Investing in the clean transportation revolution – Part 1 – Electric vehicles
Is this the end of cars as we know them? Reading tech blogs and think tanks’ research, you could be forgiven for expecting that in a few years, the world will have effortlessly moved from human-driven combustion engine cars, owned by their drivers, to fleets of electric ‘robocars’ summoned by their users.
- In our view, this will not happen quite so quickly but still, it is a fact that the transport industry is about to experience three revolutions, happening virtually at the same time:
- Electric vehicles, an engineering development, electrifying the means of propulsion and helping to decarbonise transportation.
- Autonomous cars, a development in control systems, with far reaching implications which are difficult to grasp.
Transport (or mobility) as a service (TaaS or MaaS), a fundamental change to the commercial relationship with the user.
We will keep the somewhat mysterious autonomous vehicles and TaaS subjects for the coming months, and will start today with electric vehicles:
- Digging into the environmental, technical and economic forces driving EV adoption, we show that EVs will progressively become an important part of the mainstream automotive sector, representing maybe half of car sales by 2040.
- This will create huge innovation opportunities for angel investors who are bold enough to take the risk of backing the right innovations. Green Angel Syndicate is poised to take these opportunities with a good deal of experience in the EV charging sector, in particular.
- However, EVs are not going to sweep the board, and so businesses developing hybrid technologies, which achieve some early benefits of EVs but with lower ‘friction costs’, will also win big. For example, Green Angel Syndicate investee companies CPT and Vantage Power are great investments in a vibrant sector.
How many EVs?
As you visit the streets of London or any major city in Europe, the chances of encountering a whisper-quiet, smoke free electric car or of walking past a brand new buzzing charging point seem to be increasing progressively.
Looking at the numbers though, you quickly realise that EVs are still in their early infancy. Electric cars (that is plug-in battery and plug-in hybrid cars) have just passed the 2m mark globally in 2016. This is less than 0.2% of the 1.2+bn vehicles in circulation in the world.
EV adoption varies massively between some very advanced countries such as Norway, where EVs now represent a third of new cars sold, and most other places. In the UK, there are roughly 100,000 plug-in electric cars currently, less than 0.3% of the total vehicles. This number is growing fast (it was multiplied by 30x in just four years), but still, in May 2017, just 4.4% of car sales in the UK were hybrid or electric.
A few days ago, Volvo announced that from 2019 onwards, all new cars it will launch will be partially or completely battery-powered. Volvo called it a ‘historic end’ to building models that only have an internal combustion engine.
Looking ahead, all experts point to exponential growth in the electric vehicles market in the coming years, with a very significant inflection point around 2025-2030. EVs are expected to represent 8-15% of global car sales by 2025, and 35-55% by 2040 (combining data from different sources, including Bloomberg New Energy Finance, the Carbon Tracker Initiative & Grantham Research Institute and UBS).
Even oil and car industry incumbents are now firmly preparing for the EV acceleration:
- Oil giant Total estimates that EVs will reach 15-30% of sales by 2030;
- A few days ago, Volvo announced that from 2019 onwards, all new cars it will launch will be partially or completely battery-powered. Volvo called it a ‘historic end’ to building models that only have an internal combustion engine.
What are the drivers of such acceleration ahead? Electric cars will be driven by technical innovation and shifting economics, helped by a growing political ambition to fight climate change and air pollution.
Climate change and air pollution put electric cars top of the agenda
Roughly half of the global oil production goes to gas-guzzling road vehicles, and 22% of the world’s annual 32Gigatons of energy related greenhouse gas emissions come from oil-powered transportation – mainly cars, trucks and buses. Transportation is growing faster than any other energy end-use sector. This means that greenhouse gas emissions from transport are anticipated to rise by nearly 20% by 2030 and close to 50% by 2050 unless major action is undertaken.
In addition to the greenhouse gas emissions, which must be reduced if we are to fight global warming, we are also facing a huge pollution crisis in megacities, including London. In the public’s eye, this has become top of mind with the astonishing ‘diesel-gate’ revelations. Today, experts estimate that nearly 40 million people in the UK live in areas with illegal air pollution levels, meaning high concentrations of toxic NOx gas and of dangerous particulates emitted by diesel engines. GAS member Baroness Valentine raised these issues in a House of Lords debate on 3rd July.
Revolutionising the way we move around, notably in cities, has progressively crept up in the political agenda:
- The ‘Paris Declaration on Electro-Mobility and Climate Change’ (COP21) pointed to a target of “at least 20% of all road transport vehicles globally to be electrically driven” by 2030, corresponding to 100m electric cars.
- More recently, the “Clean Energy Ministerial” announced a new campaign called EV 30@30 to speed up the deployment of EVs, targeting “at least 30% of new electric vehicle sales by 2030”.
- Some countries are taking bolder steps, including Norway, which has announced 100% EVs in 2025, the Netherlands (considering a similar target), as well as Germany and India (both targeting 100% EVs in 2030).
Disruption ahead: EVs will soon be cheaper than traditional cars
On the technical and economic fronts, the key force behind the development of electric cars is rapid battery innovation, enabling: (i) increased vehicle range, eliminating the ‘range anxiety’ issue, hence freeing all-electric cars from their niche of being just second cars limited to city errands; and (ii) a lower overall cost for the vehicles. Analysts forecast that EVs will become cheaper than traditional cars by 2018-2025.
These trends will enable all types of manufacturers to launch an ever increasing variety of new EV models, addressing the needs of different market segments – paving the way for an inflection point in demand.
Forget range anxiety – As the energy density of batteries increases, they can store more power with less weight. Combined with larger battery packs, this is a key driver of a rapid increase in EVs’ range. Initial EVs could drive less than 100 miles per charge, but the latest Renault Zoe claims more than 200 miles and Tesla’s leading models have ranges of more than 215 miles.
Cost parity with traditional cars in the next few years – From 2010 to 2016, battery pack prices fell roughly 80% from ~$1,000/kWh to ~$227/kWh. Despite that drop, battery costs continue to make EVs more costly than comparable traditional cars. However, analysts project EV battery pack prices below $190/kWh by the end of the decade and below $100/kWh by 2030. As such, the base version of the new Chevy Bolt could cost less than $30,000, and of the Tesla Model 3 less than $40,000 – making such EV models cost competitive with traditional cars in their relative market segments.
Charging infrastructure: a key part of the value chain
Most EV owners have a home charging point. However, this is not sufficient for drivers to be able to rely entirely on their electric car and wander far beyond their daily commute. Here, the key enabler is a dense network of charging stations across Europe and the UK.
Today, the continent has more than 100,000 public charging spots (12), and the UK alone has 13,000 connectors in 4,500 different locations (2). These numbers are growing, but the rollout represents a massive endeavour over many years, given its capital intensive nature, the time required to identify and secure adequate spots and the need to adapt electricity distribution networks.
In addition, most of today’s infrastructure, both in Europe and in the UK, is made up of ‘slow chargers’, which take hours to fill up a battery. Newer ‘fast chargers’ which can repower an EV in tens of minutes or less are rare and costly, notably because they require big connections to the grid.
Different types of players are involved in this rollout, including 1) relatively recent start-up companies such as, in the UK, ChargeMaster or POD Point, but also 2) car manufacturers themselves, including the EV specialist Tesla but also traditional ones such as BMW or Ford who recognise that installing chargers is in their own interest, 3) potentially the petrol stations themselves and 4) real estate players e.g. those building parking spaces.
Another market opportunity relates to helping drivers find their way to chargers and plan journeys accordingly. This is the idea of the Zap Map website and app, popular amongst EV drivers.
Hybrid: adding value in the long transition ahead
The faster the transition to EV the better for the environment, as long as electricity can be delivered to these cars in a clean way. Still, this transition cannot and will not happen overnight. Hence we see a number of opportunities in hybrid solutions helping combustion engines become cleaner.
Some start-ups are working on improving combustion engines, e.g. CPT. Others work on retrofitting hybrid engines to existing vehicles, for example Vantage Power, which is addressing the very important niche of buses. Even though buses represent only a fraction of total vehicles on the roads, they are heavily utilised and consume a lot of diesel fuel, so account for 16% of NOx emissions (14). The rise of pure electric buses will take time given challenges linked to their driving range and the required power. Vantage Power’s solution is to retrofit existing buses with hybrid powertrains, cutting fuel consumption by up to 40% and NOx emissions by up to 92%, at a fraction of the cost of buying new hybrid buses.