Electric Cars – Saving Real Money or Arbitrage Opportunity?

Electrek has reported an amazing set of numbers on a Tesla S:

A Tesla Model S hits 300,000 miles in just 2 years – saving an estimated $60,000 on fuel and maintenance

The vehicle is owned by Tesloop, a company that offers rides in Tesla vehicles.

A large part of this difference is due to the fact that the car is being used within an area that has extensive Tesla SuperChargers. So all the electricity is “free” (paid for as part of the purchase price of the vehicle). Also parts of the repairs and maintenance were largely paid for under the warranty. The powertrain warranty is for 8 years and includes unlimited mileage. This means that at the same annual usage rate the warranty would cover 1.2 million miles or 1.93 million kilometres.

The key question here is whether Tesla is losing money on this arrangement. If so, the savings are artificially inflated. The answer to part of that question is in the pricing models that Tesla introduced early in 2017. Before that date all Tesla S vehicles received free power on the Tesla Supercharger Network. After that date only the first 400 kWh per year are free. After that you get charged a fee for your power when charging . The fee varies between locations.

So there is no doubt that Tesla has been heavily subsiding the Tesloop operating costs. A smart business move to spot an arbitrage opportunity.

The 400 kWh is estimated to provide power for 1000 miles of driving (1609 kilometres). In Australia the current (sic) charge on the Tesla Supercharger is A$0.35/kWh.(https://www.tesla.com/en_AU/support/supercharging). so the energy cost per kilometre of driving is approximately 8.7 cents. This compares to my petrol Toyota Corolla Hatch at 8.1 cents per kilometre (combined urban/extra urban mileage claim of 6.7L/100km and fuel at  121 cents per litre). Fuel efficiency is worse in urban driving but the Tesla Superchargers are mainly for highway travel so that this is a fair comparison.

Two other comparisons bear looking at. In Illinois the charging rate is US$0.15 per kWh. This equals A$0.188 (RBA quoted exchange rate August 30th 2017) and changes the per kilometre cost to 4.7 cents.  Secondly, our current at home shoulder and off peak rates are A$0.1257, which reduces the per kilometre cost to 3.12 cents. Of course we would have to pay for a charging unit as well. If we amortise that cost then the total cost might be 4 cents per km. That is half my current fuel costs, or a saving of about $600 a year on 15,000 km.

If we use 4 cents as a reasonable figure then the cost difference for an electric vehicle travelling 100,000 km a year as a car ride service/taxi is $4,000. That is a significant advantage for an electric share vehicle over a fossil fuel vehicle. That number starts to really add up if you own 20,000 of them in a fleet ($80 million a year).

If we go to the non- fuel car costs. RACQ estimates that the private ownership costs of running a medium sized car in Australia are around 65-72 cents per kilometre. More than 50% of these costs are interest costs (about 8.2 cents) and depreciation costs (about 29.5 cents). Registration and insurance and other on road costs are at about 14.9 cents. This leaves about 7.5 cents for repairs and maintenance plus tyres after accounting for fuel costs. The vast majority of that being repairs and maintenance (median is about 7 cents). In the Tesloop case the scheduled repairs and maintenance costs were US$6,900 for 300,000 miles (482,802 km). This equates to A1.79 cents per kilometre. If we go back to my Toyota which has a fixed price service of A$480 a year then that costs is A3.2 cents per kilometre at 15,000 km per year. The reality is that I drive a little less so the cost is 3.7 cents.

If we go back to the RACQ numbers the Tesla Model S 75 version has fuel costs of 4.73 cents per kilometre. It also has maintenance costs of A8.91 cents. This seems high given the Tesla Loop experience but may just be a function of  the much higher mileage.

The Tesla S is a luxury vehicle and so its costs are likely to be higher than a standard vehicle. Lets look at the Chevy Bolt. In this analysis I have been helped by an excellent article by Steven Sinofsky at Learning by Shipping and Insideevs : Chevrolet Bolt Requires Almost No Maintenance For First 150,000 Miles.

The maintenance schedule (H/T Steven Sinofsky) for the Bolt is:

Chevy Bolt maintenance schedule Sinofsky

Insideevs estimates that if you do the very scant maintenance yourself the cost for maintenance for the first 150,000 miles (241,000 km) is US$150 (yes you read that right) while Steven says:

“Yep you read that correctly, during my entire three year lease there’s nothing for me to do. I never have to go to the dealer” – Steven Sinofsky

So one way or another routine maintenance is very low.

In terms of fuel efficiency the Bolt is rated at 238 miles (383 km) on a 60 kWh battery although city driving has a better range due to regenerative braking, and highway driving is poorer due to a poor drag coefficient.  This results in 6.38 km per kWh and if we use the off peak rate I pay then that is A1.97 cents per kilometre (note Steven was more conservative in his mileage calculations which work out to about A2.39 cents per km using my electricity costs).

This is a lot of figures so as a summary I have made up a small table:

Fuel Costs Maintenance Costs Total
Tesloop Tesla S 0 1.79 1.79
Toyota Corolla Hatch (Mine) 8.1 3.7 11.8
Tesla S (RACQ) 4.7 8.91 13.61
Luxury Vehicle (Ave RACQ) 7.06 10.2 17.26
Chevy Bolt (first 60,000km – but generally representative) 1.97 0 1.97

Now I know that I have not made a fair comparison between the Bolt and the Tesla S. In part because they are completely different vehicles, and because I have only included routine maintenance servicing for the Bolt.  There will be non -routine costs in the maintenance costs. The actual costs of those the owner will be in part determined by warranty systems. The RACQ figures appear to include a capped servicing arrangement with Telstra.

What we can say is that there are significant operating costs for the new electric vehicles, as compared to standard ICE vehicles. Even if we add in the Tesloop Tesla S maintenance costs as an estimate for the Bolt’s costs, the Chevy Bolt’s operating cost for fuel and maintenance is still only 3.76 cents per kilometre, compared to my Toyota costs of 11.8 cents. Even though I have only included my fixed costs servicing which is well below the costs shown in the RACQ figures.
 
That comparison is also unfair as the costs associated with the Tesla S are high due to its luxury model status. You can see the details of the repairs and maintenance receipts by going to : Tesla Model S Hits 300,000 Miles with less than $11,000 maintenance costs  and registering for their Google Docs page. These include warranty repairs done at no cost. I was unable to reconcile the costs to the article description as some costs appear to be missing but what is in there is in the following table:
Date Item Cost
18/08/2016 Replace 12V battery 171.33
24/10/2016 replace brake pads and rotors 1759.42
4/11/2016 Right Rear Door handle 961.96
21/11/2016 left front door handle 962.18
20/02/2017 wheel liner, rear diffuser, front aero shield, water ingress on headlights 2176.2
7/03/2017 Air conditioner , other pages to receipt are missing 2800.12
15/03/2017 Air conditioner, passenger door handle 656.64
Total 9487.85

As you can see the majority of the maintenance costs excluding the issue with the headlights and brake replacements related to the air conditioner and door handles. Some of these are likely to be costs associated with the luxury/technology parts of the doors, and early model issues. I would expect that costs for a standard production model would be much lower.

The point of all this analysis is work for our book to look at adoption timelines and business models for electric and autonomous vehicles.

In this case it is the headline number of how much it takes to run your car. That is because people get this in their face every week whereas the main costs of finance and depreciation are more removed from their experience. Once we move to the full question of costs we have to look at those more closely. we will do that in the next few days. Then we have to look at fleet options versus personal ownership.

We will do some more sophisticated modelling as we firm up the assessment for the book.

I am writing a book on autonomous vehicles with Dr Chris Rice of the University of Texas Austin. It is called Rise of the Autobots: How Driverless Vehicles will Transform our Economies and our Communities. Stay tuned for more excerpts as we finalise the book.

 

 

 

 

 

 

 

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Re-Purposed Electric Car Batteries and Its Effects on Electric Car Adoption/Driverless Car Adoption

Last night I attended the Churchill Club event in Melbourne on the future of batteries. There was a great panel presenting and the discussions covered a range of battery technologies, including Ecoult which is commercialising the CSIRO ultracapacitor technology for lead acid batteries.

In particular I was interested in the presentation by Relectrify CEO and Co-Founder Valentin Muenzel who talked about Relectrify’s mission to use electric car batteries that were no longer useful in energy storage applications. This was interesting because as part of my research for a book that Chris Rice and I are writing on the future of driverless cars I had been looking at the adoption rates of electric cars as part of the rise of driverless cars. In that research I had come across an assessment by Ark Investments that had calculated the net present value of an electric car battery in a specific energy storage scenario as shown in the following table:

Ark Invest battery depreciation table

source: https://ark-invest.com/research/ev-batteries-value – accessed June 20th 2017

The basic principle is that while a battery in an electric car might have its performance degrade to a point where it is no longer useful for driving, that battery will still have significant storage capacity (think about your phone battery after 18 months – it still works but its capacity is reduced).  If you can buy that battery cheaply and adapt it to storage use then you have a cost effective solution.

Of course the Net Present Value calculation in the table is for a specified energy reserve use which has a higher price, and nobody buys an asset for its Net Present Value otherwise all you do is get your money back over time. In discussions with Valentin he told me that without giving away commercial secrets the model for them is about 50% of the value of a new battery. This is important because the cost of new car batteries is falling. An analysis of battery prices by Bloomberg New Energy Finance in January showed the pace of that change:

battery prices falling fast from Bloomberg

source: https://www.bloomberg.com/news/articles/2017-01-30/tesla-s-battery-revolution-just-reached-critical-mass  

Now this is the price of the battery itself which is not the same as an installed battery system but the progress has been amazing, and mirrors what we have seen in solar energy. No great basic technology breakthrough, but significant technology improvements driven by the cost learning curve. In a separate report Mckinsey has stated that electric vehicle batteries fell to $227/kWh in 2016 with Tesla claiming to be below $190 per kWh (Electric vehicle battery cost dropped 80% in 6 years down to $227/kWh – Tesla claims to be below $190/kWh) Rumours have also circulated that Tesla has got the battery costs down to $125 per kWh (Tesla is now claiming 35% battery cost reduction at ‘Gigafactory 1’ – hinting at breakthrough cost below $125/kWh) although the truth of that remains to be seen. There is no doubt about the rapid pace of changes occurring, just the quantum of that change.

Valentin and I also discussed the model for autonomous vehicles given that a fleet model or a car sharing model means that cars would travel far more kilometres in a year. For an electric car this means that the battery will reach its degradation limit more quickly as the battery would be charged and discharged more often. Interestingly for Valentin this meant that the battery would be worth more for repurposing, because outside of the energy capacity the battery still retained, its relative newness means the technology is likely to be more advanced, and safety and physical deterioration characteristics would be much better.

Given that storage is likely to become far more important in the future given changes in the energy generation mixes around the world it puts a slightly different complexion on the costs of electric cars. It is our view that the end game for driverless cars is mass fleets supplied as a service with hardly anybody owning a car. If electric car batteries only last 3 years in shared driverless vehicle but have significant re-sale value it lowers the lifetime cost of a kilometre travelled and therefore accelerates us to the point where the cost of running an electric car is lower than running a fossil fuel car. Lifetime cost factors less into individual car ownership decisions but if you own 50,000 cars in a mass fleet in a highly competitive market it becomes it becomes a much more important factor. This changes adoption rates and also the balance between fossil fuel and electric cars.

The effects of this will be lumpy as Valentin advised that different batteries have different degrees of difficulty for repurposing as stationary storage. This is related to the original design decisions made for the battery technology which were originally made with the purpose of electric cars in mind, not stationary storage. For example apparently Tesla has stated that their car batteries will not be repurposed and that is due to the design constraints in their battery technology.

A note of caution:

In a discussion with John Wood (CEO of Ecoult) he quite rightly warned me to be careful of the public statements of battery manufacturers and suppliers on their lifetime use. Given that we are talking about changes in technology and lifetimes of 10-15 years which are therefore untested in the real world, those are wise words.

 

Image credit: The featured image is from http://www.relectrify.com/

The Smart Business Model Play in Solar Energy Solutions

In conjunction with the announcement by Tesla on April 30th that they are supplying home battery storage systems (Tesla launches a stationary battery aimed at companies with variable electricity rates and homes with solar panels.) Solar City in the USA has announced that

Using Tesla’s suite of batteries for homes and businesses, SolarCity’s fully-installed battery and solar system costs are one-third of what they were a year ago

Just think about that for a moment. A model which has dropped in price by 67% in 12 months. That is disruption on a major scale.

The solar panel business and the battery storage business is likely to be a continually brutal Darwinian space and require huge capital to supply the necessary scale because of the structure of the technology and the cost reductions that are occurring.

This raises the question of what is the smart play in this space and I think it is in staying away from the panel and battery technology space and playing in business model innovation at the layer above that.

There has been considerable comment on what is happening in the cost curve reductions in solar panels and battery storage including:

Why Moore’s Law Doesn’t Apply to Clean Technologies

and a counterpoint from one of my favourite analysts/writers Ramez Naam:

Is Moore’s Law Really a Fair Comparison for Solar?

who embedded the following graphic from Nature Climate Change

Nature-Climate-Change-Batteries-Cheaper-than-2020-Projections-800x488

looking at the falling prices in battery storage.

I think both articles make excellent points but the main issue is the cause of price change over time which has been 60% annually for transistors and 14% annually for solar (over 37 years) according to Naam. Analysis of the two articles indicates that the change in transistors has been far more driven by technological innovation while the pace in solar has been more by the classic cost learning curve and move to scale.

Which brings us to the smart play. My view on the key drivers when thinking about business strategy:

  1. Just as many solar manufacturers have bitten the dust over the last decade the same will apply to battery manufacturers and start up battery companies in the next decade, as well as being a continuing issue in the panel industry.
  2. One of the main problems with Lithium Ion batteries is the charge and discharge cycle lifetime. From a cost per kWh storage point of view the shorter the life cycle then the higher the cost as the initial capital costs have to be depreciated over less energy usage. Therefore alternative battery storage options have to be a key competitor in the space. There is lots of investment going on in technology development. So to win you either have to have the capital backing that companies like Tesla boast or pick the right technology and take the development risk.
  3. Particularly at a household level the costs are related as much to installation and deployment model as to cost of the technology (just as transistors are only a fraction of smartphone or tablet costs).
  4. At the household level adoption issues beyond costs will also be critical.

So while there will be clearly winners in the panel and battery space the risks and capital required are enormous. There are better opportunities in deploying innovative business models in the space including:

  • Models for landlords that get around the issues of the landlords bearing the capital costs and tenants gaining the cost reduction on their power bills. This includes leasing and income sharing models driven by algorithms.
  • Efficient and low cost installation models that drive down the costs of installation and maintenance.
  • Financing models that allow installation for people that otherwise could not afford installation.
  • Community models that integrate use of the grid into distributed generation, storage and consumption models that reduce costs to consumers while improving the income for local generators and renewable energy systems

There are parallels for this in other sectors. The sports clothing company Under Armour is pursuing a strategy for fitness apps to complement its sports clothing sales. That strategy is hardware technology agnostic in that it integrates with a range of technologies that users are adopting. This means they do not tie themselves to any particular hardware solution and avoid riding on top of a technology that fails.

That is the smart play here

Paul Higgins

 Full disclosure: I have recently worked for the sugar milling industry here in Australia on energy transition scenarios. I may in the future have a financial interest in community models.