The battery bear case

The biggest risk to the thoughts I have presented on energy costs are the assumptions about the cost of batteries.

Battery costs have been shrinking at 20% per annum for the last few years.

  • If that cost improvement continues for the next 5-10 years then disruption for the energy sector will have arrived.
  • If it slows to 10% then we are talking 15-20 years.
  • If battery costs stop falling then there is a bullish case for energy prices.

The FT and BCA Research are taking the bearish side of the electric vehicle argument https://ftalphaville.ft.com/2017/08/03/2192188/electric-vehicle-realities/ :

[paraphrasing] Electric vehicles are still much more expensive than petrol cars for the average person

No argument from me on that one – although I still contend that for commercial vehicles doing 100,000km per year that the costs are very close to even

[paraphrasing] The cost of a battery pack (which houses the batteries and has wiring/cooling/electronics) is unlikely to decline any more than the cost of other car parts and so real world battery costs aren’t falling

I find this argument a little weak – manufacturing the world over sees scale benefits. Manufacturing 10,000 units of just about anything is much cheaper per unit than manufacturing 100. Their claim that battery costs aren’t really falling seems strange, I’m going to look more into this as it flies in the face of every other source.

[paraphrasing] EV manufacturers understate the battery pack replacement costs as they know no one will take them up. If you bought a Bolt with an 8 year warranty on the battery, after 8 years would you spend almost $16,000 on a battery, plus labour or would you just buy a new car? 

It’s an interesting observation but doesn’t add anything to the argument. No-one is buying a new car because they think the cost savings in year 8 are going to be great.

BCA’s analysts suspect the industry is being far too optimistic about how much better batteries are getting year to year. The view that batteries are getting longer lasting, they say, flies in the face of what every consumer has experienced with mobiles phones, notebook computers or any other cordless device.

It is entirely possible that everyone is too optimistic about battery improvements. I find the anecdotal suggestion that “because my iPhone 8 has a similar battery life to what my iPhone 2 had” disingenuous. The battery life is the same because of all of the added features – streaming videos and GPS use a lot of battery. 

But I agree that this is the major assumption that needs to examined.

Frustratingly for the EV industry perhaps, if durability did indeed get significantly better, there would still be a cost: prior-generation EVs would plummet in value.

Nope. Don’t buy this argument. In the early 2000s a flat screen would set you back $15-20k. 5 years later they were down to $2-3k. Did anyone consider going back to an old cathode TV because they were worried about the re-sale value of their flat screen?

But the biggest threat to the economics of batteries may, ironically, come from increasing demand for EVs.

This is a really important point.

The counterintuitive logic is based on the assumption that large scale manufacturers — the sort that have lots of access to cheap labour and cheap dirty fuel (China ahem) — will rush to compete in the sector for political strategic reasons. But rather than driving down costs by way of innovative practices or technological shifts, they’ll do so because of their access to cheap resources (both human and energy) and general willingness to undercut competitors by selling batteries at a loss.

This is a path, BCA points out, China already took with the solar industry, one reason why solar companies across the board are having trouble keeping afloat. If China were to follow a similar route with batteries — mass producing at a loss for the sake of gobbling up market share — the strategy could result in heavy losses for battery manufacturers leading to even bigger expenses from sunk costs.

I’m not sure that pointing at the solar industry (where costs have plummeted) supports their argument in any way.

What I do strongly agree with is that because of China and changing technology picking winners will be difficult.

However, picking losers is much easier. See the bottom of yesterday’s post for a list of investment ideas.

Subsidies will be hard to maintain as EVs become a greater proportion of the market. For example, about 2 million new passenger cars are registered in France every year. If only half of those were EVs, subsidies would total $7.2B. Money for roads, infrastructure maintenance, policing, and so on have to come from somewhere, and if ICEV sales decline substantially, European governments’ huge gasoline tax revenues would also deteriorate; in such an environment, it is reasonable to assume that EV subsidies would eventually disappear and be replaced by taxes

Absolutely. Electric vehicle will only take off when the economics support them and you should do your maths assuming zero subsidies.

Adding taxes to batteries is something I haven’t done in my analysis… I’m of the view that taxes won’t get added until the economics of EVs is at parity or better. If taxes do get added, it will definitely delay the take-up. Something to keep an eye on.

 

Net effect is there are some interesting observations, but nothing too concerning for my base case. 

I’m keen to see more bearish predictions, so post away in the comments…

 

 

Damien Klassen is Chief Investment Officer at Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.