If you buy a new car in 2040, there’s a better than 50/50 chance it will be powered by electricity rather than gas. In July, Bloomberg New Energy Finance (BNEF) issued an exceptionally bullish forecast for electric vehicles (EVs), estimating 54 percent of global car sales, and an even stronger 58 percent of U.S. sales, will be EVs by 2040. While this is great news for EV fans—and electrical contractors who install charging equipment—such a rapid growth trajectory will raise important questions on a range of issues, from how we pay for our roads and bridges to electric utility rate structures.
Cheaper batteries, cheaper cars
Just last year, BNEF’s 2016 EV Forecast estimated 2040 sales capturing 36 percent of the global market. The remarkable leap in this year’s report is largely the result of faster-than-anticipated decline in lithium-ion battery prices. Analysts see battery costs dropping by a whopping 70 percent per kilowatt-hour by 2030, thanks to improvements in manufacturing processes and energy density.
“We think you can get there from where we are today mostly in scale but also in energy density,” said Colin McKerracher, BNEF’s head of transport analysis and a co-author of this report.
Tesla’s Nevada-based Gigafactory is only one of a number of large battery-manufacturing plants under construction that will quickly ramp up global production (see “Giga-Expectations,” July 2017). The 21 gigawatt-hours (GWh) of battery output produced in 2016 is expected to grow to 270 GWh by 2021 and 1,300 GWh by 2030.
As a result, between 2025 and 2029, EVs will become less expensive to buy and cheaper to own than comparable internal combustion engine (ICE) vehicles. That will prove to be a tipping point, according to BNEF, and EVs will quickly rise to make up 24 percent of global sales in 2030, up from only 8 percent in 2025. Mechanically, EVs feature a much simpler design than ICE vehicles, so buyers will enjoy much less expensive maintenance, in addition to fuel savings over their vehicles’ lifetimes.
“EVs have a magnitude of fewer moving parts, so there are significantly lower operating costs,” McKerracher said. “That’s why, in the 2020s, we see them become much more popular with fleet operators.”
Manufacturers adding to their EV lineups will also aid growth. Much of this is happening at the higher end of the market. Perhaps eyeing Tesla’s success with its Model S and Model X vehicles, with starting prices of $69,000 and $83,000, respectively, Jaguar and Audi have both confirmed new EV launches for 2018. But even Tesla sees a big opportunity at lower price points, with its $35,000 Model 3 hitting the road this fall with a backlog of an estimated 400,000 reservations.
In the short term, manufacturers will need to factor an upcoming loss of tax credits into their sales projections. To nudge the growth of the EV market, buyers have been receiving a federal tax credit worth up to $7,500 on their vehicle purchases since 2010. Manufacturers face individual credit phase-out dates as they hit a target of 200,000 vehicles sold. The credits then drop to zero over the course of the following year. Tesla likely will be the first to hit the 200,000 limit, likely in 2018 if Model 3 sales are as successful as estimated. McKerracher also sees credit phase-outs possibly beginning for GM vehicles in 2018, with Ford and Volkswagen (which includes Audi) in 2019.
“In general, it will create some strange dynamics,” McKerracher said.
The staggered timing of individual manufacturers hitting their 200,000-vehicle targets will help balance the overall impact. At that point, consumer interest will quickly become the most important driver in the early 2020s and could help cement a lead for Tesla in the market.
“Tesla’s probably the closest to being able to sell its vehicles without the credit. The consumer interest in them is higher for their own sake,” McKerracher said. “Tesla has been able to create more consumer appeal.”
The same could not be said for other companies, which could see sales drop off without the tax credit.
Highway fund push-back
Although EVs currently account for a mere 4 percent of U.S. light-duty vehicle sales, the potential impact of large fleets of the cars no longer buying gasoline—and paying infrastructure-funding fuel taxes—is already being considered across the country. As of July, 17 states had imposed some sort of user fee on EV owners to help pay for the upkeep of roads and bridges. This even includes California, the nation’s EV capital. That state passed a $100 annual registration fee for EVs in April as part of a larger road-repair bill that will see ICE drivers paying an additional 12 cents in state gas taxes at the pump.
Of course, the issue of user fees for EVs is wrapped up in the larger conundrum of tying road funds to gas taxes, just as all vehicles are gaining in efficiency.
“We have fuel efficiencies increasing more rapidly than the number of vehicles on the road,” said Jerome Dumortier, economist and associate professor at Indiana University’s School of Public and Environmental Affairs, and co-author of a number of peer-reviewed articles on the impacts of EVs and infrastructure spending.
He said it is confusing that a number of states charge EV owners a user fee while providing incentives for purchasing the vehicles.
“It seems weird to me that, on the one side, you’re incentivizing electric vehicles, and the other side, you’re taxing them,” he said. “You [should] decide one or the other, depending on what you want.”
California, for example, offers EV buyers an instant rebate of up to $2,500, with some income limits, while the new fee will cost buyers $100 per year. At this point, their greater numbers mean high-efficiency ICE vehicles are having a far bigger impact on falling gas-tax revenues than EVs. However, the fact that EVs use no gasoline at all is putting them in legislators’ crosshairs.
“It might be much easier to say an EV never uses gasoline, so let’s tax electric vehicles,” Dumortier said. “From a political perspective, it’s probably much more clear cut.”
In the long run, Dumortier believes falling gasoline use across the board will require road-funding mechanisms that detach revenues from fuel consumption.
“The current taxing scheme isn’t sustainable,” he said. “The person using the road more should probably pay more.”
He said an alternative approach could be a registration fee that varies with actual miles driven.
The cost of deploying public charging stations is another potential hurdle to cross should EV sales begin to hit BNEF’s forecasts over the next decade. Of special note are the direct current fast chargers (DCFCs) that allow EV owners to recharge in 20–30 minutes. Unlike the more residential-style Level II charging equipment one might see at a shopping mall or commercial office building, DCFCs draw a large amount of electricity—currently 50 kilowatts—during a brief period of operation. These periodic spikes can lead to exceptionally high electric-utility demand charges for equipment owners, especially if one of the few times a month the equipment might currently be used falls on a peak-demand period.
This added demand-charge expense could pose a major roadblock to ambitious EV-deployment forecasts, said Chris Nelder, a manager with Rocky Mountain Institute’s Electricity Group and co-author of a recent study on the issue for EVGo, operator of the largest U.S. publicly available DCFC network. For the study, Nelder and fellow researcher Garrett Fitzgerald analyzed data from EVGo’s 230 DCFCs in California and found that demand charges could be responsible for more than 90 percent of a station’s total electricity costs. If such rate structures aren’t addressed, they could hinder broader DCFC development, which could frustrate EV owners looking for a recharging experience as convenient as a gas station for ICE vehicles.
“If you imagine a future that follows a gas station model, then DCFC becomes very important,” Nelder said. “Especially for high-density, high-traffic areas—places with a lot of traffic and a lot of turnover.”
In the report, “EVGo Fleet and Tariff Analysis,” Nelder and Fitzgerald argue the future success of DCFC networks will require a utility rate structure tailored to their unique load profiles. Standard demand charges are added to the utility bills paid by commercial and industrial customers and are based on the highest 15 minutes of a facility’s demand over the course of a month. Generally, such buildings present a fairly consistent load, so the demand charge can encourage owners to improve overall efficiency. DCFC load profiles spike steeply when the equipment is in use, then drop to near zero once charging is complete.
“A spiky load with a 2-percent utilization rate should not be penalized for drawing 50 kilowatts for one hour a month,” Nelder said. “The DCFCs are being forced to pay more than their fair share for meeting that load.”
In place of a demand charge, Nelder supports a variable electricity rate based on time of use. If this rate were reflected in the price an EV owner paid to recharge, it could encourage greater use in low-demand periods. Both Southern California Edison and San Diego Gas & Electric have proposed such rate structures that are specific to the needs of their territories.
There is still time to address the policy questions an EV fleet will raise in a nation whose fortunes have, in large part, been built on petroleum. Even McKerracher recognizes that BNEF’s prediction of EVs grabbing almost a quarter of all vehicle sales in a little over a decade is difficult to believe.
“There are still a lot of people who disagree, but there is much more optimism around EVs than there was a few years ago. We’re not the only ones raising it up,” he said.
Economic and political forces, including dramatic battery price reductions and a growing global policies promoting zero-emissions vehicles, are certainly lining up in the market’s favor. Now, it’s only left to see if car buyers will start lining up as well.
“That’s the single biggest question hanging over the market,” McKerracher said.