Alice in EVland Part II; The Hall Of Mirrors | Renewable Energy News Article

Alice In EVland: Six Impossible Things
By John Petersen, Contributor | September 21, 2010

Many of my regular readers know I'm a working securities lawyer, a humble scrivener who writes reams of deathless prose that private companies use to raise money from investors, and public companies file with the SEC in the form of registration and proxy statements, and annual, quarterly and current reports. I've spent a couple years as an oil company executive and a few more as board chairman of an advanced lead-acid battery technology developer. The balance of my 30-year career has been devoted to natural resource and technology-based businesses that needed somebody elses' money to pursue their plans and had to pass through a gatekeeper like me to get it.
It's a fascinating job because I need to develop an encyclopedic understanding of a client's business, operations, technology and industry before I can begin to offer sound advice on important business, financial and tactical decisions. In The Devil's Advocate, Al Paccino described a law degree as "the ultimate backstage pass." The movie line may be a slight exaggeration, but like most of my brethren I've learned that ambitions, optimism and bold plans are universal, failure is more common than success, and mediocrity is more common than excellence.

Along the way I've developed a kind of sixth sense for business models that will or will not work. While I haven't seen every fatal error a businessman can make, I can spot most of the common ones in my sleep. While part of me hates to tell an bright-eyed entrepreneur that his business model can't fly, I'd rather ride my bicycle for free than get paid for working on a deal that violates my "life is too short" rule.

I started blogging a couple years ago because of a love hate relationship with my own profession; one that always informs but often fails to communicate because full and fair disclosure of all material facts in compliance with the rules can never do a good job of explaining a business strategy and integrating the facts in a way that maximizes comprehension. My goal was to share my knowledge of the energy storage sector and help contemplative investors understand where the sector is going as cleantech, the sixth industrial revolution, unfolds.

Over the last year I've gotten bogged down in a series of absurd arguments with philosophically committed EVangelists who obviously slept through Economics 101, another violation of my life is too short rule. Since one of my favorite financial writers, John Mauldin, has recently had a lot of fun with the following quote from Lewis Carrol's Through the Looking Glass,

Alice laughed. "There's no use trying," she said, "one can't believe impossible things."

"I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for half-an-hour a day. Why, sometimes I've believed as many as six impossible things before breakfast."

I'm going to borrow John's theme and identify six impossible things about electric vehicles that most investors choose to ignore or simply don't understand.

Impossible Thing #1 – Zero Emissions

The gold standard of vehicle electrification is the Prius from Toyota Motors (TM). With an admirable ten-year history of user satisfaction, a base price of $21,000 and a design that maximizes fuel efficiency by using a 1.3 kWh NiMH battery for hybrid drive functions, the Prius delivers a combined city/highway fuel economy rating of 48 mpg, which is twice the 2011 model year combined fleet CAFE standard of 24.1 mpg.

According to Toyota, the 2011 Prius has tailpipe emissions of 143 grams of CO2 per mile, which is 3 grams per mile LESS than an electric car plugged into the average US utility. While a simple comparison based on average emissions shows that the Prius has a slight edge over every EV, the reality is even bleaker because EVs with theoretically be charged at night and most off-peak power comes from coal fired generators, while about half of daytime power comes from natural gas. I've never seen a study that analyzes the CO2 emissions differential between peak and off-peak power, but I'll give long odds that an EV charged with off-peak power is considerably dirtier than a Prius.

Impossible Thing #2 – Consistent Marginal Returns

Like all things in life, electric vehicles are subject to the law of diminishing marginal returns, which states that the first unit of a variable input yields the greatest benefit and each additional unit yields a progressively smaller incremental benefit. Frankly, I can't imagine a better proof of that economic law than a quick comparison of four vehicle electrification options.

* The Toyota Prius uses 1.3 kWh of batteries to slash fuel consumption by 50%;
* The GM Volt uses another 14.7 kWh of batteries to save the next 30%;
* The Nissan Leaf uses another 8 kWh to save the last 20%; and
* The Tesla Roadster uses another 29 kWh to satisfy the range requirements of people who have a commute of more than 30 miles, the maximum that Nissan recommends for potential Leaf purchasers.

There may be a "PHEV-light" alternative like Toyota's planned Plug-in Prius that gets to a more optimal point on the marginal utility curve, but the big battery behemoths have all the long-term potential of the Edsel unless someone can find a way to repeal the law of diminishing marginal returns.

Impossible Thing #3 – Available Raw Materials

Like all things in life, electric vehicles are subject to raw material constraints. Each year our planet produces a few kilograms of aluminum and copper and a few grams of rare metals per person. It is impossible for more than a handful of politically favored elites to use hundreds of kilograms of highly refined and processed metals to reduce their personal consumption of oil, which is produced at a rate of 616 kilograms per person.

Impossible Thing #4 – Assured Battery Safety

The green press is full of happy stories about the improving safety of lithium-ion batteries. At the same time, Federal regulators are focused on a recent 747 crash in Dubai that was caused by spontaneous ignition of lithium-ion batteries during shipment. While EVangelists think mommies and daddies across the land should place their child safety seats securely on top of the battery pack, the Federal government is preparing to impose sweeping restrictions on the transportation of those same batteries on US cargo planes.

Impossible Thing #5 – Assured Recycling

EVangelists invariably assume away battery recycling issues with blithe assurances that somebody will solve the problem before used battery packs become a disposal problem. However, nobody has been able to demonstrate a cost-effective lithium-ion battery recycling process. The primary recoverable materials are steel, aluminum, copper and some rare metals. While these materials were highly refined when they went into the batteries, they lose the original processing value in recycling and the recovered metals aren't worth much more than any other scrap metal. Since there is no recycling technology, a discussion of the problem promptly degenerates into "second life" mythology, where electric utilities will become dumping grounds for used battery packs that have outlived their usefulness in transportation.

Impossible Thing #6 – Economic Payback

Even EVangelists acknowledge that the incremental investment in an electric vehicle will not be recovered over the life of the vehicle unless oil prices soar to levels that would crush the global economy. Most investors are concerned with return on investment. A business model that can't offer a return of investment is worrisome.

Any one of these six impossible things should be enough to give a contemplative investor pause. In combination they spell disaster for investors in electric car manufacturers like Tesla (TSLA), Fisker Motors and Th!nk, and nothing but trouble for battery manufacturers like A123 Systems (AONE) and Ener1 (HEV) that are devoting immense resources to the electric car dream. There are a wide variety of rapidly evolving and lucrative markets for lithium-ion batteries, but companies that chase this White Rabbit down the hole may be unable to find their way out.

Most of us know that money managers, analysts and investors tend to follow the herd, but few of us ever really come to grips the unappetizing corollaries that:

* Unless you're the leader the view never changes; and
* If you follow a big enough herd, you'll spend a lot of time wallowing in manure.

Disclosure: I'm a former director of Axion Power International (AXPW.OB) and have a substantial long position in its stock. I don't believe that Axion's advanced lead-carbon PbC® battery will be a contender in the plug-in vehicle space because it's a power battery rather than an energy battery. Accordingly, the success or failure of electric cars will be irrelevant to my finances. With any luck, this will be the last time I focus on electric cars because there are important business opportunities to discuss and I'm not willing to waste any more time debating make believe with the folks who slept through Economics 101.

Alice in EVland Part II; The Hall Of Mirrors
By John Petersen, Contributor | December 7, 2010 | 30 Comments
Mark Twain reportedly said that "Figures don't lie, but liars figure." Truer words were never spoken.

On November 22nd the EPA issued an official fuel economy sticker for Nissan's (NSANY.PK) Leaf that shows an impressive electric drive equivalence of 99 MPG. Two days later it issued an official fuel economy sticker for General Motor's (GM) Volt that shows a comparable electric drive equivalence of 93 MPG, a gasoline drive fuel economy of 37 MPG and a combined equivalence of 60 MPG.

Both stickers were heralded as the dawn of a new age in transportation. Unfortunately, they were outrageous lies that account for the distance a car can travel on a kilowatt-hour of electricity but ignore the energy needed to make a kilowatt-hour of electricity in the first place.

To arrive at their magical fuel economy numbers, the EPA started with the scientific fact that 1 kWh of electricity contains 3,412 BTUs of energy and 1 gallon of gasoline contains 124,238 BTUs. After calculating a base energy equivalence of 36.41 kWh per gallon, they adjusted that value to show a 7.5% energy loss in the battery and arrive at a final value of 33.7 kWh per gallon. In the words of autobloggreen "Since the Leaf has a 24 kWh battery pack and can go, officially, 73 miles, then, the EPA says, it could theoretically go 99 miles if it had a 33.7 kWh pack."

Now let's talk about what really happens.

To get a gallon of gasoline we have to drill a well, produce the oil, refine it and transport it to a gas pump near you. Overall, the production, transportation and refining consumes about 20% of the raw energy the crude oil contained at the wellhead. So if we back the entire process up to mother earth, each gallon of gasoline had an initial energy value 155,300 BTUs.

To get a kWh of electricity from sources other than water, wind and solar, we have to consume fuel to create heat in a generating plant and then turn that heat into electricity. The conversion process is very inefficient. According to the Energy Information Administration, it takes 10,378 BTUs of coal energy, 11,015 BTUs of petroleum energy, 8,305 BTUs of natural gas energy or 10,453 BTUs of nuclear energy to make 1 kWh of electricity. In other words, about 2/3 of the raw energy extracted from mother earth is wasted. If we include electricity from water, wind, solar and all other sources, the US consumed an average of 8,775 BTUs of raw energy last year for every kilowatt-hour of electricity it produced. By the time we account for transmission and distribution losses on the electric grid, the energy inputs for each kilowatt-hour of electricity delivered to a wall socket near you is about 9,375 BTUs.

When we track all the numbers back to mother earth, the energy equivalency ratio between gasoline in a car's tank and electricity in an EVs battery is 16.6 kWh per gallon – not 33.7 kWh per gallon.

The EPA's official sticker for Toyota's (TM) venerable Prius shows a respectable combined fuel economy rating of 50 MPG. Since the Prius only burns gasoline but does so very efficiently, we have to extract 3,106 BTUs of energy from mother earth to move the Prius a mile. In comparison, we have to extract 3,388 BTUs of energy from mother earth to move the Leaf a mile and we have to extract a whopping 3,873 BTUs of energy to move the Volt a mile.

The bottom line is all the efficiency talk for plug-in vehicles is based on a fundamental deception that ignores the energy required to produce electricity in the first place, the same way it ignores the emissions impact of producing electricity. As a result, all of the arguments in favor of vehicle electrification have the intellectual integrity of a no peeing zone in a public swimming pool.

William Martin wrote that "In America we get up in the morning, we go to work and we solve our problems." We don't delude ourselves by creating a hall of mirrors where unconscionable waste can masquerade as conservation. We can do better, but not until we take our heads out of the sand and recognize the problems.