Automakers & PHEVs: Between "Barack" and a Hard Place

David Fessler
by David Fessler, Energy & Infrastructure Strategist, The Oxford Club

Automakers & PHEVs: Between "Barack" and a Hard Place

by David Fessler, Advisory Panelist

Friday, March 20, 2009: Issue #960

During the last few years of the Bush administration, the EPA was directed to ignore California's pleas to grant it a waiver of the Clean Air Act.

Why? The grant would effectively have permitted California to enforce stricter emission rules its legislature had enacted a number of years before.

The EPA dragged its feet because as many as 16 other states were considering legislation modeled after California's - with one notable difference: emission rules even more stringent than California's.

The automakers lobbied Bush administration officials to oppose California's request. And it's not hard to understand why: They're struggling just to stay in business.

But now, automakers are between Barack and a hard place, as the President told the EPA to "reconsider" its Bush-era denial. If it does, car manufacturers could find themselves having to make cars that get 43 mpg by 2016. It's why PHEVs have generated so much interest lately.

Not that that's a bad thing - but it's far more aggressive than the current goal of 35 mpg by 2020. The problem is that the new requirement would nearly double today's fleet-wide average of 25 mpg.

Automakers Scramble To Get Into Plug-In Electric Vehicles

All this has had the automaker's scrambling to get into the Plug-In Electric Vehicle (PHEV) business. Most already have an active PHEV development program underway, with GM being the closest to production with its Chevy Volt.

Unfortunately, GM is also teetering on the edge of bankruptcy.

Necessity is the mother of invention, and we're seeing that in spades with PHEV development. One of the more intriguing schemes is the "Vehicle-to-Grid" (V2G) concept, and it's been strongly endorsed by the head of the Federal Energy Regulatory Commission (FERC).

It works like this:

  • When your V2G car is plugged in to recharge its batteries, the utility regulates the rate at which it is charged.
  • More importantly, it can reverse the flow and use the V2G's battery pack as a power source during peak use periods on the grid.
  • Similar to the way cloud computing works - where many PCs are combined to create a huge supercomputer - all the V2G vehicles taken as a whole would equate to a giant, nationwide power storage battery.

In return, the vehicle's owner would receive a credit towards his or her electric bill. It's been estimated that - utilizing this concept - the entire premium cost for owning a V2G vehicle could be recouped in as little as three years.

The benefits go way beyond recouping the added expense of owning an electric car, however.

  • By reducing our demand for oil and gas, it would make the process of weaning ourselves off of fossil fuels much less painful.
  • Greenhouse gases would significantly decrease, an impact that would be most notable in densely populated urban areas.
  • The additional revenue that the power companies would reap from PHEV charging could finance the additional solar, geothermal or wind power installations necessary to provide the additional charging power.
  • It also solves one of the biggest problems with solar and wind power: That they can't be used as baseload supplies.
  • This giant nationwide, distributed storage system would allow utilities everywhere to store power from solar and wind sources and redistribute it whenever it's needed.

For the moment, neither GM nor Toyota - the two leading PHEV contenders - have announced any plans to produce this type of vehicle.

Clearly what's needed is legislative regulation or an incentive (or both) from the FERC that will coax the utility companies into embracing the V2G concept. This will create the need for the vehicles, and the incentive for car companies to build them.

The Fly In the Ointment - Improving Battery Technology

The only fly in the ointment - and regular readers have heard me say this before - is an improvement in battery technology.

Right now, the most promising technology that seems like it can provide the power densities required for the 100 to 200 mile target commuting range is Lithium-Ion.

And those few companies in the lithium battery business are destined to be the big winners, as the technological challenges are met. So who's in the battery business?

EnerSys (Nasdaq: ENS) is one of the largest manufacturers, marketers and distributors of industrial batteries. From submarines to spaceships - and everything in between - EnerSys has a battery technology to fit the application. It also makes the charging and power equipment as well.

Last fall, the company launched its EcoSafe line of batteries designed for renewable energy storage applications. Targeted towards the wind and solar energy generation markets, this product line should see significant growth under President Obama's EPA initiatives.

Of more interest to us, EnerSys is working with a number of niche players to develop a lithium-ion line of batteries specifically targeted to the PHEV transportation market.

Where Will All the Lithium Come From?

The short answer is Bolivia and Chile, and Sociedad de Chile (NYSE: SQM) - based in Santiago, Chile - is a world leader in the production of lithium carbonate and a number of other specialty chemicals.

Right now, the world's demand for lithium is growing at roughly 7% annually. SQM leads the world in lithium production, too, with over 30% market share.

Lithium is used in greases, glass and portable power tool batteries, but its biggest future growth prospects are large, lithium-ion batteries for hybrid electric vehicles. New HEV battery demand is expected to ramp up sharply in the latter half of 2009, and even more in 2010.

And SQM is getting ready to meet this increasing demand: Its three-year capital expenditures of $1 billion means an across-the-board capacity increase of 25% to 30% for all of its products by the end of 2010.

Changing 100 Year-Old Perceptions

There's an old rub that goes something like this: "Science only progresses with the death of each scientist." The idea is that sometimes it takes the passing of a generation in order for fresh ideas and discoveries to rise to the top of the heap.

Let's hope - at least in this case - it doesn't take that long for PHEVs. We don't have that much time to waste.

Next week, I'll be speaking at the 2009 Investment U Conference at the beautiful Vinoy Resort in St. Petersburg, Florida. Our regular format will take a week off and instead you'll be getting daily reports from Scott Brown. I look forward to seeing many of you there.

Good investing,

David Fessler

Today's Investment U Crib Sheet

Recently we've been looking at a number of options and alternatives in the "green" energy sector. And new auto technologies are on the forefront of "hot topics" in this field. The debate over cost effectiveness and environmental impact has been clashing with the scientific hurdles and limits of our current technologies.

In fact, our discussion boards over Plug-in Hybrid Electric Vehicles: The Only Roadblock to PHEVs and the follow up article Is General Motors the Buy of the Decade? PHEVs Part Two ranged from supporting, to disgust over a number of the current options and their potential.

It's a decision that you'll have to make for yourself. But regardless of which side you fall on, we all can agree that it's an area we need to keep an eye on. Whatever technology and solution that emerges will have the potential to change the way we live around the world.

With new solutions and technologies, many of the initial investors are rewarded handsomely - Think Microsoft, Google and Wal-Mart. Ultimately, we don't have a crystal ball to know exactly what will happen, and that's why we pay attention to all of the alternatives.

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