The number of electric vehicles (EVs) has grown substantially in the last couple of years and this growth rate continues to accelerate. In 2013, over 206,000 plugin Electric Vehicles (PHEV's) were sold, while in comparison, only 11,768 PHEV's were sold between 2007 and 2010. Every top car company has introduced at least one hybrid model and there currently are a handful of fully electric models available. One of the more fundamental reasons why EVs are experiencing such momentum is due to government policy response to climate change. At the core of these policy measures are the stringent CO2 targets (Graph 1) to which global car makers have to adhere (Graph 2). This in turn has created a massive need for fuel efficient and fully electric cars. Furthermore, government subsidies, especially in the EU and the USA, have fueled the initial demand for electric vehicles. However, the old fashioned internal combustion engine (ICE) cars still have significant prospects for reducing CO2 footprints and, on average, they are still superior to EVs on performance metrics, such as range and price. The heating race for market share between EV and traditional ICE powertrains is central to this article. We will discuss, in detail the various challenges and opportunities currently facing EVs, such as battery technology and charging infrastructure. This report will also give an exhaustive overview of projections and forecasts, of how the EV market is expected to develop during the next decades. To start with, what are reasons consumers would prefer to choose electric over other alternatives available, since EVs are more expensive in purchasing value?
Graph 1: Planned emission standards in select regions (Source: Librarato)
Graph 2:CO2 emissions of selected OEMs and brands 2012 in Europe vs 2020 targets (Source: McKinsey, Evolution: Electric vehicles in Europe: gearing up for a new phase? April 2014)
Why go Electric?
From a consumer point of view, electric cars in today’s market provide lower maintenance costs and go with a very low mileage. Maintenance costs are much lower because the mechanics are far more rudimental and the low mileage has to do with the price difference of electricity and gasoline. To illustrate, even at today’s relatively low oil price, conventional gasoline cars go around $0.11 a mile3, whereas mileage costs of EVs are only around $0.04. An additional benefit electric cars offer is the staggering lack of noise. Acceleration at the same time is impressive thanks to the unique torque characteristics of an EV powertrain. Although resentment over long charging times exists, consumers generally appreciate the energy independence of charging at home. In order to stimulate the development towards lower emissions, governments have jumped in to make hybrid and electric cars more affordable (Graph 3). Tax credits and other tax incentives are being offered and have been responsible for a notable number of cars on the road today.
Graph 3: National purchasing subsidies (EV compared to ICE car) (Source: McKinsey, Evolution: Electric vehicles in Europe: gearing up for a new phase? April 2014)
Types of EV and Hybrids
Currently there are several types of (partly) electric vehicles on the market: electric vehicles (EV), hybrid electric vehicles (HEV), and plug-in hybrid electric vehicles (PHEV). Another type of vehicle is Fuel Cell Vehicles (FCV) which are powered by Hydrogen and only expected to reach mass market after 2020.
Electric vehicles are propelled by a battery powered electric motor and charging works through charging at the grid at home or through public charging stations. EVs do not use a combustion engine and are therefore not dependent on petrol. Hybrid electric vehicles (HEV) on the other hand are a combination of a conventional internal combustion engine (ICE) and an electric powertrain. Two engines are combined in the vehicle and work in conjunction with one another. The battery is charged through both power regeneration of braking and the excess power from the internal combustion engine. Unlike EV and PHEV, the HEV cannot be charged by plugging them into the grid. HEV are particularly useful for long distance driving as the combination of methods of propulsion gives the driver more range.
A detailed overview of the various powertrain technologies, with key characteristics, is given in the Graph 4 and Table 1.
Graph 4: Overview of various powertrain technologies (Source: McKinsey)
Table 1: Comparison of BEVs, PHEVs, HEVs and FCEV
Source: Lytton (2010), Perugo and Ciuffo (2010) and McKinsey, Evolution: Electric vehicles in Europe: gearing up for a new phase? (2014)
EV Battery technology
Current challenges facing EVs include its high price tag, mainly caused by the high cost of batteries and also by its range limitations, long charging times, and a limited but vastly improving charging infrastructure.
Batteries take up a huge part of the purchasing value so the long-term potential of the EV depends on innovations that will significantly reduce the cost of batteries. According to the latest IEA report on EV’s, batteries cost around $485/kWh on average in 20124. Although this an impressive 50% decrease from the average battery price consumers paid in 20074. Current battery prices are still quite uncompetitive versus regular ICE vehicles, especially if one factors in the currently low price of oil. To visualize this in concrete fashion, we will look into an analysis conducted by McKinsey in 2012 on the relationship between battery prices, fuel prices and the relative competiveness of EV versus ICE vehicles (Graph 5).
Graph 5: Interaction of battery cost, fuel prices and EV competiveness (Source: UBS and McKinsey, Battery Technology charges ahead, 2012)
According to IEA5, as of December 8th, average gasoline prices in the US stand at $2.679 per gallon. As one can deduce from Graph 5, low gasoline prices make EV’s relatively unattractive. At the current low price of gasoline, battery prices have to drop towards roughly $175/kWh for EVs to be economically viable without subsidies. As one can logically deduce either battery prices have to drop further or fuel prices have to increase or a combination of these two has to happen before EVs can become economically viable.
According to various Investment Banks such as Citigroup, Deutsche Bank, Credit Suisse and HSBC, the current low price of roughly $55 for a barrel of WTI crude is not sustainable long term. While we will not go into too much detail, these Investment Banks expect WTI crude to eventually trade in a range between $70-$90/barrel for the next several years. Taking the low-end of this estimate, we can deduce a long-term average US gasoline price of roughly $3.00 per gallon, which coincides with a battery price of approximately $225-$200/kWh. So, when can we expect these prices for EV battery packs?
In order to answer this question, we turn to an analysis conducted by the University of California, Davis. In their analysis they looked at the EV battery price forecasts from various influential consulting firms (Graph 6). According to these projections we expect to see competitive battery pack prices around the year 2020, assuming a relatively low oil price of $70/barrel for WTI crude. If oil prices where to rise above this level, it would accelerate the expected date which EV and ICE reach pricing parity.
Graph 6: EV battery prices in $/kWh from various institutions (Source: UC Davis)
This forecasted reduction in battery costs would equate to $5,000-$10,000 a vehicle, thereby making EVs much affordable for mass markets. These expected technological developments give much reason to remain enthusiastic about the long-term potential of EVs.
As noted above consensus expectations are for battery prices to decrease significantly over the next few years. But which developments are going to be responsible for this projected price decline? An analysis conducted by Investment Bank UBS, might provide some insights into this. According to their analysis most of the price decreases will come from improvements in battery cell manufacturing and the optimization of battery materials (Graph 7).
The most well-known example of lowering battery costs through improvements in manufacturing, are Tesla’s plans to build an astonishing factory, nicknamed the “Gigafactory”, in collaboration with Panasonic. According to the comments made by Tesla and Panasonic, the Gigafactory could lower the costs of Tesla battery packs by over 30% as soon as 2017. This would be a highly significant milestone, as Tesla is already the lowest cost producer of battery-packs at around $275/kWh6. If these estimates from the Tesla/Panasonic duo hold true, Tesla could produce battery-packs which are cost competitive with ICE vehicles in just a few years’ time. Although highly optimistic about the prospects of the Gigafactory, UBS and chemical company Umicore take a more conservative stance, as they expect battery prices to drop towards $200/kWh by 2020 and as low as a $100/kWh in 2025, which is more or less in line with projections made by other consulting firms.
Graph 7: Basic overview of Li-ion battery cell and the expected contribution by technology in reducing battery costs (Source: UBS)
Lastly, there is also the possibility of radical technological breakthroughs, which may profoundly increase capacity and reduce charging times. Some of the most promising projects include: lithium air, magnesium ion, graphene, and solid state technologies. Because these technologies are at the forefront of science, it is very hard to estimate when they might contribute to EV battery technology.
Even though EV are still uncompetitive versus standard ICE vehicles with current battery prices, this lead is diminishing rather quickly and, as we have discussed above, 2020 looks to be the approximate year when we can expect EVs to become economically viable without government subsidies.
EV Charging Infrastructure
Together with reducing battery costs, building more charging stations is one of the major prerequisites for w