Navigant Research Blog

How Bjorn Lomborg Gets Subsidies Wrong

— August 8, 2013

In a recent op-ed in The Financial Times, the controversial economist Bjorn Lomborg argued that investments in research and development grants, not taxpayer-funded subsidies, are required to solve the energy problems that are causing global warming.  He cites government grants for drilling research as what, he claims, eventually led to the unconventional natural gas boom (some people refer to this as the “fracking debacle”) that we are enjoying today.

“This is what the US has done with fracking.  It has spent about $10 billion in subsidies over the past three decades on innovation, opening up huge resources of previously inaccessible gas,” Lomborg wrote. “Despite some legitimate concerns about safety, it is hard to overstate the benefits: US consumers are saving $125 billion annually on cheaper gas, and a switch from coal to gas has reduced US emissions by twice as much as the EU and the rest of the world have managed.”

In other words, the U.S. government’s return on investment has been spectacular in the unconventional gas arena.  Spend $10 billion and get back $125 billion?  Just tell me where to sign.

But Lomborg has the facts wrong. The U.S. government actually spent very little money on unconventional drilling research and development (R&D).  The vast majority of innovation in the unconventional gas space has come from corporations (many of them small business wildcatters) trying new things.  To claim that the U.S.  government “invested” $10 billion in R&D in the natural gas space is a wild exaggeration.  The primary federal institution for natural gas research is an arm of the Department of Energy called Natural Gas Technologies, which has requested a 2014 budget of only $17 million – the vast majority of which will be spent on institutional overhead, not active research.

Straight Up & Successful

In fact, the primary method in which the government helps the natural gas industry is through the tax deductible master limited partnership shelter, which most natural gas exploration projects use to shelter their profits from taxation.  This is not a research and development grant.  It’s a straight-up subsidy that is worth billions to the industry every year – one that has been very successful in helping to establish an unconventional natural gas industry.

Another example of a subsidy that worked is Germany’s Renewable Energy Act, better known by its German language acronym, the EEG.  The EEG established the global solar industry we have today.  Thanks to massive subsidization, photovoltaics moved rapidly out of the laboratory and onto German rooftops.  Once a multi-billion euro market was established, then industrial competitors raced each other to cut costs, which has now led to photovoltaic panels that cost less than a dollar per watt.  The solar portion of the EEG law was extremely expensive for Germany, costing somewhere between $60 and $300 billion to German ratepayers during the course of its lifetime (the range is so large because of variables regarding how future feed-in-tariff rates are calculated and what the future cost of fossil fuel generation will be).  But there’s no questioning that it achieved its goal: establishing a market that didn’t exist before.

And that’s where Lomborg’s fundamental premise falters: He thinks that technology innovation is the only way to solve the global warming crisis.  Yet, the best way to harness the power of technology innovation is to put it to work in an existing market.  If that market doesn’t exist, then it doesn’t matter how many lab coats and microscopes you have.  Combine a robust R&D program with a robust global marketplace and you will see innovation happen at lightning speed.  That’s what has repeatedly happened in fields as far-ranging as semiconductors, smartphones, photovoltaics and, yes, natural gas.


Japan Moves to Become PEV Leader

— August 8, 2013

As of today, the two biggest plug-in electric vehicle (PEV) markets in the world are the United States and Japan.  (China is close behind.)  Both countries have enjoyed central government support for PEV purchases and EV charging deployments.  Both are top markets for hybrid vehicle sales, which indicate the right demographics for interest in higher-priced, green, and high-tech cars.   Both countries also have domestic automakers leading the way in EV research and development (R&D). These automakers are therefore anxious to promote their technology in their home markets.  Nevertheless, in each country, PEVs are viewed by some advocates and by the government as having under-performed in the market so far – a perception that Navigant has argued is inaccurate.

In response to this concern, Japan’s automakers announced in July  that they will join together to significantly expand EV charging station deployments in Japan.  Currently, Japan has around 1,700 fast chargers and 3,000 public AC chargers.  The automakers agreed to cooperate to install 12,000 charging stations: 4,000 fast chargers and 8,000 regular AC chargers.  This effort will be supported by an astonishing 100 billion yen ($1 billion) from the Japanese government.

This announcement demonstrates the advantages that Japan has over the United States in creating an environment where PEVs could capture a significant share of light duty vehicle sales.  For one thing, the sheer geographic size of the U.S. makes it extremely difficult to provide full charging coverage for PEV drivers.  Even if the U.S. government were inclined to make more money available for large-scale EV charging equipment deployments, as a practical matter, it would cost billions to make major metropolitan areas across the U.S. truly EV ready.

In It Together

Second, Japan has the advantage of a more cooperative attitude among its automakers, who appear to have decided that they will rise or fall together in the PEV market.  U.S. automakers are not on the same page regarding plug-in technology – Chrysler, for example, has not  strongly committed to battery vehicles – so are not inclined to support a major collective effort to install chargers.  Third, Japan made an early commitment to a DC charging standard. As Navigant noted in its DC Fast Charging Equipment report, this allowed fast charging deployments to proliferate while the United States continued to debate its own standard. This new subsidy program for DC charging should further entrench the CHAdeMO standard in Japan.

The new charging stations will be installed at restaurants, retail sites, gas stations, and along major highways across Japan.  The automakers did not provide a timeline for the infrastructure rollout.  Automakers will promote collaboration among their respective charging networks, addressing another hindrance to the market: lack of network interoperability.

This program will serve as an interesting experiment on the “chicken and egg” question.  Clearly, the Japanese automakers have concluded that PEVs, which right now account for less than 2% of Japan’s car sales, will not see significant market penetration without the widespread availability of public charging.  The bigger issue for PEVs right now is the significant price premium, coupled with the limitations of range and charge time.  An extensive network of charging stations can help address these issues to some degree by allowing OEMs to incorporate smaller batteries (since drivers will be able to recharge more readily), reducing the prices of their cars.


As GM Cuts Volt Price, EV Bargains Multiply

— August 6, 2013

GM announced on August 6 that it will reduce the price of the 2014 model Chevrolet Volt by $5,000 from the 2013 model.  After the price cut, the Volt will be under $35,000, and after the federal tax credit, under $27,500.  The price cut on the Volt has been expected for some time, following a similar reduction on the Nissan LEAF and multiple mass market PEV introductions in recent months with price points far below the 2013 Volt MSRP.  These moves have sparked what has been termed an “electric vehicle price war” in a market that has been relatively stagnant over the last seven months.

Nissan LEAF slashed the price of the LEAF by $6,400 in early 2013, and the slow-selling Ford Focus Electric was reduced by $4,000  last month.  The price cut sparked demand for the LEAF in the U.S. considerably: average monthly sales have increased from just under 800 for 2012 and the first two months of 2013 to more than 2,000 since March – or roughly the monthly average for Volt sales over the last 12 months.  As a result, the Volt has shed PEV market share, going from just over 43% in 2012 to under 25% so far in 2013.

The growing list of available PEV options, including the Tesla Model S,  Ford C-MAX Energi, Ford Fusion Energi, and the Smart ForTwo ED, as well as discounted lease deals on PEVs from Mitsubishi, Honda, and FIAT, has also begun to eat into the Volt’s supremacy in the U.S. market.  Monthly sales of the Volt, which reached more than 2,500 at the end of 2012, have only broken 2,000 once in the last 7 months.  Adding to the mix, the Mitsubishi Outlander PHEV, and the highly anticipated BMW i3 are expected to be introduced in early 2014.

As Cheap as Gas

While the market has grown significantly more competitive in 2013, it has not expanded much.  Since total PEV sales reached the 8,000/month mark in December of 2012, monthly figures have averaged just below 7,000.  This does not mean the market is smaller; annual 2013 sales will likely surpass 2012 sales this month.  But it does mean that the market is not growing as fast, even as new models are being introduced.

To garner greater shares of the market, PEV makers are differentiating themselves in a variety of ways.  The most common method has been to offer reduced prices and/or discount lease deals; many automakers, though, are branching out by offering free rentals of longer-ranged gas powered vehicles for road trips, battery leasing options, and free charging services.  Significantly lower PEV ownership costs should help expand the overall market.

The Volt is the most popular PEV in the U.S. with over 43,000 cumulative sales to date.  The price cut puts the vehicle on par with gas powered counterparts in terms of total cost of ownership, and is likely to not only increase the vehicle’s PEV market share, but convert a significant amount of hybrid and conventional gas-powered vehicle owners.  Bargain prices from other PEV makers, such as Ford, are likely to follow soon.


With Invensys Deal, Schneider Surfs the Industrial Automation Wave

— August 5, 2013

After a high-profile initial announcement in mid-July (and following a few weeks of speculation about counter-offers and a bidding war that never materialized), Schneider Electric, the French power systems and automation giant, agreed to buy Invensys, the United Kingdom-based engineering company, for £3.4 billion ($5.2 billion).  On August 2, Invensys accepted the offer, making it Schneider Electric’s largest acquisition since its 2006 purchase of American Power Conversion for $6.1 billion.

The agreement will add Invensys’ software and control systems to Schneider Electric’s arsenal, bolstering one of its highest-profit businesses and placing it on more equal footing with other industrial automation giants such as Siemens and Mitsubishi.  Schneider Electric has been expanding its focus from sales of industrial automation products to broader solutions that consist of hardware, software, and recurring services.  Invensys, which provides engineering services to integrate processes for large industrial sites, will complement Schneider Electric’s product offerings. Schneider says the acquisition will also create €140 million in cost reductions and generate an additional €400 million in revenues by 2018.

Smart Automation

This move also marks a notable end to the British tenure of Invensys, one of the largest tech and engineering companies in the United Kingdom, though that may be more a symbolic fact than reality. As Sir Nigel Rudd, chairman of Invensys, pointed out in the Financial Times, “Basically this is an American company – 95% of sales are outside the U.K. … this is not a U.K. company.”

The driving force behind the acquisition, however, is the expectation that demand for smarter industrial automation and energy management systems will grow in the long term, particularly in Asia Pacific. As Navigant Research concluded in our report, Industrial Energy Management Systems, the global market for industrial energy management systems will reach $11.3 billion in 2013 and grow to $22.5 billion by 2020 at a combined annual growth rate (CAGR) of 10.3%.  The market in the Asia Pacific region will grow even faster, at a CAGR of 13.4%.  Adding Invensys’ deep expertise in industrial automation should enable Schneider Electric to take advantage of this growing market.


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