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07/12/2016

Electromobility: Still a long way to the mass market

Climate & Environment

Electromobility: Still a long way to the mass market

For various reasons, from rising oil prices to changing consumer preferences, the number of electric cars will rise steadily in the coming years. Yet there are a variety of factors which mean that the technology is still far from suitable for mass production, including technical issues as well as political ones, writes Eric Heymann of Deutsche Bank (DB) Research in an April paper.

This commentary was authored by Eric Heymann of DB Research.

"The degree of electrification in the automobile industry will increase steadily over the coming years. More and more vehicles will be powered partly or fully by electricity in future. However, rapid structural changes are unlikely as many general problems surrounding electromobility have yet to be solved. Probably the greatest challenge in this context is the high cost of batteries.

There is no doubt that times are changing in vehicle manufacturing. Over the next few years, vehicle electrification will increase steadily. The share of mild-hybrid and micro-hybrid vehicles is rising worldwide. And soon there will be plug-in hybrid cars and purely battery-powered vehicles entering the market – albeit in small numbers.

All major carmakers have intensified their R&D efforts in this area. The large power companies have also been 'electrified' by this development. Parts suppliers are looking for ways to benefit from the trend. And companies with know-how in battery technology are sensing big business opportunities, too.

The drivers of electromobility are well-known: rising oil and petrol prices as a side-effect of the finite nature of 'black gold', strict regulation – for instance in the EU – of CO2 emissions of cars, changes in consumer preferences, as well as competition in the car industry, have triggered this trend reversal away from fossil fuels to electromobility.

Quick structural change unlikely

Despite these long-term trends, rapid structural changes in car manufacturing are unlikely. The reasons are legion. The decisive issue at present is the fact that batteries are still too heavy, bulky and, above all, expensive. Costs per battery currently amount to a minimum of EUR 10,000 to EUR 15,000. As electricity is not free either, one would have to drive about 250,000 kilometres for the battery to pay for itself – provided it does not have to be replaced along the way.

Compared with this cost disadvantage, other unsolved problems of electric vehicles look almost insignificant: for many users the range of electric vehicles is still too small, and the life of the expensive batteries too short.

Moreover, batteries take a long time to be recharged, not all security issues have yet been solved, the infrastructure (e.g. charging stations) is still in its infancy and power generation also causes CO2 emissions. Nonetheless, some articles on electromobility seem to suggest that there will be a plethora of battery-powered cars on offer tomorrow which the average consumer can afford (without any kind of subsidy). However, even small purely battery-powered cars will probably cost no less than EUR 30,000 for some time to come.

At the end of the day, companies and politicians will have to manage public expectations wisely. Should the currently very high expectations regarding electromobility be quickly disappointed, this would be counter-productive for the long-term success of this promising technology.

Government subsidies – A balancing act

To make it absolutely clear: this article is not meant to convey any doubts as to the medium to long-term prospects for the success of electricity-powered cars. However, structural changes in this sector will take up to two decades, especially as there is still considerable potential to boost the efficiency of both petrol and diesel cars. A farewell tribute to the combustion engine would certainly be premature. Moreover, other alternative fuels such as gas or bio-fuels are likely to gain in importance, too.

All the same, the race for pole position in the transition to the age of electric cars has begun. China, for instance, has set itself the ambitious target of building roughly one million battery-powered vehicles per year from 2012. To meet this target, massive subsidies will be granted to the car industry and car buyers (as is the case in other countries, by the way).

In terms of the ecological impact, though, this is a questionable plan. First, most of China's electricity is generated by coal-fired plants which would mean large-scale CO2 emissions. Secondly, in the case of electromobility the CO2 mitigation costs by far exceed the threshold of EUR 1,000 per tonne of CO2 and are thus exorbitantly high. At present the price of CO2 in EU emissions trading is approximately EUR 13 per tonne. First and foremost, China's strategy is politically motivated: the country wants to be one step ahead in battery technology – and actually stands a good chance of achieving this goal.

In this environment it is not easy to find the best way to promote electromobility – especially in a country such as Germany where the car industry plays an important role. It cannot be in the governments' interest that the leading car-manufacturing nations enter into an incentive competition, but the risk of this happening cannot be ignored.

What should the government do? Direct grants for purchasers of electric cars to the tune of several thousand euros are not only very expensive but also problematic in ecological terms as there are in fact many considerably cheaper ways to reduce CO2 emissions. It would be better to promote basic research or provide political support , e.g., for the development of technical standards. Other conceivable options are preferential treatment of battery-powered vehicles on the road – for example by granting them exclusive use of dedicated lanes.

In the longer run, though, electromobility should be able to work without subsidies. To this end, enormous technological progress would have to be achieved and economies of scale generated over the next few years. This will hardly be possible without cooperation across the entire value-added chain in the automotive sector. To make battery-powered vehicles attractive to the mass market without subsidisation, the cost of batteries would have to fall by approx. 70-80%. This cannot be achieved over the short term but will take several years. Moreover, the other challenges mentioned above will have to be met.

All things considered, it will be a balancing act for the sector's R&D departments to achieve progress with electromobility without at the same time neglecting improvements to conventional propulsion methods, which will remain important for many years to come. And the effects of the latest recession will not make this an easier task, either.''

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