issues, including the cost of the batteries, efforts to overcome the lack of recharging infrastructure, the lifecycle environmental benefits of EVs, and the real-world experience of a participant in one of several EV consumer tests now underway. Although I've blogged about most of these topics in the past, I also found some insights in the articles that deserve to be highlighted, along with serious questions regarding the assumptions behind federal and state EV policies and incentives and the benefits of these vehicles for the country.

The US government is investing large sums to create a domestic EV industry and ensure there's a market for its output. Between the stimulus grants for battery and component factories and recharging infrastructure, and the ultra-generous tax credits for the first million or so vehicles, it adds up to around $10 B, and that's not counting the federal loans and loan guarantees to unproven EV manufacturers, at least a few of whom might not survive long enough to repay them. It also doesn't include more than $1 B in foregone federal and state motor fuel taxes over the lives of these cars. This is all justified on the grounds of energy security and emissions reductions and predicated on the idea that by making early sales more affordable for customers, the government can help the industry expand its volume to the point at which costs would come down dramatically. That would ultimately make EVs competitive with conventional cars on their own merits, without perennial subsidies. The Journal articles identify at least two major factors calling this model into question.

The first and most important of these relates to the high initial cost of the batteries that contribute a major portion of the total cost of an EV, and essentially all of its cost premium over a conventional car. Citing several battery experts, the Journal raised doubts about how quickly battery costs are likely to fall, based on an assessment of the components of these batteries. Although the Lithium-ion batteries that go into EVs are new products, many of the things that go into them are not new at all, and are thus unlikely to become dramatically cheaper. Should we really expect that EV batteries would follow an entirely new "experience curve" of their own, yielding sharp cost declines over the first few years as output grows, or do they really fall within the larger category of all Lithium-ion batteries, for which the cost curve has flattened significantly in recent years, in applications such as laptop computers and cellphones? This is a crucial point, because if volume/experience effects do not quickly drive down the cost of EV batteries, then when the current subsidies expire EVs would become prohibitively expensive relative to their non-EV competition, and sales could collapse. That would force the government to choose between extending generous EV subsidies for a much longer period or standing by as US factories producing EVs and their components shut down.

The other assumption that looks questionable is the basis of competition between EVs and non-EVs. The Journal makes a good case that most of the developments that could make EVs cheaper and more effective would also benefit hybrid cars. Cheaper batteries for fully-electric cars mean much cheaper battery capacity for hybrids, even those providing a few miles of all-electric driving. That strengthens the argument that consumers won't be choosing between EVs and big, gas-guzzling cars, but between EVs and hybrids that already capture the most valuable portion of the available fuel--and fuel cost--savings. That shrinks the consumer benefits that would offset the inconvenience purchasers will take on when they buy plug-in cars without onboard generators. When you aggregate the annual fuel savings of the first million EVs on the basis of their displacing 50 mpg hybrids rather than 25 mpg average cars, they shrink from 480 million gallons per year to 240 million gpy, or just 16,000 barrels of oil per day. At that rate, it would take 22 years to repay the government's $10 B investment in them, even ignoring the cost of the energy from other sources--mostly domestic natural gas and coal--that these cars will consume.

So while I still regard the electrification of transportation as an inevitable trend, as I have for more than a decade, and am tremendously impressed by the engineering that went into the Chevrolet Volt and the other new models on their way--20 in all, by the Journal's count--I'm left with some serious doubts about their viability as a sustainable national energy strategy. It seems pretty clear that we wouldn't be seeing nearly this level of activity without the huge commitment to EVs by this administration and, to a lesser extent, the previous one. Although these decisions have largely already been made, the EV tax credit would still have to be renewed next year, as I understand it.

$10 billion is a lot of taxpayer money to invest in making these cars more attractive to a group of relatively well-off early adopters. Consumers in states like California will receive as much as $12,500 for buying a Nissan Leaf or other qualifying EV. Nor do I buy the argument that if we don't invest in this industry now, China will own it within a few years--not because I don't think they would, but because it's not clear to me that we have any particular competitive advantage for building millions of Lithium-ion car batteries cheaply enough to hold our own, particularly when we'll be importing many of their components and could come up short on access to any rare earth metals required. Spend a few minutes gazing at the accumulating federal and state debts and even larger unfunded liabilities displayed at and you might join me in wondering whether, as cool as these cars promise to be, the generous incentives associated with them are a luxury we can't afford just now. While it wouldn't be fair to the companies that have invested in factories and hired workers on the basis of these incentives to cut them off suddenly, it might make sense to slim them down and phase them out faster than currently planned.

No comments: