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There is a lot of talk about Robo-taxis with the emergence of autonomous taxis and good milestones met by Waymo, Tesla, GM and others. This is certainly an interesting trend to watch. However, there is a here-and-now trend for 2019: electric taxi fleets and EV Ride Sharing. The economics seem compelling just from the perspective of fuel savings.
As Brent oil prices stay around $70-80/barrel or go higher, the economics will get even better. As battery costs drop by 18% for every doubling of production (aka learning curve) reducing the capex of EVs, the economics get even better. No wonder GM is expanding its Maven service across cities in the USA, and Tesla has announced its intention to enter the market soon.
So lets explore the simple math, just focusing on fuel savings and its power to contribute towards (an ever declining fixed cost of the EV). In business, the revenue minus variable costs is the contribution margin (or gross margin) that pays for fixed costs.
First, some context. The electric vehicle market is growing rapidly from a small base driven by a combination of rapid technology advances (battery cost declines, power electronics integration, and new vehicle platform emergence), relentless well capitalized new entrants (eg: Tesla, BYD etc), and a combination of government policies (mandates, subsidies). 783 000 units were delivered during H1 2018, a gain of 66 % over the same period last year. The EV sales momentum is expected to accelerate over the next few years. BNEF observed that WW EV sales (inclusive of PHEVs) hit 4 million, and a million EVs are being sold in less than 6 months worldwide for the second consecutive time. Tesla Model 3 was the largest selling car in the US by revenue beating Toyota Camry in Q3, propelling the company to a profit and positive free cash flow.
Energy Efficiency and Energy Cost Differentials
The two key driving factors are Energy Efficiency (Fuel vs Electricity) and Energy Cost (fuel vs electricity). If both these factors are favorable, the EV transition will have greater tailwinds economically.
EVs are energy efficient (85-90% conversion of electrical energy to traction vs 20-25% for ICEs). The cost of petrol / diesel / gas is a function of world oil markets, but at levels of $70- 80/barrel of oil, the average retail price is about $3/gallon for gas ($3.25/gal for diesel) in USA and around $5.65/gallon (or 1.3 euro/litre) in Europe. Electricity prices in USA are lower than Europe (13 cents/kWh vs 17 cents/kWh), though there is a wide variance. There are some other components of opex (eg: lower maintenance of EVs vs diesel) and common variable costs which further strengthen the case for EVs.
The pictures below show the gas and electricity prices by state / country in USA and Europe / respectively.
Lets consider gas prices. First note: 1 gallon = 3.785 litres. 1 Euro = 1.15 USD. A mean value of 1.3 euro/litre (see trend graph below) = 1.3 x 1.15 x 3.785 = $5.66/gallon for comparison. Consider Norway which has a 2.02 euro/litre = $8.79/gallon price. In contrast Russia at 0.73 euro/litre is $3.18/gallon. Hawaii and the western states in the US have highest gas prices > $3/gallon. Obviously these numbers fluctuate, but can be considered representative for Brent oil prices of $70-80/barrel (see graphic below).
Lets contrast this with (commercial) electricity prices in these regions. Note residential electricity rates are significantly higher in Europe vs USA due to support of renewables.
US tends to have slightly lower commercial electricity prices ($0.13 average) than Europe in general ($0.14 average), not including any demand charges. The midwest regions of USA have significantly lower prices (8 cents/kWh) than the coastal regions (esp California 15-16 cents/kWh). However note that the Scandinavian countries, Netherlands etc have low commercial electricity rates as well (6-8 euro cents/kWh or 7-9 US cents/kWh) for comparison. Even Germany where the rates are 15 euro cents/kWh (or 17.25 US c/kWh) is comparable to California.
One interesting metric would be the ratio of gas (or diesel) prices to electricity prices. Norway with a relatively high gas price ($8.79/gallon) and relatively low electricity price (7 cents/kWh) would be more attractive for EVs vs Germany with a gas price of $7.31/gallon and electricity price of 17.25 cents/kWh. Even so, as we shall see below, the cost per mile economics is starting to be compelling.
The energy efficiency of EV cars is between 3-4 miles / kWh (eg: Tesla model 3 is above 4 miles/kWh, and Tesla Model S is around 3 miles / kWh). Tesla claims an efficiency of 4.1 miles / kWh for Tesla Model 3 and 3.1 miles/kWh for Model X in its recent quarterly update to investors, and points to lower numbers for its competitors. In other words, for an average EV car, the efficiency is 3 miles/kWh or 0.33 kWh/mile (or 33 kWh per 100 miles); and for a highly efficient EV (eg: Tesla Model 3), it is 4 miles/kWh or 0.25 kWh/mile (or 25 kWh per 100 miles). For reference, the US EPA has rated model 3 at 126 MPGe or 27 kWh per 100 miles. The Fully Charged show reports in its youtube video that the Hyundai Kona is even better at 5.1 miles / kWh – with a 64 kWh battery pack, and an affordable price point, fast peak charging it would also be a great car for a ride sharing / taxi vehicle.
Lets put this together into a fuel savings on a per mile basis for a taxi or a ride share vehicle. A heavily used vehicle does 300 miles a day for 350 days or 100K+ miles/year. A lightly used LCV does 100 miles a day for 300-350 days or 30-35K/year.
On a levelized basis, an average gasoline car (or light commercial vehicle, LCV) in USA would cost 12-15 cents / mile vs electric vehicle (EV) of 4.3-5.2 cents/mile in USA. This implies a cost per mile savings of 7-10 cents/mile or 58-66% in relative terms. Over 100K miles the fuel savings alone is $7K-$10K (which could be realized in one year for a heavily used vehicle).
In Europe, an average gasoline car (or light commercial vehicle, LCV) in USA would cost 23-28 cents / mile vs electric vehicle (EV) of 5.8-6.9 cents/mile in Europe. This implies a cost per mile savings of 17-21 cents/mile or 75% in relative terms. Over 100K miles the fuel savings alone is $17K-$21K (which could be realized in one year for a heavily used vehicle).
Note: At a cost of $0.13 / kWh or $130 / MWh (average commercial electricity tariffs in USA), it implies a cost-per-mile of $0.043 – 0.052 / mile for an e-LCV or EV car. Annual charging energy demand for 100K miles/year is 25-40 MWh/year/vehicle. Annual charging cost is $3250 – 5200 / year/vehicle vs annual fuel cost is $12,000 – 15000.
Annual charging cost is at €150/MWh (or 15 €-cents/kWh, based upon German rates, see earlier graphic) represents a charging cost of €3750 – 6000/year/vehicle. Compare this to annual fuel cost in Europe of €19.5K – 24.5K!
The economics becomes even better for a more efficient EV like the Tesla Model 3 which will deliver saving of 11-12 cents/mile or 73-80% over an ICE car in the USA. In Europe, 18.7-23.7 US cents/mile (vs a baseline of 23-28 cents/mile for ICE) or 85% in percentage terms.
The savings for 100K miles would be $19-24K, and five year savings of $95K-120K (in an environment of low interest rates, or time-value-of-money in Europe) and well above the full capital cost of a Tesla Model 3 (around $50-60K today in USA). Note that what matters is not the full capital cost, but the relative capital cost vs an ICE car, and net of resale value (i.e. impacted by depreciation). EVs with better economics, lower maintenance and long battery lives are expected to have lower depreciation as well.
Some of the cost-per-mile dynamics and sensitivities are captured in the graphic below. Note that the European gas prices are way above the scale (average of $5.65 / gallon, and Norway at $8.79/gallon). The blue solid line (4 mi/kWh) on the left is indicative of Tesla Model 3 economics.
Given that EV prices are dropping fast, have larger battery packs, commercial end-point charging overnight is cheap, fast / ultra fast charging station networks will only grow, just the fuel saving economics for heavily used EVs will pay off the capex differential vs ICE in 1-2 years and the full EV capex cost in ~3+ years.
Consider this: A Tesla Model 3 does 4+ miles/kWh, saving 75% (US, 11c/mi saved) -85% (Europe, 18+c/mi saved) on a cost-per-mile vs an ICE car. At a $1/mile rate, and 25% paid to Uber or Lyft or Grab or Tesla Network, the owner/driver gets 60c/mile. Even at this rate, a new Tesla Model 3 capex can be fully paid off in 100K miles driven (not just the differential vs a similar sized ICE car).
Expect to see large-scale shifts towards EV fleets of taxis, ride share and light commercial vehicles (LCVs). This is already reflected in EV adoption in markets like Norway, Netherlands etc. To understand the impact, imagine what Amazon can do to the 3PL logistics market (similar to what they did via AWS to the computing market) as they shift from an ICE to EV fleet base for their logistics.
Oh, and governments are tightening emission rules in Europe post the diesel-gate issues of 2015 (see graphic below).
City councils are creating low emissions zones (LEZ) and announced long term ban of ICE (> 2030 etc). This has prompted companies like Uber to accelerate its EV push for its partners in London.
Taxis, ride share and fleet vehicles will rapidly transition to electric over the next 2-3 years. The transition will be faster than you think since the competitive pressure of not making the switch will be a huge drag on the slow movers.
Note that all the changes that I have talked about is BEFORE the potential productivity gains from Autonomous or Robo-taxi technologies. Just the electrification of transportation is the first here-and-now game-changer, especially in major developed markets around the world.
Author: Shivkumar Kalyanaraman, Executive Leader, Growth Offerings & Initiatives at GE Power Conversion