Obama’s Goal: One Million Electric Vehicles By 2015—A Pipe Dream

President Obama speculates a lot about his vision of energy and its operation in our economy, but his vision often ignores economics.  His proposals would probably become much more practical if he studied the economics of  how markets function. While governments can subsidize high cost technologies, it doesn’t mean they are affordable to the American public, particularly in these gloomy times with official unemployment at 8.2 percent[i]. High-cost technologies are still affordable to a very small niche market with enormous government subsidies, but remain too expensive for average Americans. That explains why Obama’s goal of million electric car and plug-in hybrid vehicle goal by 2015 is lucky to be at 50,000 vehicles right now.[ii]

Edmunds, an industry research firm, expects electric cars and plug-in hybrids to make up only 1.5 percent of the U.S. market in 2017, compared with 0.1 percent last year.  Lux Research estimates that number will be fewer than 200,000. [iii]

The Electric Vehicle Market

Last year 17,300 plug-in hybrid and electric vehicles were sold in the United States out of 12.8 million new light-duty vehicles.[iv] And, electric car sales continue to be sluggish. 

• Nissan sold about 2,610 Leaf electric cars through the first five months of this year[v], but expects to sell 20,000 by year-end. After 2013, Nissan plans to sell up to 150,000 Leafs a year. The company borrowed $1.3 billion from the Department of Energy to build a battery plant and manufacturing line in Smyrna, Tennessee, which will be finished in September, and will be capable of making 200,000 battery packs a year.
• GM had expected to sell 45,000 Chevrolet Volts this year, but only sold about 7,380 Volts in the first five months. Last May, the Volt got bad press when one caught fire three weeks after a lab-supervised crash test. The fire was due to leaking coolant that came in contact with the battery, causing a short. The Chevy Volt’s range is 40 miles on a battery charge and 300 to 350 miles on a tank of gas. In mid-March, GM suspended its Volt production for five weeks and temporarily laid off 1,500 workers to let production levels equal demand, having lagged well below expectations. However, because of soaring gasoline prices, a record number of Volts sold in March—2,289 vehicles—prompting GM to resume production a week earlier than originally announced.
• Ford is introducing plug-in electric models this year that are versions of gasoline-engine models. It delivered the first Focus Electric vehicles to retail customers in May. The company is down-playing sales expectations given the current market sales statistics.
• Toyota is expected to release three plug-in vehicles in the United States, but only expects to sell about 15,000 a year. It sold 1,700 plug-in vehicles in April.

According to American Enterprise Institute scholar Kenneth Green, electric vehicles have been the next great technology promise for more than a century. In fact, Henry Ford bought his wife, Clara, at least two electric cars in the early 1900s with 50 miles driving range and speed of about 35 miles per hour.[vi]

According to Green, subsidies come to about a quarter of the Volt’s $41,000 sticker price, starting with the $7,500 tax credit and adding in federal, state and local government support for charging stations, HOV lanes and research grants for new battery technologies.“They’re not saying, ‘Take away our subsidy,’” Green said of the automakers. “When they say that, I’ll be convinced the cost curves are declining.”

According to the Lundberg Survey, based on the cost of gasoline versus electricity, fuel efficiency and depreciation, gasoline prices would have to rise to $8.53 a gallon to make the Leaf competitive and $12.50 for a Volt to be competitive. Obama’s dream includes a car battery that costs half the price of today’s batteries and can reach 300 miles on a single charge, which the industry is far from achieving.[vii]

The Electric Battery Market

In anticipation of electric vehicle sales, the Department of Energy has awarded more than $1 billion to companies to make advanced batteries since 2009. The money, which funded nine battery plants scattered across the United States from Michigan to Pennsylvania and Florida, are operating well below capacity. The mismatch between electric car sales and battery production has caused problems for the battery suppliers.

• A123 Systems Inc.’s matching grant of $249 million required it to build facilities that could make at least 500 megawatt-hours of lithium-ion battery capacity a year by this November. That amount of capacity would supply the equivalent of 21,000 Nissan Leaf electric-cars, but only about 12,000 Leafs have sold in the United States since the end of 2010. The company’s grant from the Department of Energy set out a specific sequence for the hiring of engineers and ordering of equipment. The company is now trying to raise new money to stabilize its finances.
• Johnson Controls Inc. built a battery plant in Holland, Michigan, using Government grants, but the facility is nearly idled now due to the bankruptcy of its primary customer.
• Korea’s LG Chem built a plant in Michigan to supply General Motors, but that plant has not yet started production.
• Ener1 Inc., a battery maker that built a plant in Indianapolis using $54.9 million of a $118 million government grant, filed for bankruptcy earlier this year. Its plant is operating with 250 workers, short of the 1,700 originally envisioned in 2009.

Because of low electric vehicle sales, battery makers are having a difficult time despite the $1.26 billion they received in matching grants from the federal government. It was expected that more than 6,400 jobs would be created, but to date, about two-thirds of the total funds have been spent and only about 2,000 workers have been hired. Here are some of the explanations from analysts following the electric vehicle market:

“The goals that were tied to the grants said you have to ramp up this quickly, and those goals were overly optimistic,” said John Gartner, an analyst who follows the electric-vehicle market for Boulder, Colo.-based Pike Research. “The market was never going to develop it as quickly as the DOE expected. It’s kind of out of alignment with reality. The whole goal of 1 million electric vehicles [by 2015], there is just no way that is going to happen.”

Carter Driscoll, an analyst who specializes in researching alternative energy companies for CapStone Investments, blames the administration’s insistence on quickly setting up and staffing these operations for the current troubles. “It was about making jobs in certain areas. It wasn’t market driven. There is going to be a [jobs] fallback,” said Mr. Driscoll.[viii]

Battery manufacturing is substantionally overbuilt because there is little demand for electric vehicles. The automobile battery industry is finding that out right now.  The government, which has a poor track record of chosing winners and losers, is trying to get even more involved by dictating exactly how expansion should occur. They should learn from Solydra and the experience of other countries that subsidies come at a high cost.

China’s Experience

Besides manufacturing gasoline-fueled vehicles, BYD is China’s electric car manufacturer. Because of government policies, the company is losing sales to its rivals that have better quality and more expensive cars. Last year, Beijing issued two-thirds fewer license plates and used a lottery to distribute them resulting in fewer car buyers. And, in December 2010, the Chinese government ended two programs that had stimulated car sales in 2009 and 2010: one where the sales tax on cars with small engines was reduced and another that subsidized vehicle purchases by residents of rural areas. With fewer buyers, expensive foreign-brand cars sold more than BYD’s economy cars that are targeted to the rural population.[ix]

But BYD now sees the future of the auto industry to lie in hybrid gasoline-electric vehicles and not in all-electric cars, which face issues of battery range and recharging time. BYD’s battery technology came into question recently when a sports car slammed into the back of one of BYD’s electric taxis in southern China, setting the vehicle aflame. The taxi, an e6 battery-electric sedan, spun across three lanes of traffic, hitting a tree and killing all three occupants. Photos of the wreck were spread on China’s Internet.

BYD had plans to start exporting electric cars to the United States by 2010 but those plans stalled because of the global economic slowdown and because of BYD’s decision that gasoline-electric hybrids are more promising than electric vehicles in the market place.

Conclusion

When the government provides subsidies for industries, the subsidies come at a cost. It is no different whether the market is renewable energy, electric vehicles, or batteries. The government has never had a good track record of picking winners and losers. Why some think  that should now change is a mystery. The evidence is mounting that the government is a poor venture capitalist, and one only has to look at Solydra and other bankrupt firms that government  chose to support to see that it is not working.

The question for Americans in an extended economic downturn and a rapidly growing deficit must be, “can we afford these experiments and trust the government to choose the technologies we will use in the future?”  The record is not good.