The shift to electric vehicles
The transportation sector is headed toward mass electrification. It accounts currently for 29% of energy usage in the United States. Some utilities are counting on the shift to increase demand for electricity, but some experts say the shift will merely change time of use without affecting overall demand. Interesting new business models are emerging for ownership and financing of EV charging infrastructure. What is likely to occur and on what timetable, and what does it mean for independent generators?
A group of experts talked about these are other issues at the 30th annual global energy and finance conference in California in June. The panelists are Cassie Bowe, vice president of Energy Impact Partners, a $700 million venture capital fund, Jeffrey Logan, chief analyst in the strategic energy analysis center at the National Renewable Energy Laboratory, Dr. Sergej Mahnovski, director of growth and innovation for Edison International, the parent holding company of Southern California Edison, and Nick Nigro, founder of Atlas Public Policy. The moderator is Noah Pollak with Norton Rose Fulbright in Washington.
MR. POLLAK: Cassie Bowe, give us a snapshot of where electric vehicle deployment stands today, both globally and in the US.
MS. BOWE: We are in the first inning of EV deployment. We see three distinct global markets: China, North America and Europe.
China is basically half of the passenger EV market, the US is 25% and Europe is 25%. When you take it down to different electric vehicle types, China is 99% of the electric bus market. China will account for the vast majority of electric vehicle demand going forward, and it is also deploying most of the electric vehicle charging infrastructure.
There is also growth in Europe and the US. There are about five million vehicles deployed globally. One million of those are in the US. The US is basically California and everyone else. Fifty percent of electric vehicles are in California.
Three distinct markets are emerging in terms of the charging infrastructure as well. China by far is the farthest along in deploying charging infrastructure. China has the highest density of public chargers per electric vehicle even though it has way more electric vehicles. After that are Norway and a few other European markets. The US has the lowest density of public chargers of any major market.
We also see a few distinct spaces within charging infrastructure. They are residential, work place and public charging. Then you also have slow AC chargers and fast DC chargers. There has been an interesting debate about the relative importance of residential versus public and also the place for slow versus fast chargers.
Effect on Electricity Demand
MR. POLLAK: So if we are in the first inning, Jeff Logan, how long will it take to get to the second and third and finally the ninth inning?
MR. LOGAN: The change that you envision occurring in one year often does not become visible as quickly as you might want, but if you look at it from a 10-year perspective, the rate of change often surpasses initial expectations.
We see a number of different forecasts for rollout of electric vehicles ranging from Bloomberg New Energy Finance, which is one of the more aggressive ones, to what the US Energy Information Administration says, which is basically a flat line.
One question this panel was asked to address is whether the EV sector will create new electricity demand. The general, back-of-the-envelope calculation in terms of the effect of electric vehicles on electricity demand is that for every 10 million electric vehicles deployed, there is about a 30 terawatt-hour growth in electricity demand and a corresponding reduction of a quarter million barrels per day of oil demand. These are rough ballpark numbers.
They suggest that replacing all the light-duty vehicles in the United States with electric vehicles would lead to a 600 terawatt-hour increase in electricity demand. There are around 200 million vehicles. Electricity demand today is 4,200 terawatt-hours. That would be a 14% increase.
The reduction in oil use would be about 5 million barrels a day. US oil demand is 20.5 million barrels a day, so that would be a 24% decrease.
I throw out these numbers as benchmarks against which to think about things.
MR. POLLAK: If we are only at one million electric vehicles in the United States today, what does the future adoption curve look like? Is it a typical S curve for new technology? Or is it something else?
MR. LOGAN: I think it is a typical S curve. You can go all the way back to the introduction of the first internal combustion engine or more recently to cell phones to see how they entered the market. They entered very slowly initially, and then they entered a period of very rapid growth. Then as the market saturates, it levels off again. Almost all technologies that are successful follow a similar pattern.
For successful adoption, the "theory of change" must be accommodated. The theory of change requires that the technology not only be cost competitive, but more importantly that it also deliver consumer benefits that are not achievable with the incumbent technology. EVs are three or four times more efficient in their drive trains than internal combustion engines. They have far fewer moving parts, and they are fun to drive. At least in theory, they satisfy the theory-of-change requirements.
MS. BOWE: We are used to thinking about power in terms of somewhat rational actors and what is best for the grid, but car ownership is not rational. The way that people decide how to buy cars is not rational.
As a millennial, I have no desire to own anything, and so I have approached buying a car from that lens. And that's true for a lot of people. When you look at it from that lens, it becomes a little harder to predict exactly how quickly the fleet of passenger vehicles will turn over.
Axios asked consumers in the market for cars how likely they are to buy an electric vehicle. More than 60% said not very likely, and the number one reason was the lack of charging stations. While that is a real concern in a lot of places, in others it is just a perceived lack of infrastructure for a minority of the trips they might ever take.
What really underscores for me the irrationality of this whole segment is the number three reason, which 37% of them said, is that they just prefer gas power.
Michael Zenker said a word in the previous session that I had never heard anyone say before, which is "inforecastability." I think it adds a layer of inforecastability to this whole segment.
MR. POLLAK: I am going to push Sergej Mahnovski for one final try to get some forecastability. When do you think the really rapid increase will occur?
MR. MAHNOVSKI: It is impossible to forecast, but we look at this in the context of the most cost effective and feasible path to reach California's greenhouse gas emissions and air quality goals.
Our plan is by 2030 to have an electric grid supplied by roughly 80% carbon-free energy that can deliver clean energy to electric vehicles and support deep electrification of buildings, more distributed energy and market participation by customers.
We envision seven million EVs in California by 2030, representing roughly 25% of the light-duty, 15% of the medium-duty and 6% of the heavy-duty vehicles on the road.
Again, that's not a forecast necessarily, but what we think is a feasible and lowest cost pathway to reduce greenhouse gas emissions by as much as the state has targeted. We believe the pace of electric vehicle adoption should accelerate in the mid-2020s. The turnover cycle for replacing water and space heaters in buildings is longer than for cars.
MR. POLLAK: Nick Nigro, what role do governments play in EV deployment? What tools have been used so far, whether in the United States or abroad, to promote EVs? Which of those are most successful?
MR. NIGRO: I don't think we would be anywhere close to where we are today when it comes to transportation electrification without public policy. The reasons that China and Europe's markets are so strong are not because their transportation actors are more rational. It is because public policy has been pushing much harder on vehicle electrification.
In Europe, you have high taxes on motor fuel, and you have increasing incentives and mandates from governments across Europe to encourage the purchase of these vehicles. A good example of that is Norway where more than half of all new vehicles purchased are plug-in vehicles. That defies all the stereotypes of these vehicles being unable to perform in cold weather.
We see a similar situation in China where policy is more stick-and-mandate driven.
The big game changer in the last year or two has been the declining cost of batteries, making the electrification of a much broader segment of transportation now possible. You see hundreds of electric trains and buses being deployed in provinces in China, but now also here in the United States. As you get into these bigger vehicle segments, like municipal bus fleets, you start to see more rational actors.
On the passenger side, here in the United States, California, as was already mentioned, has half the market share. That is because of California's public policies, from a zero-emission vehicle program, which is a mandate to increase the offering of EVs for sale in California, to rebates for consumer purchases and other kinds of incentives to deploy charging infrastructure. The challenge we face in the United States is the American consumer remains drawn to gasoline vehicles because motor fuel is so cheap right now.
How do we electrify much larger vehicle segments? That is the open question among US policymakers. It is not yet clear whether the US will enjoy the same S-curve adoption as China and Europe or just meander along.
Let's also not overlook the investment opportunity of this space. More than $350 billion has gone into mostly passenger vehicles at this point, but also medium- and heavy-duty vehicles and infrastructure worldwide. Well over half of the expected near-term investment will be in China and Germany. The US is slated to get only about 10% of near-term investment. We have to look at this not just from a climate and energy standpoint, but also from a competitive standpoint. The future of transportation is electric, and there still needs to be stronger policy here in the US if we are going to be in a leadership position.
MR. POLLAK: If there were one or two policies to implement that would really kick-start EV adoption in the United States, what would they be?
MR. NIGRO: The vehicle incentives that we have in place at the federal level are strong and are a big part of what helped get us to where we are today. I think those need to be reformed. They are currently penalizing the leaders in the space: Tesla and General Motors. The tax credits disappear after a cap is reached based on the number of vehicles sold. The early leaders ended up making the investments needed to open markets, and now the fast followers in the industry are taking advantage of that and getting the lower-cost batteries, and purchasers of their vehicles qualify for tax credits while purchasers of the early leaders' vehicles do not.
Another key area is infrastructure reform. That is where electric power comes into play. As we look ahead to where the autos are going with market offerings, it is longer range, it is higher power, it is faster charging. We need the electric power sector positioned to provide infrastructure for those vehicles. People need to see the charging infrastructure deployed before they will purchase these vehicles even though we expect 80% or more of charging to occur at home. The road trip mentality in the US is still strong.
MR. POLLAK: Jeff Logan, that goes to the chicken-and-egg question of what is needed first: the vehicles or the charging. Nick Nigro just said his view. What is your view?
MR. LOGAN: I think at this point equal emphasis has to be placed on making EVs accessible and affordable and rolling out the charging infrastructure so that people feel secure that they will not run out of battery power when they need it. In time, there might be a different emphasis on one versus the other.
Deploying Charging Stations
MR. POLLAK: So who is going to deploy the charging infrastructure? Cassie Bowe, is it the utilities, governments or private companies?
MS. BOWE: Just to underscore how far we are from equal emphasis on both new vehicles and new charging infrastructure, in the US in 2018, new electric vehicle sales increased by 40% and, in the same time period, we only increased the number of public charge points by 2%.
We have seen start-up companies in the US in this area needing to follow the money. A big inflection point will be when we see charging infrastructure being deployed to follow where the vehicles are as opposed to the money sources.
The money sources fall into three categories: utilities, cities and auto manufacturers. Greenlots, an EV charging software company, for example, has a revenue breakdown that comes in roughly equal parts from those three segments. It is an open question which of the three will end up deploying the most money.
MR. MAHNOVSKI: The manner in which consumers interact with charging stations will probably be fundamentally different than how we are used to refueling with gas.
Let me touch on fleets for a second because that is a very important area for us. We are hoping over a five-year period to install electric infrastructure at customer sites to support charging plug-in for buses, medium- and heavy-duty trucks, forklifts and other non-road cargo handling equipment.
Our team at the parent company is looking at opportunities to work with start-up companies that are making it easier for fleets to convert and to identify new business models that may fundamentally change how customers interact with charging infrastructure. We have worked with Cassie's team as well on this. The issue for many fleet owners is how to reduce the complexity and risk of conversion to electric, including selection and management of hardware, software, vehicles and contractors, and how to master energy pricing, tariffs and utility infrastructure. We have looked at opportunities to wrap everything together to make it simpler for fleets to convert.
MR. POLLAK: What fleets, naming some specific companies, would you would like to see adopt EV vehicles?
MR. MAHNOVSKI: We have a small investment in a company, Proterra, that is a leading electric bus manufacturer. Some of the big transit fleets are starting to electrify, in part, because of federal policy support in that sector. Medium-duty parcel delivery services are also a great candidate for electrification, particularly as new class 4, 5 and 6 electric vehicles become available over the next several years. We also see a great opportunity for light-duty ride-hailing and car-sharing fleets.
V1G and V2G
MR. POLLAK: I am fascinated by some of the potential second-order effects. What are some of the ways vehicle batteries may be used that are not just to push a vehicle along?
MS. BOWE: One of the things people talk about a lot is vehicle-to-grid, meaning taking battery power from the vehicle and putting it into the grid. The shorthand term for it is V2G. We are very far from that at scale today. We have seen a few start-ups working on it with vehicles that are able to have this functionality.
Something more near term is demand response with EVs. If I look at all the companies in which our venture fund has invested, more than half of them will probably compete in the near term for demand-response revenue. That is even before you have electric vehicles coming and trying to compete for the same revenue pools. There are few markets today where vehicle-to-grid makes sense economically. Once you have more vehicles that are in fleets, especially mid-duty fleets, I think we will see more activity.
MR. NIGRO: The V1G aspect of transportation, meaning smart charging during off-peak hours to reduce the cost of charging, remains in its infancy. We have very few wide-scale or even pilot smart-charge programs today across the country. There is a lot of value potentially in getting electric vehicles to charge during off-peak hours, and utilities are starting to experiment with how to encourage drivers in particular. Individual consumers can be the most finicky to get to change behavior.
A good example of V1G is the smart-charge program of Con Edison in New York City. A dongle on the vehicle records when you are charging in Con Ed territory. If you charge during off-peak hours, you receive an incentive directly from the utility.
There is an incredible amount of value not just to individual consumers, but also to ratepayers more broadly by just doing V1G well because it lowers the average cost of delivering electricity. This can help cover some of the societal costs of deploying more charging stations.
The business model for selling electrons as a transportation service is very difficult. It is not just because the market is small, it is because you are also competing with home charging. It is tough to try to change an ingrained pattern, which is people drive their cars to work every day and then come home and plug into the garage. Fast charging services trying to compete with that face stiff competition.
The business models that will succeed in the near term are ones that look not just at the electrons and the service as an offering, but also at ways to pull in other value. Think about what gas stations owners do today by selling additional products to their consumers while they fill up. That is one model. The electric utility as a partner to benefit the ratepayers is another model. We are all familiar with what Tesla is doing as a model, essentially deploying charging infrastructure as an advertising platform.
MR. POLLAK: Many people, including the one-third of all homes that are occupied by renters, may be reluctant to install charging infrastructure. The cost is between $2,000 and $7,000 depending on the speed of the charging that you put in. Add that to the trend toward car, bike and scooter sharing and ride sharing. What does this suggest about who will end up owning the charging infrastructure?
MR. NIGRO: Electrifying shared mobility services is one of the most exciting opportunities for charging infrastructure providers. I just spent a few minutes talking about how tough the charging business model is. If there is one awesome business case for charging, it is getting Uber and Lyft drivers into electric vehicles. Something like a third of the electrons supplied by one of the largest charging providers, EVgo, were from Uber and Lyft drivers last year. That is where we can make rapid progress if we can get policies in place to make it easier for Uber and Lyft drivers to get into these vehicles. Many of these drivers do not own the vehicles that they operate. They rent them from a third party.
An example of that is a program from General Motors called Maven Gig, where drivers who need to work for ride-sharing or delivery services can rent a vehicle for a week or month at a time. Making sure that those vehicles are electric is a priority for cities. They are seeing increased vehicle miles traveled by these vehicles, and what they don't want is increased emissions.
There is also the potential for Uber and Lyft drivers to earn more money. Whatever policies are adopted in urban environments to encourage electrification of mobility services has to result in more money going into the pockets of Uber and Lyft drivers because otherwise they won't go electric.
MR. MAHNOVSKI: Ride hailing and car sharing are well positioned to electrify due to high use of the vehicles and the wider choices for electric vehicles in the light-duty space. We are looking at opportunities to accelerate electrification of these platforms, particularly as they account for a larger part of the vehicle miles travelled in the economy
How vehicles are charged will evolve with the business models. For example, companies such as Envoy are developing electric car sharing and charging services as amenities for tenants in multi-family housing complexes, increasing value for landlords and potentially reducing parking needs.
We also made a small seed investment in AMPLY Power, a startup that offers "charging-as-a-service" for fleets, helping to de-risk some of the operational and financial risks of electrification by offering a fully managed solution, including system design and maintenance with set pricing terms.
MS. BOWE: There are two countervailing forces to the notion that people will do most of their charging at home. They are, one, the future is autonomous and, two, the future is fleets.
More and more passenger vehicles will be owned in the future in fleets. That includes autonomous vehicles that almost entirely are going to be owned by fleets. And all of that load will be charged some place other than private homes. We haven't even begun to scratch the surface there. For a lot of folks in this room, that is the main opportunity.
MR. POLLAK: How quickly will autonomous vehicles become a reality, and how much will they affect the EV landscape?
MR. LOGAN: We are going to have a longer rollout of the autonomous sector than we will with just the EV segment itself. There are a lot of very complicated issues to solve. Lots of great work is getting done in that space, but there is still a long way to go.
MR. POLLAK: One of the primary questions that was presented to us for this panel was how the conversion to electric vehicles will affect the grid.
MR. MAHNOVSKI: It will increase electricity demand over time. The questions are where and when?
If you look at it from a system standpoint, there are several trends that are developing at the same time. They include customer adoption of distributed energy resources, electrification of buildings, and new ways that consumers interact with energy products, services and vendors.
The rollout of electric vehicles also varies by geography. On balance, we should start seeing an acceleration in electrification of the transportation sector in the mid-2020s.
In terms of the impact on the grid, in theory, "uncontrolled" charging could increase load on parts of the distribution network, particularly in residential areas as people come home in the evening and plug in. However, on-site generation and storage, new smart-charging technologies, new business models, and utility time-of-use rates, incentive programs and targeted buildout of infrastructure will shape demand patterns and help utilities manage.
Getting It Wrong
MS. BOWE: There are two opportunities for utilities. One is the increased load, and the other is the potential for additional rate-based investments in infrastructure.
Estimates are that the charging infrastructure will require $6 trillion globally.
There is a distinct possibility that we will look around in five to 10 years and say, "Oh God, why did we deploy the charging infrastructure where we did?" We misjudged where the electric vehicles would be, how people would use them, and how fast the chargers would be. There could well be a second wave of grid infrastructure investment to undo or redo what we did in the first wave.
MR. MAHNOVSKI: So we are going to mess it up the first time?
MS. BOWE: I just see a lot of opportunity for start-ups.
MR. POLLAK: Nick Nigro, are we going to build it out the right way?
MR. NIGRO: This is critically important. Think back 10 years about what was available from a technology standpoint. If we went all in on electric vehicles 10 years ago and built out infrastructure for a bunch of plug—in hybrid vehicles that travel 20 to 30 miles, that would have been that worst-case scenario that we were just talking about.
Instead, for better or for worse, we held back a little, and now what we are looking at is battery costs reaching a point where the long-range all-electric vehicle is the main offering that we will see from most auto manufacturers within the next five years.
We are in a much better position now, frankly, to do proper planning, but we must always keep in mind what are our end goals. What are we trying to accomplish? Greenhouse gas emission reduction, for sure. Improved use of existing assets on the grid. All of these factors are driven at the societal level. We need to have good strong public policies in place so that the individual consumer choices end up helping to solve these challenges rather than making them worse.
The biggest challenge is the unevenness of how policy is distributed in a market like the United States where so much is done at the local level. We could see, five to 10 years from now, huge pockets of electrification in cities because they have electrified their entire transit systems, cities like Seattle and Washington, DC. And then in other major metro regions that are less inclined to engage, let's say Houston or Dallas, things may not look very different than they do today.
Policies will adapt over time based on market changes and what we learn along the way.
MR. POLLAK: Most EVs use lithium-ion batteries that are good for light—duty and medium—duty vehicles. Is there a reasonable pathway to get heavy-duty vehicles, long-haul trucks, to be adopters of EV?
MR. LOGAN: Elon Musk already announced Tesla will roll out a heavy-duty truck with a lithium-ion battery. People are experimenting today with a lot of different battery chemistries. If a fundamental breakthrough were achieved in a new metal battery, it would take 10 years before it really entered the market and began to displace lithium ion. So for the time being, we are stuck with that technology for better or worse, but that technology also continues to improve and the costs keep coming down. I think it does have a role. Whether or not hydrogen fuel cells or some other variant on the electric battery is more suitable in the heavy-duty space remains an open question.
MR. MAHNOVSKI: Most of the duty cycles, for example, medium duty, appear to be well suited for electrification. The one that might be a little more difficult is class 8 long haul, due to the long-range driving requirements. I always leave room to be surprised.
MR. NIGRO: There is a significant amount of travel that occurs in the class 8 space that is under 500 miles a day. That is suitable for lithium-ion batteries. That is why companies like Tesla and Freightliner will be introducing electric vehicles in the class 8 space in the next five years. They see a market opportunity.
Because the battery costs have declined much faster than people thought was possible with lithium ion, I think we are going to see medium- to long-haul trucks that are powered by lithium-ion batteries within the next decade. That is something I don't think hardly any researchers thought was possible five or 10 years ago.
MR. POLLAK: Are there any audience questions?
MR. SHORE: This is Bill Shore from Hanwha 174 Power Global. I'm wondering if you could address battery degradation and how that affects willingness to own electric vehicles and what the long-term expectations are in terms of what happens to vehicles as the batteries degrade. Will the batteries be replaced? Will vehicles be scrapped?
MR. LOGAN: It certainly is a key question in a lot of consumers' minds when they decide whether to buy. The answer is I don't know.
MR. POLLAK: I read that the degradation after about seven years makes the battery no longer good enough for a car, so the battery must be swapped out. I have been interested in what happens to the spent battery. Cassie, we were talking about the fact that battery prices are coming down so much that there really isn't, at this point, a viable second use.
MS. BOWE: I think the auto manufacturers will be on the hook to figure out what to do with these batteries.
MR. PICKER: Michael Picker, I work for the state of California.
I am confronting a central policy choice as to how we design the electric infrastructure for charging. I am someone who wakes up every morning with three Jump electric bikes parked on my front lawn waiting to be picked up to be charged and gig cars that are there when the garbage truck drivers are trying to come pick up my garbage.
It seems like transportation as a service is a pretty rapidly evolving area. I know that there are still logistical challenges to deal with autonomous vehicles, but all of these transportation-as-a-service-type emerging opportunities call for a really different kind of an infrastructure than what I hear you talking about, which is to get consumer adoption, customers must be able to recharge their electric vehicles at home at night.
That seems to me to present two really different public policy choices and suggest two different expenditure patterns, probably in the range of billions of dollars. I don't know how to decide the right way to bet.
MS. BOWE: On the light-duty side, no one knows yet what to do with the charging infrastructure. Bird, for example, which is the scooter company, charges a majority of its scooters by leaving charging to the free market. Bird says if you pick up a scooter and charge it at your house overnight, we will pay you something like $5 a scooter. A whole industry is growing up on something called Bird hunting, where people at the end of every day are going around picking up scooters at night in massive trucks and charging them at home. Scooters are not allowed to be used at night. I think we could opine on what use patterns will develop, but we are very early in figuring out what that will look like. It is probably going to get a little more messy before it gets better.
MR. PICKER: We are already starting to see the impact on specific feeder circuits with large apartment buildings in beach communities. That's absolutely unintended, and I am concerned that we are placing too many bets in the same place.