Automotive analysts – including this one – have been predicting a comeback for diesel cars in the United States for several years.  Demand in the United States has indeed been steadily rising in recent years.  According to the HybridCars Dashboard, sales rose from just over 58,000 in 2009 to 125,522 in 2012, a compound annual growth rate of 29%. Despite these rising sales, though, diesel’s share of total passenger car sales has persistently remained well below 1%.  In 2010, diesels captured 0.7% of U.S. passenger car sales, while in 2012, diesels captured 0.87%.  So why the hype over clean diesels in the United States?

First, the reality is that all alternatives to conventional gasoline cars are but a tiny portion of the total U.S. car market.  Hybrids are selling around 3 times the number of diesel cars – which means that, more than 15 years after the Prius was introduced, hybrids still only capture 3% of the market.  Plug-in vehicles are receiving a huge amount of attention, as they represent the potential to be a disruptive technology.  However, while we’ve seen a significant uptick in sales in the United States, from roughly 18,000 in 2011 to 53,000 in 2012, PEVs are an even smaller percentage of the U.S. car market than diesels.

Annual Sales of Clean Diesel and Hybrid Passenger Cars, United States: 2009-2012

(Source: HybridCars Dashboard)

Second, as has been discussed in this blog, automakers must come up with an array of fuel-efficient options to meet the stringent federal Corporate Average Fuel Economy (CAFE) standards for 2017 and beyond.  While automakers will primarily focus on modifications to conventional gas cars, diesels may well appeal to a different demographic than small, fuel-efficient gas cars.  The diesel Chevrolet Cruze, to be introduced for model year 2014, offers an example.  The diesel Cruze gets 42 mpg on the highway.  While this is the same highway mpg as the gasoline-powered Chevrolet Cruze Eco, the Eco is equipped with a manual transmission, and U.S. drivers are not big fans of manual transmissions.

Volkswagen (VW) just released the results of a survey that found that the likely clean diesel customer is also different from the average hybrid customer.  VW’s survey indicated that, while both groups are concerned with fuel efficiency, diesel buyers tend to be more concerned about torque and acceleration, while the hybrid drivers are more motivated by the car’s eco-friendliness.  These results suggest that the soon-to-be-introduced hybrid Jetta will not compete with the diesel Jetta – the best-selling diesel in the United States – but will expand VW’s appeal to a different type of efficiency-conscious consumer.  This survey will be heartening to automakers as they marshal a combination of diesel, hybrid, start-stop, plug-in technology, and other options to meet the CAFE standards.

The U.S. Environmental Protection Agency (EPA) today announced a proposal to lower tailpipe emissions levels from passenger cars and trucks.  To be phased in from 2017 to 2025, the proposed rule also calls for average sulfur content in gasoline to drop to 10 parts per million by 2017.  Meanwhile, the Obama Administration appears to be giving up on a carbon tax and there are warning signs that the EPA will retreat on its power plant greenhouse regulations.  This new announcement thus seems like a return to the EPA’s comfort zone – regulating criteria pollutant emissions from passenger cars.  

However, the proposed regulation does in fact support the EPA’s efforts to limit carbon emissions.  The timing for these proposed standards is clearly aligned with Corporate Average Fuel Economy (CAFE) standards, which will begin to ramp up from 35.5 mpg in 2017 to 54.5 mpg by 2025.  The automotive original equipment manufacturers (OEMs) are going for an “all of the above” approach to complying with the 2025 regulations.  They know they cannot get there just with alternative fuels, so they need to squeeze everything they can out of conventional gas cars.  Low-sulfur fuel allows them to do that by using technologies like direct injection engines.

Indeed, it is clear from the auto industry’s response to today’s announcement just how on board they are with the proposed regulation.  The Association of Global Automakers and Alliance of Automobile Manufacturers both expressed support, citing the benefits of a single, national low-sulfur fuel standard.  Automakers will not only be able to improve fuel economy, they will also be able to sell the same cars in all 50 states – since the EPA rule harmonizes with California’s more stringent standards.

It’s good that the Administration has Big Auto in its camp, because Big Oil is not happy with this proposal.  In fact, the rule will force major investments in refinery upgrades in the United States.  Petroleum refineries are already engaged in a battle with the EPA over its cellulosic ethanol blending mandates, so this new ruling will add more fuel to their argument that the EPA is placing an undue burden on the oil industry.  

Another aspect of the proposed requirements that may cause controversy is that the EPA is in favor of changing the emissions “test fuel” from gasoline with no ethanol to an E15 blend.  While most gasoline in the United States is close to an E10 blend (i.e., with 10% ethanol), the new test fuel will actually leapfrog over this level to the more aspirational E15 target.  As such, this proposal could face blowback from both automakers and refiners.

If I had to make a prediction, the broad rule on emissions and fuel sulfur will stand, though some details such as the E15 test fuel may be tweaked, since automakers can more easily meet stricter CAFE standards with the new rule in place.  If the proposal does stand, the White House would gain an early environmental victory in its second term.  Such a victory would also buttress the ambitious fuel economy goals set in the Obama Administration’s first term by giving OEMs more options for compliance and thus holding off potential challenges to the regulation.

The ChargePoint/Ecotality joint venture, announced last week, underlined the fact that the EV charging sector is experiencing a bout of consolidation.  Earlier, Car Charging Group acquired New York-based Beam Charging, which will strengthen its presence in New York City.  This will be especially interesting if Mayor Bloomberg’s commitment to add 10,000 public parking spots by 2020 comes to fruition.  Better Place closed operations in North America and Australia.  In the United Kingdom, Chargemaster acquired Elektromotive last year.  These were two of the biggest charging equipment providers in the United Kingdom, so Chargemaster’s move positions the company well for the growing U.S. market.

This inevitable consolidation will continue, and it’s healthy for the industry.   There are too many companies chasing after too small a market right now.  This is not to say the EV charging market is small – please, no more stories on the “dying EV industry” – but Pike Research has found that there are well over 100 companies competing in the EV supply equipment (EVSE) sector globally.  These include not just companies that sell their own EVSE units but also “third party providers” that sell and service EV charging equipment made by others, like CarCharging Group.  Many of these companies are competing primarily for the commercial charging market – that is, units installed for use at offices, fleet depots, apartment buildings, parking garages, and a slew of public facilities like airports and retail outlets.

Globally the market for EVSE was around 180,000 units in 2012.  Half of those were residential units, so that means just 90,000 in commercial sales.  It doesn’t take complicated math to figure out that, if the market were evenly divided among the 100-plus companies offering EVSE, that would be a pretty small revenue base.

Catch-Up Time

Looking at the U.S. market alone, we estimate that sales of commercial EVSE were around 20,000 in 2012.  These units serve a total fleet of plug-in vehicles that reached around 71,000 at the end of 2012.  That is simply not enough demand to maximize utilization of these EV stations.  The PEV market is growing fast, so station utilization will rise and begin to match the expectations of the EVSE providers.  But for the near term, the EVSE market is out ahead of PEV sales, and the market will struggle to sustain the number of players wanting a piece of it.

So more consolidation is ahead, as companies look to secure a single geographic market or expand their portfolio of EVSE offerings by partnering with companies that have complementary technology.  For the moment, the industry would do well to focus its resources on the current EVSE equipment and networks in order to give PEV drivers the most seamless user experience possible.  This means keeping track of the basics, such as making sure equipment is working when drivers show up.  But it also means focusing on “interoperability:” making it easy for drivers to find and use all available EVSE units, something that the industry has been working on – by featuring stations from competing providers on a network app or enabling drivers to pay for charging without needing a network pass – but is still a long way from achieving.

Early 2013 has brought a slew of “reassessments” of battery vehicle prospects, as some industry commentators have decided that the nascent plug-in vehicle (PEV) market is already a failure.  Pike Research has already countered this doom-and-gloom, showing that the PEV market is poised for growth similar to that of the hybrid market. Undoubtedly PEV sales have been lower than some OEMs and their battery suppliers had projected, leading to overcapacity in the lithium ion battery sector.  Battery manufacturers are looking for solutions to this problem in the near-term as well as hedging their bets should PEV demand not rebound.  Can the electric bus sector help take up some of this overcapacity?

For the near-term, the answer is no.  As I discussed in my Electric Drive Buses report, the battery bus market is quite immature in most parts of the world, except China.  China has made battery bus development and deployment a key element of its industrial policy, in order to exploit the country’s vast lithium resources.  Nearly all major bus producers in China have battery bus products, and hundreds of e-buses have been deployed.  Unfortunately this near-term promise is limited to China, since transit bus specifications in North America and Europe are quite different than for China’s buses. Chinese battery and vehicle manufacturer BYD has been most aggressive in pursuing developed-country markets, with deals in Windsor, Ontario and the Netherlands, among others.  However, taking a serious share of these markets remains far off.  As a start, BYD is building a manufacturing facility in California to comply with U.S. Buy America laws for selling buses to U.S. transit agencies. In January, BYD received approval to sell its electric buses in the European Union; the company established manufacturing in Bulgaria to serve this market.

Under 1,000

A handful of small companies offer electric buses in North America, but of the mainstream bus manufacturers, New Flyer and Nova Bus have each unveiled prototype electric buses, but these are  still early in the testing and demonstration phase.  Europe also has a few OEMs, including Optare and PVI, offering small electric buses, but again total numbers are low (dozens, not hundreds).  Overall, electric buses will be a niche application for the next several years, due to issues of range, recharging time, and price.  Worldwide battery bus sales in 2013 are anticipated to be under 1,000, which will generate around 133,000 kWh of lithium ion battery demand.

 Annual Electric Drive Bus Lithium Ion Transportation Battery Capacity by Region, World Markets: 2012-2018

(Source: Pike Research)

Longer term, demand for lithium batteries will grow substantially, hitting 1 million kWh in 2018.  Add to this the demand from hybrid and fuel cell buses, and battery buses become an attractive long-term market for battery companies.  But it’s not a near-term solution.