Magnifying rather than quelling range anxiety

In the ongoing search for electric car nirvana, the Tesla Motor Company has enjoyed an unusually charmed existence. Perhaps it’s the Silicon Valley mystique, perhaps it’s the Midas touch attributed to its co-founder Elon Musk — who became a centimillionaire from selling PayPal to eBay, and then used his funds to start a car company, a rocket company and a solar company.

After discontinuing its $100k niche toy, the Tesla Roadster, the future of the company depends on producing and selling its $60-100k Model S sedan in volume. The latter effort was dealt a major blow Sunday when the NY Times reported the very real problems in an actual test drive:

Stalled Out on Tesla’s Electric Highway By JOHN M. BRODER

Washington — Having established a fast-charging foothold in California for its electric cars, Tesla Motors has brought its formula east, opening two ultrafast charging stations in December that would, in theory, allow a speedy electric-car road trip between here and Boston.

But as I discovered on a recent test drive of the company’s high-performance Model S sedan, theory can be trumped by reality, especially when Northeast temperatures plunge.

The problem was that — after several close calls — the car ran out of power shy of the next charging station, requiring a complex and time-consuming flatbed tow. Perhaps it was the effect of cold upon the battery life, perhaps it was the power consumed by the heater, perhaps it was bugs in the software or hardware.

Still, there’s no reason to think that the problems didn’t actually happen. In response, one would presume that Tesla would both improve its products and add additional charging stations to enable long-distance recharging.

Instead, the notoriously thin-skinned Musk tried to smear the messenger, both on a CNBC interview and on his twitter account:

@elonmusk: NYTimes article about Tesla range in cold is fake. Vehicle logs tell true story that he didn't actually charge to max & took a long detour.

In responses to major media outlets, the NYT stood by its story:

The Times's February 10 article recounting a reporter's test drive in a Tesla Model S was completely factual, describing the trip in detail exactly as it occurred. Any suggestion that the account was "fake" is, of course, flatly untrue.

Our reporter followed the instructions he was given in multiple conversations with Tesla personnel. He described the entire drive in the story; there was no unreported detour. And he was never told to plug the car in overnight in cold weather, despite repeated contact with Tesla.

Apparently the attack was an effort to prop up the stock price, which fell 4% in response to the NYT story. (That’s about $175 million in market cap — more than any of us mere mortals will ever see in a lifetime).

Despite the stress on the company and its stock, this is a textbook example of how not to handle a PR crisis. But it appears that within a NASDAQ-traded public company, no one can tell the emperor of Tesla to put his clothes on, or to listen to professional advice. As The Atlantic summarized its media report: “Elon Musk's Crusade Against The New York Times Isn't Helping Tesla.” The WSJ wonders whether this sort of concerted effort to intimidate reviewers will discourage coverage in the future.

Of course, this happened the same week that Musk — an expert in all things everywhere — was offering advice on Boeing 787 batteries. As Seeking Alpha dryly put it:

Tesla has burned through $1.25B in free cash flows in order to develop the company, and we expect that terrifying test-drives of electric vehicles from Tesla Motors will continue. We find it amusing that Elon Musk is willing to help out Boeing's Dreamliner due to the battery issue. We would like to remind Elon Musk and his team that they need to first fix their problems with their products before trying to be a superhero with the products of other companies.

Cruising range is an inherent limitation of the current generation of electric cars, and thus “range anxiety” will be a major obstacle to adoption. Musk has done himself — and the industry — no favors by helping to call attention to the article, rather than (as his employees apparently were trying to do) work with the reviewer to understand and correct the problems.

Solving the EV chicken & egg problem

As part of a settlement over the 2001 California energy crisis, NRG Energy promised to spend $100m to build EV charging stations across the state. On Friday a rival charging station company sued to block the settlement.

The settlement itself was fraught with ironies, since many saw NRG as the next most “evil” big business (after Enron) in the whole crisis. The settlement was trumpeted March 23 by Governor Jerry Brown, while the brownouts and blackouts brought the forced retirement (through recall) of his protegé, Gray Davis, who’d been chief of state (and a stabilizing influence) on Brown during his infamous “Governor Moonbeam” days.

According to the GTM coverage of the deal, NRG’s $100m would fund “a statewide infrastructure of at least 200 public fast-charging stations and another 10,000 plug-in units at 1,000 locations.”

There are other aspects of the plan that belong in la-la land, such as the Governor’s vision that (again according to GTM) “California’s personal transportation is to be essentially all-ZEV by 2050.” Fortunately for the state (and the governor), Gov. Moonbeam will be at least 20 years in the ground at that point, with his fanciful promise long forgotten. (For a whole range of reasons ± starting with batteries — electric vehicles will remain a niche product through the first half of this century.)

Still, EVs face a crucial chicken-and-egg problem: they will only get limited adoption without charging stations, and nobody wants to spend big bucks to install charging stations before there is an installed base of EVs. The governor’s settlement of his predecessor’s screw-up allows him to take credit for solving this (very real) “green” problem without spending any taxpayer money (which makes it a rare opportunity indeed). Or, as Michael Peevey, the head of his Public Utilities Commission, noted in the official press release

The settlement will launch a virtuous circle in which ever more Californians will feel comfortable driving EVs, and growing EV sales will in turn attract ever more investment in charging infrastructure to our state.

On Friday, San Francisco-based Ecotality sued the state over the governor’s deal with its competitors. As the Merc reported

Ecotality argues that the agreement "punishes" NRG for price gouging during the energy crisis by allowing it to invest money into its own business.

"Such 'punishment' is equivalent to a motorist settling his speeding citation by simply being required to buy a faster car, subsidized by the public," reads the lawsuit, filed Friday in the 1st District Court of Appeal in San Francisco.

I loathe crony capitalism as much as anyone, but the Ecotality suit seems to be minimizing the very real risk that NRG is running of owning a fleet of white elephants. (If the suit says California should take its lawsuit settlements in cash rather than business investment, that seems like a more promising argument to make.)

Not everyone share’s Ecotality’s pessimism — or fear — about the impact of NRG’s buildout. As the other Bay Area newspaper, the Chronicle reported:

Jay Friedland, legislative director of an electric car advocacy group, said California's market for charging equipment should grow big enough, fast enough for multiple companies to thrive.

"We think this market is going to expand out pretty rapidly," said Friedland, with Plug In America. "And NRG could be a viable player, just like Ecotality and Coulomb could be."

Ecotality is right that NRG will have a leg up if this turns out to be a good business investment, but it’s lying to claim this will create a “monopoly.” (Electric charging stations are no more monopolistic than gas stations — the national market will support at least 3 competitors.)

Yes California is a desirable market to dominate, but if Ecotality wants to build its own stations, it is free (in a free market) to do so. It just needs to find a deep-pocket source of funding — a problem it had before March 23, and a problem that is solvable by selling itself (earlier, at a low valuation) to a major energy company like Edison, Exelon or PG&E.

A new class of carpool cheaters

The Merc reports that the Prius and other California hybrid owners are finally losing their carpool cheating stickers. Come July 1, the 85,000 privileged owners of a yellow sticker will no longer be allowed in the carpool lane.

Instead, the $1,500 subsidy to affluent buyers of expensive high-mileage cars will pass to those who buy an EV such as the Nissan Leaf. (Chevy Volt owners need not apply). We are repeating the mistake again, just with another class of privileged few.

Transportation writer Gary Richards found at least one honest Prius owner who recognizes the mistake:

“I am happy to see the carpool access experiment come to a much-deserved end,” said Ted Coopman of Santa Cruz, who never applied for stickers for his 2005 Prius. “While I support inducements for buying hybrids, granting carpool access was a major mistake. Hybrids don't get people off the road, and reducing traffic is the primary reason for carpool lanes.”

If gasoline prices remain high, California is going to need the lanes for actual carpoolers. So lets hope that the state doesn’t fill those lanes with 85,000 single-occupant EV owners.

A green way to fight EVs

The general public and the media hype machine seem to assume EVs are good for the planet, even though that assumption is dubious at best.

Still, I was unaware of environmentalists passing policies to reduce the use of EVs here in California — until now.

A Purdue study (forthcoming in Energy Policy reported by the LA Times) notes that the state’s aggressively tiered electricity rates — plus our electricity prices — make the state one of the most expensive (i.e. least desirable) places for a consumer to charge an EV, perhaps 35% above the national average.

Philosophically similar to a progressive income tax, California’s tiered electricity rates charge more per kWH for big users than small users. It’s designed to encourage energy efficiency (but also also sock it to the rich.)

A PHEV would increase a homeowner’s electricity consumption by 60%, thus pushing even the most efficient homeowner into a higher tier.

The study from Purdue’s Energy Center pointed to another problem: California’s average electricity price is among the highest in the country: 4.4¢ per kWH vs 8¢ for a low cost state like Indiana.

In short, the economics of the Chevy Volt don’t work, according to the Purdue press release:

The researchers determined the plug-in hybrid would be less economical than the Toyota Prius, a hybrid that does not charge its battery through a plug, or the Chevrolet Cobalt, which uses only an internal combustion engine. When oil prices are high, the Prius would be the most economical, with the advantage going to the Cobalt when oil prices are low.

Tyner said to make the Volt more economical than either the Prius or the Cobalt, oil prices would have to rise to between $171 and $254 per barrel, depending on which electricity pricing system is being used. That's because the Volt has a higher purchase price and will cost more in electricity than gasoline over the life of the vehicle.

Even with $7,500 in Federal subsidies, the numbers just don’t pencil out:

"People who view the Volt as green will pay $10,000 more over the lifetime of the car because it's green," Tyner said. "Most consumers will look at the numbers and won't pay that."

Perhaps this explains the dismal sales of the Volt (and its competitor the Nissan Leaf).

Of course, this is a job for the controversial SmartMeter™!! With time of day metering, excessive energy consumption at night (which isn’t going to be air conditioners) could be charged at the base rate rather than the peak rate.

There’s no evidence of a CPUC ratemaking proceedings yet, but I’d bet money that our local EV company and its allies will request starting one soon.

EVs' dirty clothes

The assumption of those buying, selling and seeking subsidies for EVs is that they are somehow cleaner than existing internal consumption engine cars.

The premise has numerous largely unexamined assumptions. One is that the alternatives are a stationery target — that there’s no progress on competing technologies (e.g. hybrids, diesels, fuel cells, etc.). Another is accounting for the energy cost of creating the batteries and the pollution cost of disposing of them.

And — as with any environmental investment — there is the question of whether this is the most efficient way to spend billions or trillions to save the planet. If (hypothetically) it takes $5 trillion to replace the global transportation infrastructure to not emit carbon but only $1 trillion to sequester carbon, couldn’t that extra $4 trillion be used to cure malaria, provide safe drinking water, or other alternatives that improve the health of the planet and its residents?

However, these are second-order arguments that don’t seem to be getting traction.

A much simpler argument is: is generating (and distributing) the electricity to the new generation of EVs cleaner than currently available gasoline-powered cars?

Increasingly, evidence suggests that the answer is “no”. As I noted last May, outside of New Zealand, few countries have green enough aggregate energy generation to reduce CO2 emissions if you shift from gasoline to grid power.

If you look a little deeper, the US picture is even worse. There are two types of electricity — cheap baseload and expensive (or more variable) peak load, used when lights are on and air conditioners are running. Solar obviously is a daytime peak load source, natural gas (the cleanest fossil fuel) is expensive and used only at peak load, and who knows when wind will be available.

However, smug homeowners with their non-polluting EVs are plugging into the grid at night, when there’s no solar. According to John Petersen (writing at Renewable Energy World) those kilowatt-hours will come from baseload power — which in the US means either coal or nuclear power. His article draws on a 2008 Rand study of the lifecycle comparison of HEVs vs. PHEVs.

The Rand study says that if you use natural gas to generate electricity, a PHEV is cleaner than a HEV but if you use coal it’s dirtier. (What about CNG cars? Petersen doesn’t say). Running coal plants to charge “clean” EVs is obviously somewhat of a contradiction in strategies.
From my analysis of 2008 EIA data, coal accounted for 48.2% of US electricity consumption and nuclear 19.6%. (In California, it’s 57.7% natural gas, 15.6% nuclear but only 1.1% coal.) Of course, shifting transportation from liquid fuels to the grid would require incremental increases in electricity generation — retiring fewer coal plants or even building more of them.

The one gap in Petersen’s analysis is that hydro can be shifted to be used whenever power is needed, so that increased electricity consumption at night could be fed by hydro. Of course, that takes away from its availability at (the more valuable) daytime peak load. More seriously, US hydro is only 6.2% of consumption and pretty much capped in absolute terms.

So this comes back to the fundamental systemic innovation problem: changing our century-old transportation system to be more green is complex and expensive. If we don’t use market forces — or distort the market by favoring one approach over another — there are likely to be suboptimal choices made.

In this case, it appears that it would be better to shift the grid to renewable energy first, and then put cars on the grid, than to add EVs to the grid at a time when renewable energy is a relatively small part (<10%) of our electricity supply. The only encouraging news is that when they spend their own money, consumers are thus far resisting the EV hype machine and going with more economically efficient alternatives.

EVs good on MPG, HPM

A big debate recently on EVs and PHEVs has been how to measure the miles per gallon given that a) sometimes they use no gas at all; and b) electricity is an energy cost, even if it’s not a gallon of gas.

But now I think it’s time to focus on HPM (hype-per-million): misleadingly high press popularity that masks underlying revenue model problems. Electric cars seem to be heavy on the hype — by the vendors, the business press, the general press and even politicians — while sales are barely improved from the first great coming of the EV. (And this time, there’s no one to blame for poor sales but the invisible hand of basic economics.)

An AP report Friday was stark in its assessment:

GM sold 250 to 350 Chevy Volts this month, and Nissan's sales totaled fewer than 10 Leaf sedans in the past two weeks. Production for both is slowly ramping up.

It will be well into 2012 before both the Volt and Leaf are available nationwide. And if you're interested in buying one, you'll need to get behind the 50,000 people already on waiting lists.

It's still unclear just how large the market for electric cars will be once those early adopters are supplied. The base sticker price is $40,280 for the Volt and $32,780 for the Leaf, much higher than most similar-size, gas-powered cars. If those prices rise, it could make them even more of a niche product than predicted. Buyers also are worried that advertised lease deals may not last, and a federal tax rebate of $7,500 could disappear if Congress decides battery-powered cars are no longer a priority.

According to the story, Nissan can build 50,000 Leafs a year while Chevy hopes to sell 10,000 Volts in 2011 and up to 45,000 in 2012.

By comparison, Chevy sells more than 200,000 Malibu sedans a year (for a price that’s half that of the Volt.) Of course, price is everything — now more than ever. And with the new Congress, expansion or even extension of generous Federal subsidies seem less likely than ever.

Edmunds is predicting HEV/PHEV/EV will rise from 2.4% in 2009 to 4.8% in 2013, with EVs only a small fraction. Of the 14-17 million passenger vehicles sold every year in the US, that would be an increase from about 350,000 to 700,000 vehicles a year. Most of those are probably the Prius, which is selling about 400,000 units annually (worldwide).

This is consistent with the November prediction made by Daimler AG CEO:

In 10 years’ time, the overall market share of electric cars is likely to be still in the single-digit percentage range. … In principle it’s similar to President Obama—first, expectations are being raised externally and then people are surprised they don't get fulfilled. From today's perspective it's already clear [that] we won't earn high returns with electric cars in the years to come. And that's the optimistic wording.

Even the 4.8% forecast may be optimistic: selling 70,000 Leafs and Volts would be only 10% of the US market. Given Toyota is driving most of its HEV demand to the Prius, category growth is going to depend on other makers (most likely Honda and Ford) offering their own hit HEV/PHEV/EV models.

Both Honda and Ford have offered credible products, but neither has made much of a dent: even in a good month (October 2010), Honda only sold about 4,000 units in the US. Honda promised to be aggressive in pricing its HEVs and EV models, but the Fit EV (due in 2012) is priced at $30k, only about 10% below the slow-moving Leaf.

So where is the growth going to come from? Yes, $150/barrel oil would increase EV sales (even if it has no direct effect on renewable energy, which instead competes with coal and natural gas.) But that’s not really a business strategy — unless you have the geopolitical connections to arrange a third Arab Oil Embargo.

My own purchase intentions reflect this reality. At one point, I thought my next car would be the $20k Honda Fit Hybrid, until Honda decided not to sell it in the US. Instead, it’s more likely to be $15k for a Ford Fiesta (37mpg), Mazda2 (35mpg) or Honda Fit (33mpg). Ignoring the time value of money, a $15k purchase price differential (vs. a Leaf or Fit EV) buys 5,000 gallons of gas — enough to cover the fuel costs for the entire life of the car. Plus there’s no battery to put in the landfill, or coal-generated electricity to pollute the planet.

Finding a good niche

As in any other industry, the success of new cleantech businesses usually depends on finding a good niche. Yes, the big oil companies would like to start with billion (or trillion) dollar market segments, but most other companies need to start with a small, well-defined, highly motivated and easy to target segment.

Today the Merc offered a profile of an intriguing electric vehicle company that seems to be taking a different tack than Tesla, Fiskar and the other big VC-funded firms. Green Vehicles Inc. of Salinas (an hour south of San Jose) is selling the Triac, a tricycle commuter car for $25K, with a top speed of 80mph and a “real” (not best case) range of 100 mph round trip.

The $25K MSRP does not include the $7,500 Federal subsidy and a state subsidy (under AB 118) of up to $5,000. So you pay the 10% sales tax on the full $25k, but still the car is cost-competitive (to buy, before operating costs) with conventional cars selling for around $13,500 — and there aren’t a lot of cars in that range. It would get me the 12 miles to work, or the 4 miles to the LRT to work or the CalTrain to San Francisco.

The car is severely limited in size (two people) and like other pure EVs, in range. But to me, this could be the ideal commuter car to throw into the portfolio as a third car, say for households with a teen driver that has a 2-5 mile one-way trip to high school or the mall job.

More importantly, the low up front cost will allow someone to experiment with this restricted-capability vehicle — inherent in pure EV models — to see if it fits their lifestyle. Even if it only holds two people, I think a $14k vehicle (after incentives) has a much bigger audience than the $57k ($35k after incentives) Tesla Model S sedan.

Never believe a politician

The NY Times ran a story Saturday (picked up by the Merc) about the dedication of the new BMW electric car factory in the former East Germany. If nothing else, it proved that political hyperbole is not just endemic to the US but apparently a disease that afflicts the would-be ruling class the world over.

Just as our president has visited the shiny new PV plant of the (now-troubled) Solyndra, so Chancellor Andrea Merkel was on hand for the opening of the Leipzig plant scheduled to crank out EVs starting in 2013. Merkel’s picture was used in the dead tree Merc (I don’t get the dead tree Times).

There were no quotes from Merkel in the story, but the Times found the prerequisite hyperbole from the local governor:

“We’re at the beginning of an auto revolution,” said Stanislaw Tillich, the prime minister of the state of Saxony.

Despite this glowing prediction, NYT Germany correspondent Jack Ewing interpreted the company’s announcement as predicting limited production of only tens of thousands of units each year. Politicians notwithstanding, BMW appears to see this as a limited niche for now. (Various web sources suggest that BMW sells about 1 million cars/year, the majority of those 3-series sedans.)

Also, the new car seems like it will be less of a BMW and more a new subbrand, Megacity, a sister to the BMW-owned Mini brand. The factory already produces the BMW economy car, the 1-series, that we don’t see here in the US. I don’t know if this is to start a new brand for electric cars or (more likely) protect the performance reputation of the main BMW brand.

The Merc headline (but not the story) also trumpeted this as competition for Palo Alto-based Tesla Motors. While the rumored volumes dwarf anything yet demonstrated by Tesla, it’s hard to see how an electric econobox will draw demand from the existing Roadster.

We would have to see the actual list prices of the vaporware Megacity — as well as Tesla’s planned sedan — to predict whether the former will cannibalize sales of the latter. Based on what I’ve heard so far, this would be like asking whether Camry drivers will trade down to a Yaris — it’s possible if there’s a $30k difference but probably not if there’s a $10k difference.

However, a planned BMW PHEV sounds like a direct competitor for the Roadster:

BMW said it had also decided to produce a plug-in hybrid sports car known provisionally as Vision Efficient Dynamics. The car, which has been displayed at auto shows as a design study, will accelerate from zero to 60 miles per hour in less than five seconds, but be more fuel-efficient than most economy cars now on the market, BMW said.

The fabled BMW image, engineering and track record (in both senses of the phrase) could give it an edge over the fledgling Silicon Valley firm.

The three-cylinder diesel BMW would not be available until “2013 or 2014” at a price above €100,000. So for now, the limited-range all-electric Roadster has some breathing room.

End to most carpool cheating stickers

On Wednesday, the Governator signed AB 1500, which extends HOV lane privileges for a small number of California EV owners. However, the vast majority of the 85,000 sticker owners — owners of Prius and other hybrids — will be losing their carpool heating privileges on January 1.

John Voelcker of Green Car Reports spells out all the nuances and implications of the plan, which is aimed at handing out the perks to the Nissan Leaf and other expected EV/PHEV models — and keeping the perk for the RAV4 EV and other existing EV and CNG alternatives.

The policy decision makes all the sense in the world. The yellow stickers were always intended to be temporary incentives. The hybrids offer a marginal improvement over gasoline vehicles, particularly with the increasing fuel efficiency of affordable non-hybrid cars like the Ford Fiesta, Honda Fit and Toyota Yaris.

The stickers provided a subsidy (with a market value of up to $1500/car) to fuel adoption of expensive hybrids by the affluent and upper middle class. Given their popularity — particularly in the urban areas where the HOV lanes are found — they’ve already served their purpose. Meanwhile, the 80,000+ (by one estimate) empty slots and lanes can be used to encourage adoption of a new round of lower emission vehicles.

Tesla's big day

Today was a great day for Tesla Motors and its CEO Elon Musk. Both got tons of favorable publicity — opening the NASDAQ market this morning — and wads of badly needed cash as the company enjoyed a wildly successful IPO.

By any measure, the IPO was a huge success:

• The offering was expanded from 11.1 to 13.3 million shares.
• The offering price was raised from the planned $14-16 to $17/share; and
• The stock rose 40% in the first day of trading to close at $23.89, creating a market cap of about $2.2 billion

All this on a day when the Dow fell 2.6% (the NASDAQ 3.8%) as common investors panicked in the face of worsening economic news, and in a year where IPOs are few and far between. (My theory is that the stock defied the market because TSLA stock buyers were a combination of rich environmentalists that buy the cars and hot stock faddists who buy the story.)

(As with most Tesla financial news, the best reporting came from VentureBeat reporter Camille Ricketts.)

By selling almost 909,000 of his own shares, the 39-year-old Musk grossed $15 million, while his remaining shares were worth more than $650 million. Once the lockup is over, this presumably will allow him to pay some of his bills and start to resolve his long-deferred divorce settlement. After going broke, it also amounts to a personal vindication of the vision of the billionaire serial entrepreneur.

In fact, the LA Times found an Edmunds.com analyst who saw this as more of a referendum on the Tesla and Musk star power than its business or the industry at large:

"It's all the hype that's been built up, the first-day craziness," [editor John O'Dell] said of Tuesday's stock surge. "I would not take what's happening as a referendum on the EV market overall. It's unique to Tesla and Elon Musk and his reputation and persona."

Now that they’re a public company, the real scrutiny begins.

Ricketts has a list of 10 key questions for the company and its investors. Some are the obvious ones — when will Tesla stop losing so much money and how will it support the stock (and the balance sheet) when its second product is two years out. Others are less obvious, including how will Tesla balance its two strategic investors — Daimler and Toyota — who gave the company legitimacy, technology and (competing) potential exit strategies.

Others are also asking piercing questions. For example, John Gapper of the Financial Times wonders why investors are (apparently) so sanguine about having a part-time CEO of a multibillion dollar (market cap) company. Yes, Musk apparently fancies himself the greatest entrepreneur (and perhaps greatest tech CEO) of all time, but even Steve Jobs only managed to run two companies (Pixar+NeXT, Pixar+Apple) while Musk has three (Tesla, SpaceX and SolarCity).

One of the other questions Ricketts asks is how Tesla’s planned Model S sedan will compete with rival offerings from Chevy and Nissan — two well-capitalized manufacturers with better distribution. There’s also Fisker, the other major startup EV company, which used $20m of its $529m in stimulus funds to buy GM’s shuttered Delaware plant — part of its plan to help stimulate Finland’s economy.

Right now, electric vehicles are niche products: Tesla has sold 1,100 cars in two years — less than the total number of cars sold every two hours by the incumbent vehicle makers. The Model S and its rivals all hope to be the Camry (or Taurus) of electric cars, albeit at a healthy price premium (even with subsidies).

Into this niche are coming GM and Nissan right away, Fisker and Toyota soon after, and probably Ford, Honda, Chrysler, the Koreans and the Chinese by 2015. So far, the cars are 20-50% more expensive than their internal combustion counterparts. Meanwhile, the economics and green footprint of these vehicles depend on both the cost of gasoline (retail or with externalities) and how that compares to the real cost of grid power.

Meanwhile, sales are flat for the rest of the auto industry (at least in the developed world) with too many companies and factories chasing too few buyers. Even if electric cars increase their share of the market, they’re not going to grow the overall market, and that existing capacity (both manufacturing and distribution) will chase wherever the market goes.
The best case: the EV market grows rapidly and the rivals are slow to enter (unlikely) or are unable to match Tesla’s innovative products. The worst case (pick one): the market grows slowly, the prices remain high, a political shift reduces federal subsidies, or rivals (such as GM or Nissan) reach the mass market first.

I think the Tesla team should celebrate a well-deserved 4th of July weekend. After that, it’s back to work on trying to stay ahead of what will inevitably become a price-sensitive commodity business.

Toyota-Tesla: less than meets the eye

VentureBeat has analyzed the latest Tesla S-1 filing about its recent deal with Toyota, and found some interesting tidbits:

• Toyota has not yet agreed to partner with Tesla to build a car;
• Toyota made only a conditional promise to buy Tesla stock after an IPO;
• Tesla did not buy any NUMMI production equipment.

Some excerpts of the story:

…the newly revised S-1 states very clearly:

“In May 2010, Tesla and Toyota announced their intention to cooperate on the development of electric vehicles. This may involve the production of vehicles or powertrain components. However, we have not yet entered into any agreements, including any purchase orders, with Toyota for such arrangements and we may never do so.”

This is surprising, considering that Musk is already enthusiastically talking about not just one joint Tesla-Toyota vehicle — due out in the next four to five years, he says — but multiple tandem projects using Tesla’s powertrain technology and Toyota’s components.

and

For now, all that is tying the major Japanese automaker to the venture-backed startup is an agreement to buy a $50 million stake in the latter if and when it goes public.… [However,] if Tesla doesn’t have a successful IPO by Dec. 31 of this year, Toyota is no longer obligated to the buy these shares. This puts even more pressure on the company to make it to an IPO at all costs.

The conclusion of reporter Camille Ricketts:

Tesla and [CEO Elon] Musk have a history of making announcements that sound sweeter than they really are upon closer inspection. Last July, when the company declared profitability — with a margin of just $1 million — a number of reports said the claim was all smoke and mirrors. And when Tesla first filed to go public at the end of January, it conveniently provided financial reports only through the end of 2009’s third quarter, omitting the fourth quarter’s dismal sales. That data has since been included, but there’s a trend here.

Update 9pm: If that’s not enough, Venture Beat reporter Owen Thomas also reports Thursday that due to personal liquidity problems — tied in part to his inability to stay married — Musk has been broke for more than six months. Musk once used his personal fortune to keep the company afloat for the first five years, but now it appears he no longer cover a negative cash flow exceeding $100 million/year. Thomas concludes that even with government loans, the Model S is unlikely to begin production unless Tesla completes a successful IPO in the next seven months.

(Most of the divorce story is already several weeks old, having been covered by Edmunds, Divorce Saloon and Musk’s ex-wife herself May 6 and May 8.)

The upshot of both stories suggests that Toyota seems to be first in line to acquire Tesla and its technology if it runs out of cash, but has no financial obligation to bail it out if it doesn’t like the terms.

EVs: An expensive way to pollute the planet

I've always wondered about the green bonafides of electric vehicles: not because of the batteries, but because of the greenness of the electricity that it pulls off the grid to charge those batteries.

Sure, some people make themselves feel better by buying electricity from green sources — but then that reduces the supply of renewable energy available for others to buy. Meanwhile, if California (and other regions) is straining to achieve even 20% RE share, the marginal effect of increasing electricity demand will be to increase fossil fuel consumption from peak sources. It’s easy to ramp up electricity generation from peak natural gas (or coal) plants, but nearly impossible to quickly increase baseline generation of carbon-free sources like RE or nuclear power.

Even if you go for average — rather than marginal — CO2 emissions from grid power, the federal Energy Information Administration predicts that fossil fuels will account for 65%of electric power generation in the US even in 2035.

Now, a veteran British auto journalist has attempted to calculate the lifecycle CO2 cost of electric vehicles. Building on a team of consultants working over a three year period, the report, “The Emperor’s New Car,”was authored by Clive Matthew-Wilson of the auto review site Dog & Lemon Guide.

As Matthew-Wilson writes:

Claims that electric cars are ‘emissions-free’ are simply a lie; they merely transfer the pollution from the road to the power station. Not only will electric cars not reduce emissions, they may actually increase emissions, because burning coal to make electricity to power an electric car creates more pollution than if you simply powered the same vehicle using petrol.

Renewable energy sources may be growing fast, but they’re still a tiny percentage of the world’s electricity supply and they’ll stay that way for the foreseeable future, because renewable energy sources tend to be far more expensive than fossil fuels.

The study contrasted the Tesla Roadster with the Lotus Elise (petrol-fueled) car that it’s built from. It concluded that the Tesla produced less CO2 emissions if used in New Zealand (where grid power is primarily hydro) but more emissions in the US, UK, China and Australia.

The report also concludes that the EVs are likely to be produced mainly at Chinese factories with far less environmentally friendly production and energy generation than those of the developed world.

Such errors are hardly accidental. As the Toronto Globe & Mail summarized the report:

The report says car makers, not environmentalists, are prematurely pushing electric cars. Car makers want electric cars because of the enormous subsidies they will generate.

This is hardly the final word on the subject, and it would be naïve to think this will end the hype and exaggeration. However, one can hope it will engender more accurate estimates among environmentalists and policymakers as to actual ways of reducing CO2 emissions.

Instead of cutting edge, technologically risky and expensive EVs, the report concludes that the best way to reduce CO2 emissions in populated areas is by using a proven (100-year-old) technology: mass transit.

Here in Silicon Valley, we’re heading in the other direction. In Santa Clara County, we have a mediocre bus network and a limited light rail system. Meanwhile, the three-county commuter rail (Caltrain) is about to disappear as cash-strapped local governments end their subsidies. Meanwhile, Googlers and other members of the Silicon Valley elite buy Teslas rather than depend on mass transit.

To me, it seems like stimulating EV usage before we have a large supply of RE is putting the cart before the horse. In 2009, both RE and EV manufacturers won generous Federal subsidies, but if the government some day decided to adhere to a budget, the data suggests subsidizing RE now and EVs later.

Picking a few EV winners

Economist Arnold Kling quotes a Wired article by Darryl Siry, which says

Of all of the Department of Energy programs intended to advance the green agenda while stimulating the economy, the Advanced Technology Vehicle Manufacturing incentive to spur the development of cleaner, greener automobiles is perhaps the most ambitious. But it has a downside.

The energy department has approved direct loans to Nissan, Ford, Tesla Motors and Fisker Automotive totaling about $8 billion out of a budget of $25 billion. The magnitude of this program dwarfs other DOE campaigns like the $2.4 billion given to battery and electric vehicle component manufacturers and the $4 billion disbursed for “smart grid” projects.

To the recipients the support is a vital and welcome boost. But this massive government intervention in private capital markets may have the unintended consequence of stifling innovation by reducing the flow of private capital into ventures that are not anointed by the DOE.

Kling complains that “The American people are being forced to participate in a venture capital fling in which they take most of the down side and none of the up side. And it is not being debated.”

Certainly the president campaigned on a plank that included aggressive government intervention to support green technologies, this is something that (under our system) was supported by a majority of Americans who voted. While voters endorsed a more interventionist economic policy, they didn’t vote for stupid deals: one way transference of risk — whether on Chrysler or Fannie Mae — would certainly count.

My gripe is more to Siry’s, on two fronts. First, the massive size of the grants distort the market — they are far in excess of the money available to private sources.

Secondly, most previous energy policy interventions have been more fairly distributed. Hundreds or thousands or millions of individuals/businesses get Federal/State tax credits for buying insulation or double pane windows or solar panels.

These tend to be non-discretionary, categorical payments that go to all class of applicants over an extended period of time. If the Westgate mall gets an energy conservation grant, the Eastgate mall can apply and get one on the same terms. (Let’s ignore the problem that around here, Westgate and Eastgate have the same owner). Of course, some of the stimulus money was pure pork, earmarked for pet projects by influential legislators — the opposite of a broad categorical grant.

Siry comments:

Startup companies that enjoy DOE support, most notably Tesla Motors and Fisker Automotive, have an extraordinary advantage over potential competitors since they have secured access to capital on very cheap terms. The magnitude of this advantage puts the DOE in the role of kingmaker with the power to vault a small startup with no product on the market -– as is the case with Fisker — into a potential global player on the back of government financial support.

As a result, the vibrant and competitive market for ideas chasing venture capital that has been the engine of innovation for decades in the United States is being subordinated to the judgments and political inclinations of a government bureaucracy that has never before wielded such market power.

After noting other innovative companies are dead in the water unless they get their DOE grants, he suggests an inherent conflict between casting a wide net to many firms and making bets on likely winners.

I’m not sure what should be done now. I’d like to think that a lesson has been learned and this mistake won’t be repeated, but as long as lawyers (elected by campaign contributions) are making economic policy, there’s no reason to be optimistic.

The $1600 hybrid sports car

The NYT has an interesting post about a Portland engineer who built a $1600 hybrid out of a used Pontiac Fiero:

[Bryce] Nash, who works for Daimler Trucks North America, built his hybrid Fiero for just “$1,600 and change.” He started with a 1988 Fiero Formula with a dismantled engine, bought on Craigslist for $500. His real find, located in a Michigan junkyard for $800, was the electric motor and inverter from an electric Chevrolet S10 pickup [PDF]. The batteries came from several Toyota Priuses (about $250 a pack), and totaling at best guess around four kilowatt hours.

A major theme of this blog is the importance of cost-effective cleantech solutions. Obviously $1600 isn’t going to be the retail product for a new hybrid car (perhaps an electric scooter), but technology diffusion theory demonstrates how hybrids will remain a niche product until the prices become competitive with existing products.

Fortunately, Honda has decided that economy cars should be, well, economical, and is working on low-cost hybrid versions of the Fit and CR-Z, with both due next fall.

Sensing a challenge to its hybrid near-monopoly (and monopoly rents), Toyota’s working on a hybrid Yaris, presumably at priced below the $22k MSRP of the 3rd generation Prius, currently the lowest priced hybrid in the US (according to Edmunds).

To me the real question is: why isn’t Nash working on converting a Rambler (or perhaps an AMC Gremlin) rather than a GM car?

Warren Buffett helps make PHEV maker rich

The richest man in China is now 43-year-old Wang Chuanfu, founder of BYD (“Build Your Own Dream”). According to an annual ranking of Chinese billionaires, Chuanfu is worth 35 billion RMB or $5.1b.

Founded in 1995, BYD worked its way up to become the world’s leading maker of cellphone batteries. The Shenzen-based company (and Chuanfu’s holdings) gained tremendous legitimacy by selling a 10% stake last year to a subsidiary of Berkshire Hathaway, the investment vehicle of the Oracle of Omaha. The $232 million investment has appreciated fivefold since then.

Part of the attraction of the BVD investment was its foothold in China’s high-growth auto industry. Last December it got favorable publicity for its pathbreaking F6DM plug-in hybrid. However, earlier this month it revealed it had only sold 100 units since introduction, rather than the target of 3000+ units. It still hopes to sell the PHEV in Europe next year.

Not quite 230 MPG

There were a lot of headlines Tuesday about the Chevy Volt claim of best case EPA mileage of 230 mpg. Kathleen Pender of the SF Chronicle (which is still alive) does a good job of dissecting the nonsense behind the calculation. Since the “mpg” figure doesn’t count electricity use:

In real life, the cost of driving a plug-in hybrid like the Volt would depend entirely on how far you drive it between charges and how much you pay for gasoline and electricity.

If you drive 20 miles on electricity alone, technically your mpg is infinite. If you drive 20 miles on gasoline alone, you might get 30 mpg or more.

This is a little more scientific than the explanation developed by comedy writers for Conan O’Brian, who noted that the mpg required going downhill, with a sail, etc etc.

Clearly the EPA guidelines need to be revised to give more realistic numbers for plug-in hybrids. But I imagine GM (aka Government Motors) got what they wanted: free publicity for their new (still vaporware) car.

More good news for Tesla

Tesla has landed $465m in a federal loans for its electric car development; the other winners with Ford ($5.9b) and Nissan ($1.6b). The award was prominently played in the FT — curious whether it will become a trade issue (as French and German subsidies for Airbus have become).

It’s been part of a string of good news for Tesla and CEO Elon Musk recently, which includes favorable reviews for the Roadster in the FT. Tesla says it’s getting production costs for its $109k roadster down to $80k, from the former $140k (losing money on every unit, making it up on volume).

It still has an ongoing lawsuit with founder Martin Eberhard. The WSJ (blog) said

Eberhard unfurls a long list of grievances against Tesla and Musk in the complaint, accusing Musk of trying to “appropriate control of Tesla…and Eberhard’s legacy as the company’s founder and visionary” from the moment he became involved in the company as a first-round investor in 2004.

He claims that Musk caused the delay of the launch of the Roadster, Tesla’s two-seater, luxury sports car, compromised the company’s finances and engineered his ousting in November 2007. The lawsuit also lists a number of occasions in which Musk is portrayed publicly in the media as the founder of the company and doesn’t try to rectify that, and another number of instances when Musk says that Eberhard was to blame for the Roadster’s delay and the company’s financial difficulties.

Musk counters on his blog. The WSJ summarized it as

Much of the dispute with Eberhard centers on delays in getting Tesla’s cars on the road. Eberhard blames Musk’s ambitions, while Musk cites Eberhard’s unrealistic business plan (which he said foresaw a $65,000 price tag for the Roadster after 25 units produced) and ill-chosen suppliers.

The reason the Roadster cost so much to develop is that Tesla had to spend development money twice, Musk said. After Eberhard was asked to leave two years ago, the company had to redesign or retool many of the cars’ vital parts, including the body and power electronics, he said.

As always, Musk is not lacking in confidence:

"We don't need to raise more money; we may choose to, but we're not out there beating the bushes to find other investors." And he predicted "the entire automotive market will eventually become fully electric, mark my word. It's just a question of how long."

Asked why he was so sure, Musk offered Tesla's recent sales as proof. "We sold 1,000 cars in a month and a half without having the money secured from the DOE, in the worst economy since the Great Depression, and with no advertising. What more do you need?"

At the time of Daimler’s ≈10% investment in Tesla last month, one estimate placed a post-money valuation of Tesla at $550m. With $700m in VC funding, the VCs will still want another 10x-20x increase in the market cap before they sell Tesla to Daimler (or another car company).

Despite the good news, the Merc quoted one analyst as remaining skeptical about Tesla’s ability to reach adequate scale.

Automobile analyst Philip Gott with IHS Global Insight welcomed Tuesday's announcement, but he wondered whether a niche company like Tesla, despite its innovative prowess, was the best place to put government money. …

"This will be a very tough global race for technological superiority over the next decade," he said. "It's about time we got started. But with all due respect to Tesla, and I admire their entrepreneurial zeal and perseverance, my view is their business model works only in a very specialized premium market. And I wonder if our tax money would be better spent on a more mainstream player."

CAFE, NiMH, and EV

The administration’s proposed CAFE standards should be good news for the EV industry. The standards will naturally force Americans into smaller cars than they would otherwise buy, perhaps more in line with the rest of the world (where gasoline is more expensive and urban parking is more scarce).

If an SUV is twice the mass of an econobox, it’s pretty cheap to build a gas tank twice as big. (Yes, there’s more steel in the body and iron in the engine block, but…).

Thus far electric vehicles have been on the small side, in large part due to battery size and cost issues. Batteries have been the biggest cost for EVs (and HEVs and PHEVs) asw ell as the major technological limiting factor. So having buyers used to smaller cars makes it more feasible to sell small EVs — and to design smaller EVs with smaller batteries that are more cost competitive with efficient gasoline-powered cars. (My next car is more likely to be a $15k 35mpg econobox than a $40k Chevy Volt.)

On an unrelated note, Tuesday Daimler announced a 10% stake in Tesla Motors that Business Week guesstimates is worth $50 million. The investment from the world’s oldest (and once most prestigious) car company should go a long way to legitimate the San Carlos-based startup. The company has already pulled away from its startup competitors, but partnering with Daimler could help it overcome the liability of newness facing all startups.

Get a charge out of this news

The late TV news Tuesday offered a brief snippet about how San Jose is encouraging the installation of free electric vehicle charging stations.

The video clip included the San Jose mayor, Chuck Reed, who like other politicians wants to wrap himself in the popularity of AEVs. The announcement won free publicity for Coulomb Technologies and its ChargePoint network, as well as Richard Lowenthal, CEO of the Campbell-based company.

The near-term impact of these installations will be minimal. Even here in the Bay Area, CBS 5 estimated there are only about 1,000 electric vehicles. A quick check shows that there are 4.3 million vehicles here, or EVs accounting for less than a quarter-percent.

Of course, there is a huge chicken and egg question for true ZEVs, both EVs and also FCVs. So leading the market (to a certain level) makes sense, but obviously we need a larger pool of EVs in consumer hands to justify more stations. (My sense is that PHEVs will not generate any demand for the stations). If we don’t get cars and drivers, then these stations will whither away they did after the EV1 fizzled out.

Tesla praying for its own bailout

Tesla delivered their 100th car Tuesday, of 1200 cars on their backlog. The (presold) delivery took place at their Menlo Park dealership to a minor celebrity best known for standing next to Oprah.

However, the big news is that Tesla is seeking $350 million in low interest loans to develop its (currently on hold) plans for a mass market ($58k) four-door sedan. The parallels to the bailout of the Detroit three are unavoidable.

Despite such parallels, CEO Elon Musk rejects the analogy. As KCBS radio summarized

Tesla needs government capital, but the federal loan the electric car manufacturer wants to use to finance production on a battery-powered sedan does not come from the auto industry bailout now being debated in Congress.

The San Carlos-based company is awaiting a $350 million loan from the Department of Energy under a program Congress approved last year to encourage the development of energy- efficient vehicles.

Tesla CEO Elon Musk said that money would finance a plant in San Jose where the Model S—to be priced just under $60,000—will be developed.

He was quick to clarify the money would go towards future development rather than existing day-to-day operating costs, a crucial difference between the DOE program and the bailout of the Big Three.

So it’s coming from a different pot of money, and (perhaps) the plan predated the recent collapse of demand for consumer durables.

Certainly the Tesla funding is more consonant with existing DOE policy to encourage alternative fuel vehicles, rather than the recent tendency of Washington politicians to offer (as both left and right deride it) a “bridge loan to nowhere.”