Navigant Research Blog

Shifting Its Fleet, Toyota Strives for ZEV Mandates

— June 9, 2014

In mid-May, the news broke that Toyota has, for the time being, backed out of battery electric vehicles (BEVs) in favor of plug-in hybrid electric vehicles (PHEVs) and fuel cell vehicles (FCVs).  The company ended production of the small Scion eQ in 2012, and will end production of the RAV4 EV in 2014.  The move is not much of a surprise, since the original plan was to sell only 2,600 RAV4 EVs in California from 2012 through 2014 to comply with the California Zero Emission Vehicle (ZEV) program.  Toyota now plans to stay in compliance by introducing its first FCV in California.  That will be Toyota’s only vehicle falling within the definition of ZEV, as defined by the California ZEV program.

The ZEV program mandates automaker development and deployment of a number of fuel efficiency vehicle technologies to California and seven other states.  A specific regulation mandates that large automakers must sell a minimum amount of ZEVs as a percentage of their total sales in these eight states or be fined for non-compliance. Vehicles falling under the ZEV definition are BEVs and FCVs, and automakers subject to this requirement as of 2013 include Chrysler, Ford, GM, Honda, Nissan, and Toyota.

At face value, these regulations would mean that these six automakers would have to sell around 30,000 ZEVs in 2015 in California alone.  This, however, is not the case.  The ZEV program is governed by a system of credits that may be traded between any automaker or third party.  Therefore, if a large automaker is unable to meet its ZEV mandated requirement in a given year, it may buy ZEV credits from an automaker that has a surplus of credits.

A Sales Challenge

Further complicating this program is the fact that not all ZEVs sold receive the same number of credits.  For instance, a RAV4 EV receives 3 credits, a Tesla Model S receives 4 (it used to receive 7), and an FCV with a range of over 300 miles receives 9 credits.  This essentially means that the sale of one FCV by Toyota in 2015 would be worth the sale of 3 RAV4 EVs.  Therefore, Toyota does not actually have to produce and sell enough ZEVs to reach 3% of its total number of vehicles sold in 2015, as the ZEV program states – which would be good news for Toyota.  It does, however, mean that the company needs to start selling around 1,000 FCVs annually in just California for the next 5 years or it will likely have to start buying ZEV credits.

1,000 FCVs may not sound like much, considering Toyota sold slightly over 1,000 RAV4 EVs last year.  However, FCVs have considerable market challenges that BEVs do not, including:

  • Hydrogen infrastructure is expensive to build and few stations exist today, while electrical infrastructure is cheap and ubiquitous, including in homes.
  • The cost savings of driving on hydrogen rather than gasoline are questionable, while the cost savings for driving on electricity are significant and well documented.
  • Lastly, the first FCVs are anticipated to be far costlier than BEVs.

The advantage an FCV offers is a range over 300 miles and fast refuel times.  Toyota bets this advantage is substantial enough to drive sufficient consumer interest to achieve compliance targets.  If Toyota is wrong, the abandonment of the company’s BEV compliance programs will prove extra costly.

 

Energy Consumption Falling in the Transportation Sector

— May 21, 2014

Climate change has been in the news a lot lately due to recently published reports from the United Nations, the White House, NASA, and myriad other scientific institutions that have highlighted the consequences of increasing levels of CO2 in the Earth’s atmosphere.  While there are many ways to reduce per capita energy consumption, one of the greatest opportunities lies in making light duty vehicles (LDVs) more energy efficient.  In no other sector is the potential for reduction so high and the pathway to achievement so accessible.

Not all energy consumption is carbon intense, but an overwhelming majority of the energy consumed in the transportation sector, born from the burning of oil, is.  Burning a gallon of gasoline (with 10% ethanol) consumes around 112,000 BTUs of energy and emits 8,887 grams of CO2.  It’s also estimated that gasoline requires around 6 kWh (20,500 BTUs) of grid-sourced electricity to refine 1 gallon of gasoline from crude oil, and the 2010 emissions factor of the U.S. grid was estimated to be 690 grams/kWh.

The Widening Gap

Given the average fuel economy of 24.7 mpg for new LDVs in 2013, the average new car in the United States consumes 5,364 BTUs/mile, emitting roughly 527 grams of CO2/mile.  The fuel economy of 2013 models has improved from the prior year by 1.2 mpg, meaning that the average car purchased in 2013 saves 274 BTUs/mile and 27 grams of CO2/mile over 2012 models, an improvement of nearly 5%.

Navigant Research estimates that, thanks to Corporate Average Fuel Economy (CAFE) standards, the average fuel economy of a new LDV will be 52% higher in 2025 than in 2013.  This means that the average new LDV will use 1,836 fewer BTUs/mile and emit 180 fewer grams of CO2/mile than 2013 models, equaling improvements of roughly 66%.

Meanwhile, the sales-weighted average of a 2013 battery electric vehicle (BEV) had a 3.1 miles/kWh rating.  This means that 2013 BEVs consume 1,100 BTUs/mile and emit roughly 222 grams of CO2/mile, a reduction of nearly 80% in energy consumption and nearly 58% in carbon emissions from conventional 2013 cars.

These calculations do not include full lifecycle emissions and energy consumption characteristics of either the gasoline or electricity supply chain; a more comprehensive analysis would no doubt improve the returns of BEVs over conventional petroleum-powered vehicles.  Additionally, a static figure of 690 grams/kWh is used to assess grid-sourced carbon emissions.  The carbon emissions intensity of the grid varies significantly by location, as seen here, and the grid will become much cleaner over time due to increased penetrations of wind and solar in the generation portfolio – furthering the energy and emissions efficiency gap between gasoline and electricity as a fuel.

 

Cellulosic Biofuels Not Dead

— April 4, 2014

Risk_webCellulosic biofuels have multiple advantages over conventional biofuels like ethanol and biodiesel.  Primary among the advantages is that the fuel’s feedstock is agriculture waste, which means it avoids controversial topics like the food versus fuel debate and direct or indirect land use change concerns.  Despite these advantages, hope for cellulosic biofuels has eroded because multiple companies have failed to produce the fuel at scale and a competitive price point.

The many failures forced the U.S. Environmental Protection Agency (EPA) to cut the annual volumetric blending requirement for cellulosic biofuels mandated by the Renewable Fuel Standard (RFS) to levels ranging from 6 million gallons to 9 million gallons between 2010 and 2013.  For 2014, the EPA has proposed cutting the original volume requirement for cellulosic from 1.75 billion gallons to 17 million gallons.  Additionally, KiOR, the company closest to producing cellulosic biofuels at scale, has run into financial stumbling blocks.  This situation is leading some to question whether cellulosic biofuels will ever take off.  But while the industry has certainly appeared to be on the brink, investors do still have hope, as demonstrated by Cool Planet’s successful closing of $100 million Series D financing at the end of last month.

Saving Cellulosic Biofuels One Plant at a Time

Cool Planet has often been described as similar to KiOR, as the two companies take cellulosic biomass and convert it to hydrocarbons chemically identical to petroleum-based fuels.  The two companies are, however, also “dramatically different,” as described in interview with Cool Planet’s CFO Barry Rowan.  The most significant differences are related to Cool Planet’s novel approach to production plant development, the production process, and the development of the company’s propriety biochar, CoolTerra.

Rather than focusing on one or more major production facilities, Cool Planet will develop numerous small-scale (10 million gallons per year) plants.  This approach has multiple advantages.  First, it reduces risk to investors, as each small capacity plant is significantly less costly than one giant facility.  Second, the development costs of each new plant are reduced and production margins improved since Cool Planet is able to innovate on lessons learned from past plant developments.  Third, it allows Cool Planet to bring the plant to the biomass rather than the biomass to the plant.  This reduces the transport costs for the cellulosic biomass and insulates Cool Planet against feedstock shortages.  Rowan notes that the capacity of each plant is limited to a fraction of a region’s cellulosic resources.

Cool Planet can use a variety of cellulosic feedstocks, which the company exposes to high temperature and pressure to create a biovapor.  The biovapor is then converted to a high octane gasoline blend stock.  In contrast, KiOR’s process produces a biocrude oil, which is then refined into gasoline and diesel products.  When put through a proprietary catalytic column, the biovapor created by Cool Planet’s process produces the biofuels and a residual biochar – both of which have markets.

The biochar produced from the biofuels development is then treated by Cool Planet to create the company’s proprietary product, CoolTerra.  According to the company, which has five PhDs working on this product, trial results show improved crop yields and growth rates, as well as reduced water and fertilizer input requirements.  The resulting impact is a fuel that is carbon-negative; any carbon produced is sequestered in the CoolTerra, which will be used to produce carbon-absorbing plants and thus reduce atmospheric carbon concentrations.

Development of Cool Planet’s first 10 million gallon facility located in the Port of Alexandria, Louisiana is underway; the plant should be operating by 2015.  The development of two other plants in Louisiana is scheduled to follow in 2015 and 2016.  Rowan estimates Cool Planet can be profitable at oil prices of $50 per barrel, well below today’s rate.  Real world tests of Cool Planet’s business model will demonstrate its viability.  If anything can be gleaned from the recent struggles and successes of KiOR and Cool Planet, it’s that the industry is not dead; rather, it is simply taking longer to adapt to technological and logistical problems than expected.  And it’s clear investors believe Cool Planet may have a winning approach.

 

Electricity Pricing and the Economics of EVs

— April 2, 2014

The hottest global market for plug-in electric vehicles (PEVs) is Norway, where PEVs accounted for nearly 5.5% of all light duty vehicle sales in 2013.  Success of PEV sales in Norway has been credited to the country’s attractive purchase incentives and tax breaks, which include exemption from all non-recurring vehicle fees, annual road taxes, all public parking fees, and toll payments, along with free access to bus lanes.  While these incentives are appealing, equal credit goes to the massive price gap between the costs of petroleum fuels and electricity in the country.

One of the most attractive aspects of PEVs is that driving on electricity is significantly cheaper than driving on gasoline or diesel.  While this is largely true in most markets, the price difference can vary significantly by market.  The most meaningful variables in fuel cost returns are the retail price of petroleum-based fuels, the residential rates for electricity (since a vast majority of PEV charging is done at the owner’s home), and the average efficiency of new conventional vehicles compared to PEVs.

The Turkish Premium

The price of retail gasoline and diesel varies sharply from country to country.  The starkest example is in Turkey and Iran: in 2012, a gallon of gasoline cost $9.61 in Turkey (highest in the world) and $1.25 in neighboring Iran.  Electricity prices are also vastly different from country to country; residential electricity rates per kilowatt-hour (kWh) in France, which gets 80% of its electricity from nuclear power, are half the rates as those in Germany.  The variation in prices for each fuel determines which markets offer the best returns for PEV owners.

The best returns on fuel costs in Europe are in Norway and the worst are in Germany.  If the average new light duty vehicle in Europe has an mpg rating of 35 and the average new PEV has a miles per kWh rating of 2.7, then on a per-mile basis, Norwegian PEV owners save $0.16 per mile while German PEV owners save only $0.05.  Given that Germany’s incentives for PEVs are far less attractive than Norway’s, it’s not surprising that the Scandinavian country (population just over 5 million) still put around 1,500 more PEVs on the road last year than did Germany (population just over 80 million).

State to State

Among U.S. states (average new vehicle mpg is now 25) the best returns are in Indiana ($0.11 per mile) and the worst are in Hawaii ($0.03 per mile).  Given current government incentives, maintenance cost reductions, an annual vehicle mileage of 12,000, and an average $12,000 premium for PEVs, a battery electric vehicle (BEV) driven in Indiana nets a return in less than 4 years – twice as fast as one driven in Hawaii.

Fuel Costs per Mile of Fuel, Select Regions: 2014

Pricing-Economics of EVs blog (04-02-14)

(Source: Navigant Research)

Because PEV returns are so varied, local utilities can significantly affect markets by introducing time-of-use (TOU) electricity rates specific to PEV owners.  TOU rates, which incentivize off-peak electricity usage, can drastically reduce per kWh prices for PEV charging.  Residential TOU rates are limited, for now, to a few utilities in the United States.  Their adoption, however, is a win-win for utilities.  TOU rates can increase utility revenue by making market conditions for PEVs better, thus increasing demand for electricity, and TOU rates shift the increased demand to manageable off-peak hours.  The final outcome is one in which utilities make more money and drivers save more money.

 

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