The bottleneck of clean energy
Let’s talk about electric cars
February 1, 2008: The most important day in clean tech history. It was the day the first Tesla Roadster was delivered.
Let’s rewind. In 1990, California proposed a policy called the Zero Emissions Mandate (ZEM). This policy would have forced car companies to make an electric vehicle (EV) if they wanted to continue selling cars in CA. This policy was heavily protested by Californians Against Utility Company Abuse (CAUCA), and soon afterwards, the mandate was repealed. It was later discovered that CAUCA was an organization hired and funded by the oil industry.
Fast-forward to the present. The ZEM returns to California, passes, and is soon adopted by 9 other states (making up 30% of the U.S. auto market). Additionally, these rules are set to tighten so that EVs will have to rise to 15.4% of sales by 2025, around 5x the current level, and 40% of sales by 2030.
So what changed? What happened between 1990 and today that led to such radical policy changes?
That’s a silly rhetorical question, Aoi – Tesla created a car that changed the auto industry’s conception of what’s possible.
Before the Tesla Roadster in 2008, there were no big EVs on the market. Tesla created a product that distanced itself from rival brands by highlighting its all-electric features, and later came to capture 30% of the luxury sedan market with just a single model (the Model S). Soon afterwards, the auto industry made moves. The Nissan Leaf came out in 2010, and the BMW i3 came out in 2014. In 2016, in response to increasing policy support for EVs, Volkswagen said it would divert resources towards building electric cars, with the goal of producing 2–3 million EVs every year by 2025. Chevrolet announced its plans to build the Bolt, even though the company will lose as much as $9,000 on every Bolt that it sells. Mercedes proposed the launch of 10 new EVs by 2025, and Toyota declared that it will stop making all gasoline-burning models by 2050. This isn’t a coincidence.
All the geniuses here at General Motors kept saying lithium-ion technology is 10 years away, and Toyota agreed with us — and boom, along comes Tesla. So I said, ‘How come some tiny little California startup, run by guys who know nothing about the car business, can do this, and we can’t?’
-Bob Lutz, GM vice-chairman, August 2009
As of today, there are about 1.5M EVs on the road worldwide, and this number is growing at a rate of 60% annually worldwide. A Bloomberg New Energy Finance report suggests that the sale of EVs will hit 41 million by 2040, almost 90x the sales in 2015.
Additionally, what’s becoming clear is that the growth of EVs is pressuring the oil industry. As EVs displace oil (since 70% of all oil consumed in the US is used for transportation), there is going to be an oversupply of oil. This will lead to an oil crash —and this is going to happen much sooner than you think. The 2014 oil crisis (OPEC released cheap oil into the market to plummet costs from $100/barrel to $26/barrel to strangle competitors) was caused by a displaced oil demand of 2 million barrels a day. This crisis bankrupted over 100 (and as many as 150) oil and gas companies within 2 years, and forced the biggest firms to decommission about 2/3 of their rigs. If EV growth continues at 60% (and with more suppliers, it’s more likely that this number will grow), we could see our next oil crisis by as early as 2023.
The exact growth rate or the exact day of the oil crash isn’t important. What’s important is the fact that the exponential growth of the EV market necessitates that another oil crash is inevitable — the difference is that this one will be permanent.
Okay, so EVs are going to kill the oil industry. Where will we get our energy from, then? After all, the oil/gas sector accounts for 90% of total US energy consumption.
To explain this, I need to first talk about batteries, because batteries have long been the bottleneck of the clean energy industry.
The sun isn’t always shining and the wind isn’t always blowing, so a future relying on just solar or wind energy isn’t feasible. After all, energy consumption peaks around 8 PM when people go home and turn on their lights, but energy generation peaks around 2PM. This mismatch between creating energy when we don’t need it and not having enough energy when we need it creates something that the energy industry calls “the duck curve.”
If we install more solar than there is demand for at the time, overgeneration becomes a serious issue. In fact, solar starts to become uneconomical, since we’d actually have to shut it off to avoid overloading the grid (the grid needs to maintain a frequency of 60 Hz, and differences between power supply and demand can cause this frequency to shift and cause things like blackouts). By cutting the energy produced by each solar panel, this reduces the ROI for installing any new panel, and causes the marginal cost of each panel to rise. For example, in California, the value of solar starts to decline after about 12% PV penetration and becomes uneconomical by 32%. Even if the solar industry continues to grow at its current breakneck pace of 50% every year, this growth isn’t sustainable. Well…unless we have batteries, that is. Batteries are a flexible resource that can take up energy when we don’t need it and give it back when we do.
That said, in California alone, to achieve 40% solar, the state will need 1.3 GW of additional storage, and to reach 50% solar, the state will need another 15 GW of storage. That’s 30x the current capacity of energy storage in the entire US.
Isn’t this going to be impossibly expensive? Well, you would have been right about that a few years ago. But with current plunging costs, this goal is starting to look increasingly realistic.
Battery costs have declined 14% annually between 2007 and 2015, from $1200/kWh in 2007 to around $350/kWh in 2015. UBS predicts that if costs of battery packs reach $150/kWh, EV costs will be competitive with internal combustion engine (ICE) cars and will begin to penetrate the market more widely (Tesla claims that today they are at $190/kWh). We’re on a trajectory to do this within 6 years.
But these cost reductions aren’t happening by magic.
Batteries account for a third of the cost of an EV, so naturally, this has become an area of intense research. Tesla and Panasonic started the race for cheaper batteries with the Gigafactory, the $5B battery factory that’s going to make 35 GWh of cells every year by 2018, more than were made globally in 2014. The sheer size of the Gigafactory will gain benefits from economies of scale (cost per unit decreases with increase in production volume due to greater distribution of fixed costs) and experience effects (costs drop by roughly 15% for every doubling of production due to efficiency gains). But what makes Tesla the “butterfly wings” of this industry is that it’s no longer just Tesla. China’s BYD Auto Company has poured billions to match Tesla’s battery production capacity by 2020, while LG Chem expects to manufacture 50 GW of cells by 2020. In Europe alone, there are already 5 planned battery factories — battery manufacturer BMZ opened the first phase of a German factory this May, LG Chem plans to open a factory in Poland next year, and Samsung wants to manufacture a factory in Hungary in 2018.
The exciting part about these cost reductions achieved in the EV industry is that they also get transferred to the residential energy storage sector because Tesla also makes the Powerwall that uses the same exact battery. So the cost reductions achieved in the EV market will also have to be matched by anyone entering the residential market. I don’t think that the future of larger-scale energy storage is in lithium-ion batteries, but it’s clear that lithium-ion batteries are bringing attention to this sector and are encouraging further innovations and challenges. The excitement surrounding batteries is reflected by the fact that the industry grew by more than 284% this year.
So. Tesla changed public opinion that influenced policy, sparked the auto industry to create cheaper batteries, and opened up the opportunity to feasibly create a clean energy powered future. That’s why February 1, 2008, was such an important day in clean tech history.
Electric vehicles are our final frontier. There are still a lot of challenges ahead, but we can now clearly see the future in front of us. Is there a more exciting time to be in the clean energy sector than now?
I write about energy during my free time. I’ve written about climate change,electric cars, Trump (Part I and Part II), Congress, oil, venture capital, solar,the electrical grid, batteries (Part I and Part II), nuclear, and energy efficiency. Check them out if you’re looking to learn more about the energy industry.