Electric vehicles - Fast and furious…and green

November 30, 2020

November 2020

Are we there yet? The truthful answer is “no”, we are stuck in traffic surrounded by an additional 91million new vehicles sold just in 20191, of which about 2.3mn of EVs. Conservative estimates plan that in 2030, 1.4 bn passenger vehicles will be on the road of which, only 8% will be EVs.
EV sales have grown from 0.6% of global light vehicle sales in 2015 to 2.5% of sales in 20192 However, the rapid changing market structure and environmental pressure could bring that number to over 32% of new car sales in 20303.
The rise of electric vehicles has been fast and furious, most importantly green, and is expected to continue in the coming years, despite the COVID slowdown. In Norway, for example, 48% of new cars sold in 2018 were electric.
Several political objectives have given EV a solid support to develop and increase market shares:
• Regulatory push to deliver on the Paris Agreement through phasing out of combustion engine transportation by 2050.
• Raising traffic volumes means increasing air pollution and CO2 emission. De-congesting cities will see granted access policies to low-emission vehicles.

EV are part of the equation

The carbon variable
According to a European Parliament report, the transportation sector accounts for 30% of C02 emissions, of which 72% is generated from road transport4. Under the EU taxonomy, passenger cars and commercial vehicles are considered to potentially perform in a way that substantially undermines climate change mitigation objectives.
The decarbonisation of the transport sector needs to start. Electric Vehicles are critical to transition to a lower carbon economy, as not only direct emissions are zero, but the automotive value chain can transition to become carbon neutral. In fact, estimates that indirect emissions, such as those attributable to manufacturing of vehicles and production of fuels can nearly double the total emissions of car lifetime’s use.

The pollution variable

Cars release approximately 333 million tons of carbon monoxide into the atmosphere annually, which is 20 percent of the world's total. It is a poisonous gas that can lead to health problems, because it prevents blood from carrying oxygen to vital organs of the body.
Several policies are taking place globally, most noticeably, the outright ban of new registration vehicles of diesel/fuel cars. The UK is the latest country that has announced the ban from 2030. As a result, manufacturers adapt their strategy. A small revolution has happened at Bentley that adopted the Beyond100 program foreseeing the abandonment of thermal engines already in 2030.

The cost & environmental footprint of manufacturing a car

Currently, battery-powered vehicles are more expensive. However, by 2025, EVs within certain region will reach price-parity with internal combustion vehicles. Lithium-ion battery pack prices have dropped more than 85% from 2010 to 2019. Moreover, this does not consider the cheaper refueling charges and relatively low maintenance costs of an electric car.

Battery lifespan and recyclability

EV battery is like that of a smartphone, however, larger in size and assembled to create a “battery pack”. The lifespan of EV batteries is no longer a significant concern, as manufacturers limit the amount that can be fully charged, reducing the amount of charging cycles and secondly, technological and engineering improvements. This means that certain auto manufacturers can offer guarantees to replace the batteries for free, if for example, the battery capacity falls below a certain level before 100,000 miles.

While battery lifespan has improved, recyclability remains a key environmental issue. With the expected growth of EVs in the coming years it is critical to find a solution to reduce the environmental spill-over from batteries that have reached their useful life. It is estimated that by 2030, retired batteries will amount to current annual production5. The environmental impact is due to the harmful waste from the battery, the need to mine for raw materials, such as cobalt, and the energy intensive process for recovering components and the cost to do so.

This is a complex and challenging hurdle to overcome, but feasible in the coming years, thanks to several factors. The first is purely technical, EV battery packs are larger than the smart phones’ thus more scalable and have larger power capacity. This means that batteries can be re-used, for example, to store renewable energy from households.

Policymaking is already taking steps to address the recyclability issue. The European Union has set-up the European Battery Alliance (EBA) in order to address the urgency to establish a sustainable battery industry, which in combination to the Geen Deal, should accelerate the development of this nascent industry. In addition, China has implemented for now a tracking system to account for the life cycle of batteries and requires manufacturers to establish centers to evaluate the conditions for further repurpose. Likewise, the states of California, New York and Minnesota have banned to landfill lithium-ion batteries. Institutions are pushing for a sustainable
transition and addressing the life cycle of batteries is critical for successful policy making.

In addition, batteries require raw materials which are concentrated in certain countries, such as cobalt in the Democratic Republic of Congo. Human rights violations and environmental standards are a key risk, as well as, the expected growth in raw material prices due to increased battery production. There is a clear political and economic incentive to minimize the need to access these scarce raw materials.

Finally, the battery market is expected to generate significant economic benefit and generate new opportunities. The EBA has set the battery market opportunity at EUR250bn annually from 20256. A study from Boston Consulting Group sees the just the circular-economy of EV batteries at USD10bn in 20307 and BNEF estimates that by 2050 investment in battery storage will amount to USD550bn8.

Clean vehicle needs clean power. By 2040, EVs will account for 9% of the world’s total electricity demand. The CO2 footprint of an EV depends on the energy used to produce the electricity.

The climate footprint of EVs depends on the electricity used to charge the battery. In regions with the “cleanest” electricity grids, EVs produce lower green-house gas emissions. The graph below illustrates the lower emission footprint of EV vehicles, including the battery production process. Most noticeably, if renewable energy is used the emission footprint is multiple times lower than petrol or diesel cars, and assuming an average EU electricity mix, emissions are still lower given no C02 exhaust emissions.

Investment opportunities

Investors can capture the significant growth trend of electric vehicles through different sectors, from pure play electric vehicle OEM, battery cell manufactures to semi-conductor or distributed energy, industrial digitalization, intelligent mobility, metals, satellites, and energy storage.
Fixed income investors have seen several auto-sector issuers come to market by raising green bonds. Last September, German carmakers have issued sizeable green bonds, respectively €2 billion for Volkswagen and €1 billion Mercedes-Benz-owner Daimler. Most of the use of proceeds will be directed to the funding needed for the design, development and manufacture of EVs as well as charging infrastructure.

Conclusion

Electric vehicles have the green light to drive towards a sustainable future. The environmental benefit is significant, even considering the near-term challenges of a nascent value-chain, to contribute to a low-carbon future. Thanks to technological innovation that will drive more efficient and scalable solutions, supportive policymaking and the significant economic growth from electrification of transport, provides investors with the opportunity to generate positive impact and participate in the significant growth of electric vehicles.

Policy is the biggest driving force to transition, in the coming years, to a more sustainable transport sector.

There is a clear environmental benefit to roll electric vehicles on the roads, despite the near-term challenge of recycling batteries. In addition, technological innovation and establishing the value chain for electric vehicles will provide opportunity for investors. Fixed income investors can start to look at green bonds and equity investors to seek growth across a new value chain in the automotive industry.

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1 http://www.oica.net/category/production-statistics/2019-statistics/
2 https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/mckinsey-electric-vehicle-index-europe-cushions-a-global-plunge-in-ev-sales#
3 https://www2.deloitte.com/uk/en/insights/focus/future-of-mobility/electric-vehicle-trends-2030.html
4 https://www.europarl.europa.eu/news/en/headlines/society/20190313STO31218/co2-emissions-from-cars-facts-and-figures-infographics
5 https://www.iea.org/reports/global-ev-outlook-2020
6 Building a European battery industry - European Battery Alliance (eba250.com)
7 The Case for a Circular Economy in Electric Vehicle Batteries | BCG
8 Where 3 Million Electric Vehicle Batteries Will Go When They Retire - Bloomberg

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