Navigant Research Blog

V2V Communications Finally Arrives in America with Updated Cadillac CTS

— March 10, 2017

More than 2.5 years after General Motors (GM) CEO Mary Barra announced plans to launch vehicle-to-vehicle (V2V) communications in the US market, the first of a new generation of connected cars is now on its way to dealers. GM has begun production of the updated 2017 Cadillac CTS sedan, the first of what is likely to be several models equipped with the technology within the next year.

At the time of Barra’s 2014 announcement, it was expected by most people in the industry that a mandate for V2V on new vehicles would be in place by now. That process was held up by efforts by the wireless industry to grab some of the 5.9 GHz spectrum that the Federal Communications Commission (FCC) had allocated for dedicated short-range communications. The final notice of proposed rulemaking (NPRM) was not published by the National Highway Traffic Safety Administration (NHTSA) until December 2016. Under the new administration in Washington, it’s not clear if the NPRM will get final approval.

Pressing Ahead

Nonetheless, GM has been a strong proponent of V2V and vehicle-to-external (V2X) communications for more than a decade, having conducted its first public demonstrations in 2007. Despite the fact that the CTS accounted for only 0.5% of GM’s more than 3 million US sales in 2016, the company is pressing ahead with the introduction, clearly hoping to start demonstrating the efficacy of the technology in real-world conditions.

There is also a strong likelihood that this is only the first of a number of GM vehicles that will add V2V in the near future. The launch of the Delphi-supplied V2V system coincides with the introduction of an all-new next-generation CUE infotainment system. The new version of CUE includes support for over-the-air software updates that can add new functionality. Initially, the CTS will provide drivers alerts when cars down the road have hazard lights on, activate stability control, or have a hard brake application.

“At launch, we are offering these three features. That doesn’t rule out additional alerts in the future, as we are always looking for ways to add additional safety features to our cars,” said GM spokesperson Chris Bonelli. “Coupled with the next-generation Cadillac user experience also launching on the 2017 interim model year CTS, we are able to provide over the air updates as needed for new features and safety.”

Cadillac has already announced that the ATS and XTS will get the new version of CUE when they begin 2018 model production later this year. These vehicles will likely get V2V as part of that package, with other models to follow in 2018 as they get the electronics updates.

Another factor that may be driving GM to push the technology forward even in the absence of a regulatory mandate is automated driving. It is moving forward aggressively with the development of an automated version of the Chevrolet Bolt EV for use with the Lyft ride-hailing service. GM is projected to begin pilot deployments of automated Bolts with Lyft as soon as 2018. V2V is expected to be an important component of automated driving, significantly expanding the situational awareness of the vehicle beyond the line of sight that is possible with sensors alone.

Growing Market

Navigant Research’s Connected Vehicles report projects that more than 70 million vehicles will be sold globally with V2V technology by 2025. Toyota launched V2V on several Japanese models in late 2015 while Honda has also been very active in the development and testing of V2X communications. Neither company has made product announcements for North America, but these two OEMs are likely to follow GM in the next year.

 

Corporate Tax Reform: What the Power Industry Needs to Know

— February 23, 2017

Energy CloudUS corporate tax reform has been a key plank in the Republican platform for several years and has recently become a key focus of the Trump administration. In June 2016, the House Ways and Means Committee Republicans led an effort to unveil a blueprint toward a “Better Way for Tax Reform.” This proposal, backed by House Leader Paul Ryan, would (among other things) reduce the corporate income tax rate from 35% to 20%, allow capital investments to be fully and immediately deductible, and dramatically reduce tax rates on funds repatriated to the United States. The downside of the proposal is that it would eliminate the deductibility of interest expense on future loans. It would also introduce a so-called border adjustment, which would disallow deductions for import purchases while exempting export profits from taxation. Treasury Secretary Steven Mnuchin says the Trump administration is working with House and Senate Republicans with the aim of passing major tax reform legislation before Congress leaves for its August recess.

It’s too early to tell if real tax reform will be achieved by Congress during this administration. The border tax adjustment is being protested by many industries that rely heavily on imports, such as retailers and oil refiners, and opposition from Democratic congressmen and senators may derail the effort. Nevertheless, it’s useful to analyze how such reform (or portions of it) could affect business in the electric power industry, including utilities, independent power producers, equipment manufacturers, and constructors.

Renewable Owners

Renewable resource owners and investors in particular would be affected by the proposed tax reform due to most renewable plants’ heavy reliance on Federal Tax Credits and the accelerated depreciation of tax benefits in the capital structure. Currently, an entity with significant income tax exposure will often participate in a renewable project as a tax-equity investor to absorb these tax benefits in lieu of cash. With a reduction of the income tax rate to 20%, the value of investing in renewables for these tax-equity investors is significantly depressed. This could lead to a reduction in tax-equity supply and therefore an increase in tax-equity cost and cost of capital. This is somewhat offset by the full deductibility of capital investment (e.g., 100% depreciation in year 1), but again, that value is discounted by the reduction in the tax rate.

Due to the border adjustment, costs for renewable and conventional resources may increase to the extent that key components (e.g., combustion turbines, wind turbines, solar panels, inverters) are imported. Those costs cannot be deducted from income and are therefore taxed.  This would not be offset by the exemption for exports, since electric power generated in the United States is generally consumed in-country. As a result, power producers are disproportionately affected by the border adjustment, compared with other business that can export their product to foreign buyers.

The timing and duration of the adjustment presents another important impact, as utilities and investors may stop negotiating contracts for new resources until tax rates and rules are clarified. This could cause delay in plant construction and achievement of Renewable Portfolio Standards or carbon reduction goals. For renewables, this works against the need to start construction and secure the federal wind Production Tax Credit before it disappears in 2022 and the solar Investment Tax Credit before it drops to 10% (from 30%) in 2022. Duration also becomes a factor since the new tax regime may only last 10 years. Senate reconciliation rules require changes passed by a simple majority (in this case, 51 Republicans) must sunset after 10 years if they cause an increase in the deficit. Planning a 20- to 30-year asset under a 10-year temporary tax regime raises the risk of future cost increases.

Mitigation Strategies

Strategies to mitigate these impacts are varied. It’s likely that debt issued before a certain date in advance of the new tax regime will be grandfathered in, with the interest deductible over its term. Therefore, issuing debt now to fund resources in the future may be prudent to reducing costs. Procurement of major equipment from US-based manufacturing plants is also a viable strategy to avoid the taxation of imports under the border adjustment mechanism. Manufacturers should consider shifting production to US facilities to support this demand. Finally, the export of excess power to Canada or Mexico is also a viable strategy for mitigation, as these sales would be excluded from taxable income under the border adjustment. Utilities and/or independent power producers should consider border sites and transmission corridors that allow for these exports.

Each of these strategies will likely be constrained by specific eligibility rules and limits baked into the new tax law. Nevertheless, the momentum behind tax reform is significant, and advanced planning and actions around these strategies before the stampede will be time well spent.

 

Carbon Tax Plan Proposed by Climate Leadership Council

— February 15, 2017

Climate change is a big area of political strife. It was during the election and remains so during the opening weeks of the new administration. While the major political parties generally disagree on the issue and the measures necessary for addressing it, climate change is not a partisan topic. On February 8, a group of Republicans proposed a tax on CO2 emissions in exchange for the repeal of other regulations on the industry. The proposal is led by James Baker III, former Secretary of State under President George H.W. Bush, and other members of the Climate Leadership Council. Founded by Ted Halstead, the Climate Leadership Council is an international research and advocacy organization with aims to organize global leaders around new climate solutions based on carbon dividends modified for each of the largest greenhouse gas (GHG) emitting regions.

The Proposal

The Carbon Dividends Plan is based on four main areas:

  • Gradually Increasing Carbon Tax: A $40 tax on every metric ton of CO2 would be imposed and increased steadily over time.
  • Carbon Dividends for All Americans: The estimated revenue of $200 to $300 billion per year generated from this carbon tax would be paid out to Americans through dividend checks, administered by the Social Security Administration. On average, a family of four would receive $2,000 under the plan.
  • Border Carbon Adjustments: The plan proposes border adjustments that would increase the costs of exports and imports to/from countries that do not have a comparable carbon tax.
  • Significant Regulatory Rollback: The majority of the Environmental Protection Agency’s (EPA’s) regulatory authority over CO2 emissions would be phased out, including an outright appeal of the Clean Power Plan (CPP).

The Importance

Many Republicans, including President Trump, are publicly opposed to actions on climate change. The Climate Leadership Council is made up of a number of prominent Republicans who are not only publicly in favor of action supporting the climate, but also have created a proposal to do so. Besides Baker and Halstead, authors of the proposal include Henry Paulson, Secretary of the Treasury under President George W. Bush; Martin Feldstein, Chairman of the President’s Council of Economic Advisers under President Ronald Reagan; George Shultz, Secretary of State under President Reagan; and N. Gregory Mankiw, Chairman of the President’s Council of Economic Advisers under President George W. Bush.

The Impacts

The plan would repeal the CPP put in place by President Obama to reduce carbon pollution and reduce the EPA’s influence on GHG emissions, and will likely see opposition. However, President Trump already plans to repeal the CPP, and while it is unclear if he will be successful, the Carbon Dividends Plan is not needed to assist in that repeal. While the dividends paid back to consumers help with the increased cost of energy, many can argue this would be better if used for increasing renewable energy. If the proposal is rejected and the CPP repealed without an alternative plan in place, it is unlikely actions on climate change will be taken at a federal level.

In June 2016, the House approved a non-binding resolution condemning the idea of a carbon tax. The measure passed 237-163 and was intended to make it more difficult for those that voted against a carbon tax to do so again. President Trump also opposes a carbon tax, believing that President Obama’s CPP was a regulatory overreach of power. It seems unlikely that the current administration and Republication-controlled Congress would vote in favor of such a proposal, although there is hope that some type of alternative could be offered in its place. No matter what the outcome of the Carbon Dividends Plan, there will be many arguing both for and against it.

 

Minimal Fuel Economy Impact from Regulatory Executive Order

— February 6, 2017

The presidential executive order that commands two federal regulations to be rescinded for every new rule enacted probably will not have a direct impact on US Corporate Average Fuel Economy (CAFE) mandates, but that does not mean they will not change. At this time, it seems highly probable that at the very least, penalties for failing to meet the standards to increase fuel economy to 54.5 mpg by 2025 will be significantly reduced, and those targets may be slashed as well. Even if that does happen, it may have only a minimal impact on the product development strategies of the auto industry.

Since the CAFE regulations were already in force, the fact that the US Environmental Protection Agency (EPA) reaffirmed the standards in the waning days of the prior administration mean they are not directly subject to the new order. In addition, section 5(a)(i) of the order also states that:

Nothing in this order shall be construed to impair or otherwise affect:
(i)   the authority granted by law to an executive department or agency, or the head thereof …

The current CAFE regulations were enacted under the authority of the 2007 Energy Independence and Security Act, signed by President George W. Bush, which specifically called for a fleet average of at least 35 mpg by 2020. That would appear to make CAFE at least partly exempt from complete elimination without a corresponding repeal from congress. As of December 2016, the unadjusted fleet average in the US market was at 31.2 mpg. The auto industry would only need to get to 35 mpg to meet the congressional mandate.

Technology Development Will Continue, but…

If the new Secretary of Transportation Elaine Chao opts to scale back the standards or penalties, the industry will still develop fuel economy and emissions technologies to meet standards set by California and the global market. The problem that the industry faces in the US market is an environment of low fuel prices and an increasing consumer preference for less efficient utility vehicles. Faced with the realities of the marketplace, manufacturers are finding it difficult to sell smaller, thriftier vehicles.

If the national standard were reduced while maintaining California requirements, it would provide automakers with the opportunity to meet market demand in regions such as Texas with higher margin products—such as the full-size pickup trucks and SUVs that are favored there—without resorting to incentives to stimulate demand for small cars. This would allow some subsidization of electrified vehicles in those markets that require them.

Uncertainty and Instability

Ford CEO Mark Fields has claimed that having standards that market demands will not support with sales could end up costing up to 1 million jobs. The CEOs of Ford, GM, and Fiat Chrysler met with President Trump days after he took office to discuss this. The industry would also like to see the elimination of separate standards for California, which are possible under a waiver granted by the EPA through a clause in the Clean Air Act.

Rescinding this waiver could prove problematic. It likely could lead to a battle that would end in the Supreme Court. If it became a state’s rights case, it is not at all clear how even a conservative majority on the court would rule.

This is a situation unlikely to be resolved quickly—and the resulting uncertainty creates instability in the business.

 

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