A Questionable Future for Electric Vehicles
Like the horizon that recedes as you approach it, so it is with electric vehicles (EV). A paper by Thomas Covert, Michael Greenstone, and Christopher Knittel in the Journal of Economic Perspectives concluded that even with the decline in battery costs, the cost of crude oil would have to exceed $350 a barrel for a electric vehicle to be cheaper to operate. The authors make it clear that much better battery technology for storing electricity is essential if renewables and electric vehicles are going to have commercially viable future. Without "massive additional taxpayer subsidies" and a break-through in battery technology, it will be a long time before electric vehicles are commercially viable.
Today, crude oil prices are slightly under $40 a barrel. Needing an almost hundred-fold increase in crude prices to justify electric vehicles demonstrates just how much progress is needed in battery technology, probably a revolutionary breakthrough. Promoters of alternative energy cite significant progress in reducing the cost of batteries for electric and hybrid vehicles. In the past decade the cost per kilowatt hour (KWH) has declined from over $1000 KWH to under $400 KWH, according to the International Energy Agency.
However, the costs of current EV batteries cited in articles do not make clear whether they are manufacturing costs, costs to auto companies, costs to consumers or total system costs. A study several years ago by the Boston Consulting Group put the cost to auto companies between $1,000 and $1,200 KWH--the capacity requirements for vehicles range from 18KWH to about 50KWH. A 2014 article in Clean Technica concluded that "a typical ... 4-hour battery (designed to address the afternoon/evening peak) costs anywhere from ~$720-2,800/kWh ...." While battery costs might decline in the future, they have not yet done so.
There is at least one major reason for doubting that a significant drop in battery costs is near. Tesla Motors is building a $5 billion "gigafactory" to produce existing lithium-ion batteries, not next generation batteries. Progress in advanced battery technology and EV sales is likely to be slower because of the expectation that today's low oil prices will not return to the levels of a few years ago for some time. The notion of "peak oil" has been replaced by the recognition that proven oil reserves have consistently increased over time and their price advantage over alternatives has persisted as well, even though there has been more than 40 years of government sponsored research and development to find cost competitive alternatives.
As oil prices have fallen, so has the demand for EVs, in spite of the generous federal and state subsidies that are provided to buyers and manufacturers. Federal subsidies range from $2,500 to $7,500, and state subsidies range from $1,000 to over $6,000. An article in the Wall Street Journal reported that Tesla's "combined subsidies amount to $20,000 per car and in California upward of $45,000." A Congressional Budget Office report concluded that by 2019 the federal government will have doled out $7.5 billion for production and sales.
Auto manufacturers are producing EVs because CAFE mileage credits allow them to sell more profitable trucks and SUVs that the market demands. This is the same incentive structure that led manufacturers, beginning in the 1970s, to build small high-mileage vehicles that had to be sold at a loss to get consumers to buy them.
Government efforts to counter market forces are reminiscent of King Canute attempting to command the tides from rolling into shore. The government succeeds in making crony capitalists rich and misallocating scare resources. Is there any wonder why we are stuck at 2 percent economic growth?
William O'Keefe is the President of Solutions Consulting. You can follow him on Twitter here.
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