The best-case economics are there, but the long life of the packs will indirectly scare away price-sensitive consumers for the next 5-10 years.
Tesla made quite a splash last week with data showing their cost per mile would be that of diesel. The specific graph they showed was this:
This puts the cost at electric at roughly 17% below that of diesel. In a previous post we took a look at fixed costs plus electricity and repair costs to arrive at the battery depreciation cost Telsa might be seeing.
It's often believed that the move to electric will happen only if governments are there to make it happen. But in fact, there isn't much governments can do because the numbers get so big so quickly. Even the most progressive states and countries are having trouble keeping up with subsidies. And this shouldn't be a surprise: A nation spends perhaps 8% of its GDP on energy, and subsidizing that by overspending (which is what subsidizing effectively is) would cost a fortune. For the US, our energy spend is roughly $1.6T/year, and if subsidy required you to overspend by 25%, then that would take another $400B to change behavior. That's not going to happen. The US budget doesn't have anywhere near that much to spend. That is approaching the annual military spend.
And so, there's no much governments can do to change policy more than a year or two here or there. That is, without any government intervention, maybe half of all cars sold are electric in 2030. And with LOTS of government subsidy, perhaps that might be 2028. But in the end, it's noise. We like to think it's not. But it is.
The tipping point
The tipping point happens if and only if electric cars are better. Period. And part of being "better" means you get more for your money. And once that occurs, then there's not any subsidy required. It will happen on its own.
Today, electric cars are on the cusp of costing less per mile than ICE, as I'll show below. The final barrier to an electric car is that you must effectively pay for 10 years of gasoline up front. Instead of a weekly $50 fill up for 10 years, you pay an extra $20,000 or so up front to purchase a battery, and in return get a much cheaper weekly gas bill.
That's an easy sell if you are trying to sell to someone that has lots of savings. But it's a very tough sell if you are trying to sell to someone just getting by. The former sees it as a great long-term savings. The latter cannot afford it, and so they will fall back to ICE simply because it has a much lower acquisition cost EVEN IF long-term it's more expensive.
This is the reason furniture rental exists at all. If a new couch costs $500, but renting a couch costs $50/month, there are those that will opt to rent a couch for 2 years even though they are overpaying for the couch. They have no choice.
Now, the good news is that financial products can fix this to some degree. A car maker could sell you a car and then lease you the battery. But there are some sticking points with that. There's a reason there aren't 10 or 15 year car leases today. Why would there be 10 or 15 year battery leases? Leasing businesses tend to gravitate towards 3, or maybe a 5 year lease.
Let's start by figuring out the cost per mile for gas and electric. This will be a first-order estimate, ignoring purchase price and maintenance.
Comparing ICE and Electric
Let's compare the new Tesla Model 3 with something similar in terms of size, weight & performance. Rather than going through an exhaustive sorting process, let's just pick a car like the Acura TLX. They compare favorably:
|Tesla Model 3 Std||Acura TLX V6 P-AWS|
|0 to 60 (sec)||5.6||~6|
|Curb Weight (pounds)||3549||3600|
|MSRP (no subsidy)||$35,000||$34,000|
|Front Legroom (inches)||42.7||42.6|
The TLX V6 FWD has a highway rating of 30 MPH, and a combined of 23 MPG.
Battery Cycle Life
The previous post discussed the importance of depth of discharge on cell longevity. If you discharge a cell completely each time you use it, you'll see 500-600 cycles. If you discharge it just 70-80%, you'll see over a thousand full-cycle equivalents (in terms of total Wh delivered)
Tesla offers an 8-year unlimited mileage warranty on their 85 kWh battery, and their 65 kWh pack is warranted for 125,000 miles. At 344 Wh/mile, this is 43M total Wh delivered over the 125,000 mile life of the pack. This is 661 full cycles.
Now, what is interesting is that Tesla didn't just scale the 65 kWh pack to 85 kWh when contemplating their warranty. If a 65 kWh pack gets a 125,000 mile warranty, why not give a 85 kWh pack a proportional 163,000 mile warranty? Perhaps the data is showing 65 kWh customers are doing a much deeper discharge than the 85 kWh customers? This does have implications for the smaller pack on the Model 3.
But the pack is capable of much more as we know. User-reported data on Model S is suggesting 150,000 miles to 90%. And since the usable life of the cells is to 80%, this suggests that 250,000 miles is readily achievable. In fact, Musk has claimed they have measurements in the lab that have achieved 500,000 miles with 80% remaining. But let's assume that 250,000 will be readily achieved by most users on the Model S.
Tesla assumes the following baseline figures for efficiency when supercharging:
|Model S||344 Wh/Mile|
|Model X||369 Wh/Mile|
|Model 3||237 Wh/Mile|
The above figures correspond closely to the EPA rated cycles. The Model 3, for example, claims 220 miles from the 50 kWh pack, which is 227 Wh/km. From the Model S data, this means that Tesla can likely achieve 250,000 / 344 = 726 full cycle equivalents on the Model S, which as you'd expect would be higher than the 661 derived from warranty estimates above. Your average lifetime must always be greater than your warranty lifetime, otherwise you are going to go broke.
With 726 cycles from the pack, this suggests the Model 3 lifetime would be 159,000 miles. In fact, it could be worse if Model 3 users are discharging the battery much more between charges than the Model S users. But for now, we'll go with that figure.
The last piece we need is pack cost. Assume in 2019 Tesla is at $150/KWH, and they are selling that the consumer for $250/kWh (40% gross margin, which includes warranty, R&D, SG&A, etc), then the user is getting 159,000 miles of driving for 250 * 50 = $12,500 which is 7.8 cents per mile. Adding in electricity cost at $0.12/kwh adds another 2.8 cents per mile, for a total of 10.6 cents per mile.
The Acura TLX, at $2.50 gallon and 24 MPG would yield $2.50/24 = 10.4 cents per mile. This nets out at:
|Tesla Model 3||Acura TLX|
|Cents per mile||10.6||10.4|
OK, so today, the costs are very close. Maintenance on the ICE would be higher, of course. But remember, this assumes the Model 3 owner squeezed all the life out of the pack by driving the pack until exhausted. For a typical car owner, this would be nearly 12 years. If you own the car for 6 years, and sell it for 40% of its purchase price, then the operating cost per mile of the gas car remains the same, but the cost of the electric battery depreciation moves from 7.8 cents per mile to 9.3 cents per mile.
If you are willing to buy an electric and drive it into the ground in 10 years, and much of your driving is city, then you will probably be able to beat gas on cost handily. But if not, then gas will still be more economical for you AND you don't have to pre-pay for a decade of gasoline the way you do with electric. But the trend is clear: Electric economics will continue to improve every year.
What is so potent about Tesla's Semi offering is that the battery is fully consumed in just 5 years. With Tesla's consumer vehicles, the fact that the battery lasts 13 to 18 years of normal driving, combined with the fact that you must pay for a long-life battery up front when you purchase the car makes the sell a bit tougher because you've shut out many potential buyers that are focused on monthly economics. Leasing a pack might be an option, but as the pack lifetime increases, it gets harder to lease because the first year costs must be increased to cover the likelihood that there won't be any takers to lease the aged pack down the road. It's the same with cars today: You must overpay to lease a car, and leases aren't usually considered for anything other than a new cars.
Battery technology that delivered 1/5th the number of cycles for 1/5th the cost would alleviate much of this. You'd just replace the pack every 3 years for a modest cost that was roughly equivalent to 3 years of gasoline spending.