Navigant Research Blog

Detroit Versus Silicon Valley

— November 24, 2015

October 29, Keith Naughton of Bloomberg Businessweek described how the established auto industry of Detroit is competing against the fast emerging auto industry of Silicon Valley (SV). Naughton’s article focuses on autonomous vehicle (AV) systems and examines the different R&D strategies of General Motors and Google, which essentially amounts to a comparison between gradual adoption and rapid innovation strategies to automotive technology. Naughton’s AV focus provides interesting insights, but it’s impossible to ignore the relevance of his comparisons beyond just AVs. For instance, Detroit and SV (the latter including Tesla and perhaps Apple) are each pursuing a different approach to that other disruptive force in the auto industry: electricity.

Detroit’s philosophy regarding electricity is similar to its approach to AV systems. The city has been gradually electrifying existing vehicle platforms, and this is evidenced by the fact that most of the plug-in vehicles Detroit has put on the market have been plug-in hybrids, and the fully electrified vehicles are mostly limited to markets where states have zero emissions vehicle mandates. Alternatively, the SV mantra has been the aggressive pursuit of a fully electrified alternative requiring no customer sacrifices in terms of range or convenience.

Regional Rivalry

The differing approaches have bred a regional rivalry that is demonstrated by occasional quips from industry leaders. Elon Musk often makes headlines with statements that imply Tesla may one day be bigger than GM and that Detroit needs to have a more aggressive electrification strategy. In response, Detroit calls out SV for naivete—when rumors first started to leak that Apple may be developing an electric vehicle, former GM executives Bob Lutz and Dan Akerson both publicly cautioned Apple on the struggles of entering the car business. Additionally, Lutz has continually critiqued Tesla’s business and sales model, assessing a high probability of Tesla’s ultimate downfall despite high praise of the product.

To be fair, these critiques have a strong foundation in reality. Detroit has been historically slow to adopt and produce fuel efficient or alternative fuel vehicles, creating opportunities for other global players like Toyota and Honda to grab significant chunks of the market through hybrids. Arguably, Detroit is likely to lose market share on fully electrified vehicles to other more aggressive global automakers (Nissan, BMW, BYD, and now Tesla).

Meanwhile, SV’s aggressive approach has led to challenges regarding market regulations. Tesla’s struggles with state dealership laws are well known, but Tesla has also run into trouble on software upgrades and referral programs. Additionally, though Tesla’s stock quote is impressive, its record with profits and deadlines is not. The end Lutz has assessed for Tesla has also been well played out by other California automaker startups.

Regardless of the different approaches these two regions characterize, the future U.S. auto industry is not going to exist without Detroit or SV. Detroit needs SV’s tech innovations and probably a little more SV chutzpah when it comes to investing in a new vehicle technology, and SV needs Detroit’s extensive supply chain, manufacturing expertise, and 100 plus years of market knowledge. Notably, however, SV does not need Detroit’s internal combustion engine.


Electric Vehicles and the Clean Power Plan

— August 24, 2015

Power_Paddle_webPlug-in electric vehicles (PEVs) bridge the gap between transportation and electric power—two sectors that until 5 years ago were effectively disparate. Overall, the potential future synergies between the two sectors seem promising. However, because these sectors are somewhat foreign to each other, some uncertainties are likely early on. One area of uncertainty is with regard to the U.S. Environmental Protection Agency’s (EPA’s) Clean Power Plan (CPP), released August 3, 2015.

The CPP is not designed to explicitly affect PEVs; rather, it is designed to decrease electric power sector CO2 emissions from existing fossil-fuel power plants. However, depending on the method by which each state implements the policy, PEVs may present a detrimental or beneficial component to state compliance strategies.

Because each state has a different electric power generation mix, each state will have individual goals and pursue varying strategies in order to comply with the CPP. The CPP CO2 reduction goals have been developed by the EPA using a rate-based approach, which places CO2 per megawatt-hour limits on power plants, but states may also use a mass-based approach (i.e., total metric tons of CO2 from the electric power sector).

PEVs Increase Demand

The mass-based approach will likely create complications for states with fast growing PEV markets. The complication arises on behalf of the fact that PEVs increase electricity demand, which increases the total emissions from power plants, while the overall CO2 reductions achieved on behalf of the PEV are not integrated in CPP calculations. This means that while a PEV would likely reduce net CO2 emissions, PEVs could make state compliance efforts for the CPP more difficult.

The rate-based approach may produce similar complications; however, this is entirely dependent on what grid resources are used to fuel PEVs. For instance, utilities may design incentives to coordinate PEV charging with peak solar or wind generation times, which would in effect increase utilization of renewable generation assets, decreasing the average rate of CO2 emitted per megawatt-hour produced in a state.

Vehicle Grid Integration

Programs and technologies to shift PEV charging to off-peak hours and integrate PEV charging into advanced grid services are being developed in large PEV markets. BMW’s iChargeForward program, which aggregates 100 BMW i3s in the San Francisco Bay Area for grid services, launched in July. Recently, charging station manufacturer eMotorWerks and non-profit software developer WattTime debuted a charging station that can automatically schedule PEV charging when the carbon emissions from the grid are lowest.

While the load represented by PEVs is still marginal compared to overall electric power sector demand, PEVs will become an ever increasing concern. Navigant Research estimates that the average PEV can increase the average U.S. household annual energy consumption by around a third and estimates that the median state PEV market share of 0.5% in 2014 will grow to over 2.5% by 2024. By the time the CPP takes effect in 2022, this equates to 4.4 million light duty PEVs in use, each consuming around 3,000–4,000 kWh annually.

PEV Market Share (% of New vehicle sales) by State, United States: 2014, 2024


(Source: Navigant Research)

As PEV adoption reduces overall emissions in most states and cases, state PEV adoption incentives should not run contrary to state CPP compliance efforts. Rather, states should encourage efforts to utilize PEVs as potential distributed generation/energy storage resources useful for CPP compliance.


PEV Sales Grow Everywhere … Except Where They Started

— August 20, 2015

When the Nissan LEAF and the Chevrolet Volt were introduced in late 2010, plug-in electric vehicle (PEV) sales were concentrated on the respective automakers’ domestic markets, Japan and the United States. Japan was the largest PEV market in 2010, was quickly overtaken by the United States in 2011, fell behind Western Europe in 2012, and then behind China in 2014. Meanwhile, the United States has maintained a lead on China and Western Europe, but it’s possible that like Japan, it too will fall behind China and Western Europe this year.

In the first 7 months of 2015, PEV sales in the United States are down 6.3%. Many of the compliance PEVs made by Toyota and Honda have been phased out, while production of higher-volume PEVs has slowed before the introductions of the next-generation updates scheduled to be released before the end of the year. Similarly, only one new PEV has been introduced this year, the Mercedes S550 PHV, which is a high-end luxury vehicle likely to be sold at low volumes. The limited amount of new vehicle introductions is a stark transition from 2012, 2013, and 2014, where over the course of each year, around six new PEV models were deployed.

Meanwhile, in China and Western Europe, PEV sales in the first 6 months of 2015 are estimated to be up 175%, and 77%, respectively. The surge in China and Western Europe can be attributed to PEV introductions from an influx of domestic automaker platforms alongside significant government incentives in select Chinese cities and European countries. Volkswagen, Mitsubishi, and BYD have been particularly aggressive in these markets. In addition, the oil price dive has been less impactful on retail fuel prices in these markets than in North America due to higher taxes on retail fuels in these markets.

Though the North American market is slowing relative to China and Western Europe, annual growth is likely achievable by the end of the year. Despite some delays, a number of new PEV models are set to be introduced in the next few months. Among the introductions are three SUVs: the Volvo XC90 T8, the Tesla Model X, and the BMW X5 eDrive, which will help break PEVs into new high-volume markets. Similarly, the redesign of the Chevrolet Volt, which increases the vehicle’s all-electric range and internal combustion engine fuel efficiency at a lower purchase cost, is set to go into production this month.

However, for Japan, growth is likely negative in 2015; the market has contracted over 20% over the first half of the year. This puts Japan in line to fall behind Norway, the United Kingdom, and France, with Germany closing in. Most of Japan’s PEV sales come from domestic automakers Nissan and Mitsubishi. Toyota and Honda have been reluctant to sell PEVs, favoring fuel cell technologies instead. With BMW and Tesla being the only foreign PEV automakers making sales in the country, PEV availability in Japan is severely limited.


For EV Range, 200 Miles Changes Things

— July 23, 2015

The rapid growth of plug-in electric vehicle (PEV) sales in the last 4 years has slowed in the United States as of late. Low gasoline and diesel prices have likely had an effect, but more likely, the slowdown is coming from a lag between the introduction of next-generation models and the clearing of first-generation inventories. Notably, second-generation PEV development is focused on significant range increases at lower costs, which will greatly impact the PEV market as well as create interesting implications for infrastructure developers and electricity providers.

The most near-term second-generation introduction is the Chevrolet Volt, which is slated to enter production in August. Besides the significant redesign of the vehicle body, the Volt’s all-electric range has been extended by 12 miles and the price starts around $34,000. This is $7,000 less than the original 2011 Volt. Further afield, Nissan has announced its intention to increase range of the next-generation LEAF beyond 200 miles. The second-generation LEAF is not likely to be introduced for quite some time, however, it is rumored that some of the battery technology designed to achieve this 200-plus mile range will feed into the 2016 LEAF, assisting that vehicle in breaking the 100-plus mile all-electric range mark.

When the second-generation LEAF is finally introduced, it won’t be alone. 200-plus mile all-electric range introductions are expected from Tesla and Chevrolet at price points from $30,000-$40,000. Similarly, some premium brands, specifically Audi, are likely to introduce 200-plus all-electric range vehicles to compete against Tesla’s large sedan and SUV platforms. The introduction of these vehicles makes all-electric drive a more viable option for a larger population. However, it also drastically changes things for electric vehicle service providers by increasing demand on a per-vehicle basis and expanding that demand to intra-city locations.

Longer Range = More Use

Most battery electric vehicles (BEVs), aside from the Model S (which already has a 200-plus mile range), are acquired as the second vehicle in households with two or more vehicles, and use is limited by vehicle range. Initial studies on average annual vehicle miles traveled (VMT) for BEVs have indicated that these limited-range BEVs travel around 9,650 miles a year. Meanwhile, light duty vehicles average around 11,250 miles.

However, for the Model S, average annual VMT is higher than for the average BEV. Last month, Tesla was the first automaker to announce that drivers of the Model S have surpassed 1 billion all-electric miles, with 68% of those miles being driven in North America. This equates to roughly 13,200 miles per Model S sold in the United States and Canada through May 2015. Given estimates on Tesla’s U.S. monthly sales, the average Model S has been in service for over 1.3 years. This means average annual mileage is around 10,400 (or 7% more than other BEVs).

Granted, Model S owners have great incentives to drive often, as the Supercharger network makes long-distance travel fuel costs free. Yet, these drivers also have the benefit of a vehicle that can get them to the network stations. Soon enough, owners of non-Tesla’s will, too, and these vehicles will need their own networks.


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