What if the cost of fuel goes to zero?
(disclaimer: opinions expressed here are entirely my own, and are entirely speculative. I cannot promise that reading this post will not entirely be a waste of time. I wrote this post on September 21st, 2020).
Tomorrow (September 22nd, 2020) is Tesla’s Battery Day. The last few months have seen an increasing amount of interest for anything that has to do with EV (Electric Vehicles) and energy storage (Lithium-ion batteries and alternatives).
NKLA, QuantumScape, and others have been making the news recently, for good or bad reasons. (e.g. big news for NKLA earlier today, but I won’t comment as I have nothing specific to add to what you can already find online).
I have been interested in transportation and energy storage for a long time now, despite I am far away from being an expert. It’s fascinating how these two sectors influence how the world works, and relationships between entire nations.
I think that we often get lost in the weeds of a specific company, or in short-termism, without looking at the long term trends, and I’d like to remedy that with this blog post, which is simply about some speculative predictions. Nothing else.
With this BIG caveat, if you’re still interested in reading, let’s dive in. I also offer you a summary at the end.
Cars are what matters
92 million new cars are produced and sold every year in the world. Of these, slightly more than 2% are fully Electric Vehicles (EVs).
But wait: bicycles, motorbikes, boats, trucks, trains, small planes, big planes, small ships, large ships, represent other type of vehicles that require an engine and fuel to transport people and things around the world.
In my mental models, I prefer to divide these into two buckets: ground passenger vehicles, and everything else. “Everything else” is really complicated and fragmented, and it’s hard to introduce efficiencies in these market segments. Furthermore, in the bucket of ground passenger vehicles, cars represent by far the largest chunk of the market. It follows that cars are what matters the most. Let’s focus on cars, then, and mostly ignore everything else.
Car owners and drivers do not really care about energy density, battery cost, environmental impact (sadly), etc. What they care about is:
- total cost (capex),
- cost per mile (opex),
- friction/inconvenience of refueling.
And they are still affected by marketing/advertising, which makes people think that 0–60mph (or 0–100km/h) acceleration is an important factor in deciding which vehicle you want to buy or lease. (hint: it really doesn’t matter).
Side note on the polluting effects of cars: there’s much more than CO₂ emissions to consider. Breaking, for example, is a significant “polluting” factor, and in general an electric car manages to reduce the usage of brakes and therefore the “Non-Exhaust Emissions” from Road Traffic, which can amount to more than half of the emissions of a vehicle.
ICE vs EV
The current “internal combustion engine” (ICE) business model for car companies (e.g. Toyota, Volkswagen AG, Hyundai, GM, Ford) is that:
- cars are sold by car companies for a small margin to car dealerships, and finally to the end customer;
- and then car companies try to earn more money for the lifetime of these cars (about 12–13 years on average) by selling expensive services and replacement parts through a network of car dealerships and repair shops.
- financing and leasing to cover both capex (Capital Expenditure, or the initial upfront cost) and opex (Operating Expenditure, or what you pay to operate the vehicle) is usually available in various forms, and often represents another source of income for car companies.
Electric Vehicles differ from ICEs primarily on these things:
- fewer moving parts, simpler construction/assembly, higher efficiency of an electric engine compared to a gasoline-powered one, all lead to lower opex costs.
- range is heavily affected by battery technology and cost, and an electric car with a (good) range of 250 miles / 400 km requires a battery with the cost of approx. $14,000, as of 2020. ICE vehicles have essentially zero costs here.
- Refueling is mostly done by recharging / fast recharging. A full recharge requires a few hours. A partial, fast recharging still requires at least tens of minutes, compared to 2–4 minutes required for an ICE vehicle.
Side note: Tesla, so far, is the only car manufacturer that has decided to challenge the pre-existing model, by avoiding the extra step of car dealerships, and spending NOTHING on marketing. This offsets the lower “recurring” earnings that Tesla can earn from its cars from maintenance and replacement parts.
The result is that the TCO (Total Cost of Ownership) of an EV, such as Tesla’s Model 3, is now comparable to similar ICE cars, although ICE cars can’t really be beaten in the low end of the market (purchase cost <$25,000).
Most of this has to do with battery costs. At Tesla, pack-level costs (meaning: the total cost of a battery storage system, not just the cost of the batteries themselves) decreased to $158.27 per kilowatt-hour in 2019. A typical Tesla car has around 75–80 KWh in total energy storage. The rest of the industry hovers at 10–15% above Tesla’s costs. Many agree that a $100/KWh cost would make EVs really competitive against ICE vehicles, but we don’t need to wait for that; we saw above that the TCO of a Tesla is essentially already competitive against some ICE cars.
EVs have two issues: upfront cost and refueling
One simple reason why EVs still only have 2% of the market is that EVs do not offer the same variety of models and trims compared to ICE cars. This gap is shrinking, and will become less relevant in the coming years. Which leaves us with the TWO main reasons:
- The upfront cost is usually higher (despite a lower opex which partially offsets this issue).
- Refueling is much more painful (both for total range, time required to refuel, and availability of electric charging stations near you).
That’s it, really. It all comes down to these two things.
On the upfront cost issue: if you happen to live in a rich area such as San Francisco, California (like me), you tend to forget that in most of the world, including some parts of the US, people spend on average less than $20,000 on a new vehicle. A Tesla Model 3 starts at about $35,000, which makes it not affordable for the vast majority of the market.
On the refueling issue: most of the world doesn’t have enough recharging stations. And even if you do, most people can’t afford to wait a few hours for their car to fully recharge. Simply put, refueling can take at most a few minutes for most drivers.
That’s why EVs are still only 2% of the market in 2020.
What EVs need to close the gap
Reduce the capex, and fix refueling. How do we do that?
Reducing the upfront cost / capex can be done in three ways:
- reducing the cost of the battery (bigger cells, as part of a bigger plan that involves cheaper manufacturing and large scale production). This is an ongoing effort which will eventually lead to $100/KWh for Lithium-ion batteries, and go below that in the coming years. Perhaps as early as 2022. I am not too bullish on new technologies to be able to fully replace Lithium-ion anytime soon. My view is that Li-ion will simply dominate this decade. I can concede that certain low-income markets (China, India) might benefit from a lower-cost, lower-density alternative such as LFP. Perhaps hydrogen generation might become cheap enough to compete with Li-ion eventually (and hydrogen offers a higher density and really fast refueling), but not until the next decade, at least.
- Financing the capex and letting customers happily pay while they enjoy a lower opex. In other words: you buy the car, you rent the battery and pay it per month, like a Netflix or Spotify subscription.
- Reducing the need for a longer range by fixing the refueling issue. I’d bet on swappable batteries, something that Tesla was proposing as early as 2013, but never implemented.
You buy the car, you rent the battery and pay it per month, like a Netflix or Spotify subscription.
I don’t see any other way to reduce the pain of refueling (or, more correctly, recharging) an EV than by introducing swappable batteries.
I didn’t find any evidence that fast recharging can come anywhere under 10 minutes for a “close to full” recharge. And if you have to wait for 30 minutes for your car to charge, you haven’t fixed the problem.
However, not so fast with the optimism. There are two problems with swappable batteries, as Better Place has learned the hard way.
- You need to build a network of refueling stations. That’s a HUGE upfront investment. Which company is willing to underwrite it?
- You need to carry the financial risk, the upfront cost, and the range degradation of these batteries. Essentially, batteries become like liquid fuel; a customer “refills” the car by swapping a depleted battery with a charged one, but doesn’t care about the battery itself.
This makes me think of the following analogy:
Swappable batteries is the “oil” of a new type of oil fields. Whoever invests in extracting this new oil (read: pays for the batteries upfront), can earn a recurring revenue on a larger and larger chunk of the world’s transportation needs.
Swappable batteries is the “oil” of a new type of oil fields.
Batteries can also be used beyond cars: once a Li-ion battery has been recharged 500-1000 times, it becomes less efficient at retaining electric charge, while newer technologies might have, in the meantime, introduced denser and/or lighter batteries. At that point, instead of throwing the battery away, you can reuse it for other purposes (e.g. electricity storage for homes or factories), partially recovering the initial investment.
I bet most drivers would think: Why do I need to own the battery of my EV car? I don’t. I don’t care.
In China, Nio is pioneering swappable batteries for cars. Gogoro in Taiwan has been offering electric scooters with swappable batteries for a few years.
The logistics of doing this for cars are not simple; but it can be done. It might require the entire industry to agree on a standard (in size, voltage, interface, mechanical gears, etc).
So, my prediction #1 is that swappable batteries are a compelling innovation that needs to happen and will happen in the world of EVs. Swappable batteries mean “really” fast recharging, comparable to (if not better than) refueling an ICE vehicle, which means I don’t need a large, expensive battery with 500 mile range to remove my range anxiety.
What if the cost of fuel goes to zero?
All of the above leads me (finally!) to the provocative title of this blog post. What if Tesla, or another EV car company, decides that the customer should not pay, at all, for fuel?
You could simply tell a customer: buy this car for $50,000, and never pay for fuel, ever (the lifetime cost of the battery and its recharging is included in the upfront cost). And you can finance the car at a very attractive interest rate, because the risk profile is lower.
This could be done with or without swappable batteries. But I think that swappable batteries completely change the economics of such an offer, while removing the aforementioned “friction” of refueling.
My guess is that the majority of people would buy this EV and ignore any ICE car.
But a cost of zero is really, really bold, and it’s unlikely that a single company will manage to pull this off. It’s also risky for a company like Tesla to do this directly, as it might cannibalize current sales until the new technology is available.
What’s more likely to happen (prediction #2) is that instead of paying for refueling, you simply pay a monthly cost for any amount of refueling (up to a reasonable amount), equivalent to paying a monthly rent for the battery . Buy this car for $30,000, and pay the car company $100/month, whether you drive 50 miles or 5,000 miles. Without swappable batteries, the economies here are less attractive.
I am eager to see what Tesla is going to announce tomorrow, but irrespective of that, I believe that there are some fundamental opportunities related to the car industry and I offered you two bold, very speculative predictions that I find interesting to think about:
- Swappable batteries will become a reality in the coming years.
- A predictable fuel cost, trending towards zero, will also become a reality in the coming years, mostly for EVs. (Hmm, why not for ICE vehicles? Good question.)
These two predictions have interesting implications for Tesla, being it the largest EV producer in the world at the moment. I’m wondering if the other car manufacturers have a chance to leapfrog into the future and compete with Tesla on these two aspects. Perhaps these large car manufacturers, being challenged by Tesla and others, could agree on a standard for swappable batteries that could drive the entire industry to adopt this approach and level the playing field, reducing the gap with Tesla.
Ah, before I forget: I don’t have much to say about the “million mile battery”, or other speculations about Tesla that you can find online. I somehow find these less interesting than trying to have a general understanding of the landscape and then trying to pretend that some intelligence is enough to predict the future of energy storage applied to cars and transportation.
I also partially regret that I hadn’t time to cover other hot themes, such as trucks, hydrogen fuel cells, the beautiful simplicity and production efficiency of Tesla’s Cybertruck, and others. Perhaps I will in future posts. Let me know if interested.
As a final warning, as mentioned, I’m not an expert in either energy nor transportation, therefore there’s a high chance of a flaw or two in my reasoning. Please be kind enough to let me know, or simply to disagree with my predictions, and feel free to discuss in the comments, and “share” and “like” if you enjoyed it. Although, after having watched the “Social Dilemma”, I’m not so sure I want to ask you to do that. Oh, well.
(disclaimer, again, in case you missed it at the beginning: opinions expressed here are entirely my own, and are entirely speculative. I cannot promise that reading this post will not entirely be a waste of time. I wrote this post on September 21st, 2020).