NEVs blog

After posting my December 6 article about EVs Economics are getting interesting I’ve received numerous comments and I’ve had discussions with utility executives and board members. Based on this input I’ve refined the economic analysis of the Leaf vs. Camry and I’ve addressed a potential regulatory Catch-22 concern that utilities might run up against if they aggressively go after the EV market.

Refinements

The more I discuss EV usage, and considering how I would use an EV, I’m increasingly convinced the 100 mile class of EV will be used like a cell phone. At the start of the day, the EV is unplugged and driven. At night, the car is parked in or near its home garage and charged up. The whole discussion about public charging, or changing out batteries, will be irrelevant. These vehicles will be short range around town cars. For drivers that go on long trips the EV won’t be used, the owner’s other, gas power car, will be. Range anxiety can be addressed when necessary with a little high cost topping off from a 120 VAC outlet at the destination.

 Since the car will be charged at night this represents an opportunity for utilities to market power in a new way. Namely the utility can offer to sell electricity via a 220 VAC outlet at very low cost during the night off-peak power block period. During the rest of the day, power would be unavailable from the 220 VAC outlet and a customer would have to rely on 120 VAC charging. This avoids potential overloading of distribution transformers and aligns a cheap tariff with cheap power while placing no cost burden on other utility customers.

As part of updating the economics I double checked wholesale market outlook (thanks to www.weccterm.com) and found the outlook continues for very low off-peak prices that easily allow provision of electricity to the EV at 5 cents/kWh and allows for some utility margin:

Quarterly forecast prepared 1/18/2010, Off-peak prices
period        NP15 (Northern California)
2011-1      2.9 cents/kWh
2011-2      2.5 cents/kWh
2011-3      3.6 cents/kWh
2011-4      3.7 cents/kWh

Previously I used 15,000 miles per year as the average annual mileage driven by Americans in a year. While the DOE/EPA Model Year 2011 Fuel Economy Guide bases its annual fuel costs on 15,000 mile per year, EPA’s transportation and air quality group peg the average miles driven at 12,000 miles per year. And the Federal Highway Administration shows drivers in the 20 – 54 age range averaging over 15,000 per year. Taking this all in I’ve decided to conservatively base the average analysis on 12,000 miles per year.

Some comments noted that EV will have lower maintenance costs than gas power cars. I think it’s fair to credit the EV with avoided oil changes. This isn’t a big factor but does improve the EV economics a bit.

I also used an estimated 10 cents/kWh for a nationwide average for retail electric prices. For the average charging analysis I’m now using 11.5 cents/ kWh which according to the EIA is the actual August 2010 nationwide average.

In my first analysis I included 10% losses in the charging equipment because I was in a hurry. This is probably a little high and I revised the loss figure to 5% consistent with losses in a couple of thyristors.

Previously I based my analysis on $3.50 gasoline. This still seems a fair estimate and I’ve continued to use it. Of course, if gasoline prices spike EVs will get a boost.

All these changes taken together erode the EV economics a bit but not enough to change my previous conclusion that EVs can be a hit given some creative utility rates. But at my current rates, I’ll wait on the EV, sigh.

Scenario                 Break-even years      IRR at 96,000 miles (8 years)
1  (5 cent/kWh)                 4.6                                14 %
2  (11.5 cent/kWh)            5.6                                 9%
3  (17.6* cent/kWh)         6.9                                 4%
* this is what I pay today to SMUD for each incremental kWh

EV payback

The Catch-22
Many utilities, and certainly those in California, are facing Renewable Portfolio Standard (RPS) requirements. So if a utility added significant new load, say 50,000 EVs charging at 3kW at night, the utility would need to provide an additional 150 MW of power. In all likelihood this power would come from fossil sources, at least for some period of time. In the western US the marginal generating resource at night is almost always very efficient natural gas fired combined-cycle power (thank you again www.weccterm.com) . Essentially we would be running domestic natural gas through a high efficiency conversion and displacing imported crude or gasoline. But a utility may be penalized by RPS requirements for this very sensible activity – the Catch-22.

The RPS standards have been enacted in large part to address climate change resulting from burning fossil fuels. To test whether the RPS standards are counter-productive to their own purpose in the case of EV charging, I dove into carbon calculating.

I first calculated the annual pounds of CO2 the Camry would produce. Using EPA mileage, 12,000 miles per year, and the EPA’s CO2/gallon of gasoline figure, I computed the Camry would produce 9,502 lb/CO2 per year.

Next, to calculate the Leaf’s CO2 production, I adjusted the Leaf’s kWh consumption back to the generation level by adding back transmission system losses. Then I determined the amount of natural gas consumed using night time combined cycle heat rates of 7,500 Btu/kWh. Finally I applied EPA’s latest C-factors (including the 2 oxygens) for natural gas to compute the CO2 produced. The result: 4,049 lb/CO2 produced per year, less then one-half that produced by a gasoline engine.

This result makes sense: (1) combined cycle power plants, even after transmission and charging losses are really efficient, and (2) natural gas produces a lot less CO2 than an equivalent amount of gasoline.

The conclusion is straightforward, EV charging should be exempt from RPS requirements and the EPA should be gung-ho for EV charging. And at the end of the day I don’t see any way a utility will ultimately be penalized for encouraging EVs.

EVs are getting interesting.  With the Nissan Leaf this year, Ford planning to release its Focus EV in 2011, and the Honda Fit EV scheduled for 2012, the 100 mile range EV class will provide consumers with several choices within a couple of years.

So it’s time to take a look at whether EVs are a good deal for consumers.   It took a bit work to analyze but the results were worth it.  The initial step is to review the key drivers affecting consumer economics.

First is upfront cost for the EV, the charging station, and the incentives being offered.  The EV costs more, even after vehicle and charging station incentives.  I estimate the additional cost at $7,334 for a Nissan Leaf versus a basic Toyota Camry.

Second is annual cost.  A Camry gets 24.5 EPA miles per gallon.  A Nissan Leaf, by my estimate, will get about 3 miles per kWh.  So what matters is how much a driver drives and the cost of electricity.  The average driver drives 15,000 miles per year, or 41 miles per day, which should be reasonably feasible in an EV.

Electric costs are a big factor.  Retail rates nationwide are something like 11 cents/kWh.  In high cost states like California, without time-of-use metering, costs are 15 cents/kWh and higher.  I’m a SMUD customer with an old meter.  I’m into Tier 2 consumption and if I charged up tonight it would cost me 17.55 cent per kWh.   But wholesale, nighttime rates are dramatically lower.   One wholesale electric price forecasting company that serves electric traders shared their outlook for the next 12 months with me:

Quarterly forecast prepared 12/3/2010, Off-peak prices

period        NP15 (Northern California)
2010-4      3.3 cents/kWh
2011-1      2.7 cents/kWh
2011-2      2.2 cents/kWh
2011-3      3.3 cents/kWh

These prices may seem amazingly low but they are, in fact, realistic.  Thanks to the shale boom natural gas is being delivered to  power plants for $4.40 per mmBtu.  And the power plants setting prices throughout the western US are modern combined cycle units with heatrates around 7,200 Btu/kWh. (4.40 * 7200 / 1000 = 3.2 cent/kWh).  In Northern California alone on Dec 3 there are over 4,000 unload MW of these plants.  That’s enough to charge 1.3 million EVs consuming 3 kW each.

Tying the analysis together I computed the IRR of owning an EV under three scenarios.

• In scenario 1 my utility is serious about promoting EVs and they flow cheap nighttime power to me at a 5 cent/kWh rate.  They can do this with their new smart meters; at night they have plenty of distribution capacity; and they would make some money.
• In Scenario 2 I pay roughly the national average for power, say 11 cents/kWh.
• In Scenario 3 my utility does nothing and I have to pay Tier 2 rates — 17.55 cents/kWh.

I computed when I break-even, or when my fuel savings equal the extra cost of the EV, and my IRR, or the return on my initial investment after I’ve driven 105,000 miles (this is 7 years at 15,000 miles per year).  The results are presented below:

Scenario                 Break-even years      IRR at 105,000 miles
1  (5 cent/kWh)                 3.9                                 17 %
2  (11 cent/kWh)               4.8                                 11%
3  (17.6 cent/kWh)            6.2                                  3%

At a 17% return the EV option is pretty compelling and my local utility can make it happen, if they really want clean energy technology.

At the national average rate 11% isn’t bad, and early adopters may find EVs attactive.

And under my current personal rate schedule, EVs aren’t interesting.

That said, with a bit of creative utility rates, and leveraging the big smart meter investments being made, EV can be a hit.  And if they are a hit car companies with early products, like Nissan, GM, and Ford can pick up market share.

At the national level this makes great sense.  Every EV driven will displace over 600 gallons of gasoline per year, virtually all of which is produced from imported oil.  This reduces our balance of payments and trade deficits and improves our security situation.  Maybe a higher federal incentive would be cost effective and should be pursued?

Disclosures: none
Credits:  Price forecast and electric data courtesy of Plexos Solutions LLC and its weccterm forecast.

One of the potential game changers, electric vehicles, has been getting some negative press recently.  It’s too expensive, the range is too short, there aren’t any recharging stations are some of the obstacles frequently cited.

In my view, it really comes down to the economics individual decisionmakers face.  Economics matter, really a lot. Remember $4 gas wiped out investors in Chrysler and GM.   So I posed myself the question…is there anyway to make EVs the right economic choice?   True, even after the federal tax credit they cost more, but can this extra cost can be overcome by lower fuel expenses?

Having been around the utility industry for a while, and also helping develop a price forecasting service for wholesale electricity, I’m aware that there are some big changes in the wholesale electric markets.  These changes are the result of the rise of numerous super-efficient combined cycle power plants and the price dampening effect of lots of shale gas.  This is translating into off-peak electric prices in the western US in the 4 cent/kWh range.    So what would happen if a progressive utility that was getting tons of federal money to install smart meters decided to put the smart meters to work by flowing off-peak electricity to electric cars at wholesale prices?

But even before looking at the economics of cheap electricity, is it practical to provide cheap off-peak power?  I think the answer is yes.  The smart meters are supposed to provide utilities with two way communication and multiple meter channels.   So it should be possible to set up an outlet that only functions during off-peak hours and is separately metered.  Also, adding some load during the nighttime shouldn’t be too big an issue…this is when load is already the lowest and the transmission and distribution system should work fine, at least for a while.  Finding wholesale power shouldn’t be much of an issue either, the utility can either generate it or buy it on the market from a variety of suppliers.   Operationally the utility may need to  manage the morning and evening ramp ups and downs differently but after looking at wind integration I think this can be made to work.

For an economic comparison I chose a Nissan Leaf which is now appearing at auto shows, and a Toyota Camry.  I looked up mileage rates, ranges, charge sizes, tax credits, and basic manufacturers suggested prices.   I expect the average driver, who puts on 41 miles a day,  should be able to handle the 100 range of the Nissan Leaf.   Putting this all together I developed the following chart showing the time to payback the higher initial cost of the Leaf, after tax credits, as a function of miles driven and electric pricing.

Time to EV breakeven

The bottom line is with cheap off-peak energy the Leaf can payoff in as little as 3 years.  Not bad.  This is less than the term of some auto loans so a buyer would acutally see, after loan and fuel costs, a lower cost for the Leaf than a Camry.  And after the loan is paid off the owner would continue to enjoy the fuel savings for the life of the vehicle.  The progressive utility, it seems, can make a difference and use its new smart grid technology in the bargain.

Switching to the investment side of clean energy, 2010 has been disappointing.  While all broad market indices that I track are positive for the year, only one of the fifteen clean energy ETFs and mutual funds I track are positive YTD and many of these investments are very negative.   To review these investment results go to our Returns page.

The best, and only positive return in clean energy is the PowerShares Global Progressive Transportation (PTRP) ETF, up 7.15% YTD.   Unfortunately for investors, this fund has only been able to attract $5.8 million USD in investments in its two years, due in part to the lousy timing of opening in September 2008.   The upshot is PowerShares is closing PTRP as of December 14, 2010 and investors will have no easy instrument to invest in clean tech transportation.

Disclosures: none

It’s understandable there are a lot of players active in the small California residential / commercial (R/C)solar market.  The California Energy Commission (CEC) dataset has over 80 names.  From 2007 until 2010 year-to-date, the  CEC reports $3.0 billion in installations and $604 million in incentive payments.  Costs may be drifing down but are still a lofty $8,217/kW for the average 5.0 kW install.

So far in 2010 cells from the top eight companies have been placed in over 75% of the installs.  The market leader, SunPower (SPWRA), is now closely followed by Sharp with both companies having approximately 19% of the market.  The next six companies, Suntech (STP), Evergreen (ESLR), Kyocera, BP Solar, Sanyo, and REC (REC.OL) are closely grouped with 6-8% market share.

But even with the California R/C market topping 61,000 kW in 2009, this only represents a small fraction of the 12,300 MW produced worldwide in 2009.  If the five key market conditions I previously identified, namely:

1. continuation of federal and state  incentives which drive down the cost of installs significantly (California incentives will grow to around $600 million per year in California by 2015, this is real money) ,
2. continuation of current tariff practices that allow offsetting average rates, net metering, and exemption from standby charges,
3. continued high energy costs allocated to the residential sector in the California IOUs
4. no run up, and potential drops, in the cost of solar, and
5. no major increases in financing costs for solar systems,

continue, it looks like there is plenty of production capacity worldwide to supply any level of growth in California’s small systems market.

Disclosurer:  the author doesn’t own shares in any of the companies mentioned in this post (except in index funds).

I like the growth rate in solar installations in California.   If it continues for another 5 years residential solar will have come of age.

Let’s look at the numbers (based on my analysis of data supplied by the California Solar Initiative):

If the industry is able to continue with a 35% growth rate, 5 years from now we’ll be seeing about 375 MW being installed per year with a market value of around $3 billion !

What are the conditions needed to support that level of activity? I see five main requirements:

1. continuation of federal and state  incentives which drive down the cost of installs significantly (California incentives will grow to around $600 million per year in California by 2015, this is real money) ,
2. continuation of current tariff practices that allow offsetting average rates, net metering, and exemption from standby charges,
3. continued high energy costs allocated to the residential sector in the California IOUs
4. no run up, and potential drops, in the cost of solar, and
5. no major increases in financing costs for solar systems.

Right now its not too hard to believe these conditions will continue for a five year period.  But at some point the penetration of solar will become large enough to pressure both budgets (via tax credit costs and direct incentive payments) and utility tariffs which must collect transmission and distribution cost.

So, with California being one of the promising markets for solar developers, which manufacturers are enjoying  success in the market?  In my next post I’ll answer that question.

There is no denying the political pull of green.   Tax credits for renewable electricty projects, efficient car incentives, building efficiency stimulus, renewable portfolio standards, fuel blending requirements and associated protective tariffs, smart grid funding, and favorable net metering are in place seeking to accelerate the adoption of clean energy.

But clean energy is really just another way of doing what people are already doing with energy.  Since price matters (it really really does…remember $4 gas?), and clean energy can be expensive, the incentives are policy tools to try to induce people to do the right thing.  So how is this translating into the world of publicly traded clean energy companies?

First, investors can research and buy individual companies.  I track 335 companies that have significant exposure to clean energy.  Of the 335, about 200 are large enough (ie market cap greater than USD 50 million) and are traded on reasonably accessible exchanges to be candidates for individual investors.

Clean energy investors also now have 16 fund choices in the US.    I view these vehicles in three heaps:  ETFs that track broad based clean energy investmetns, ETF “verticals” that track specific clean energy technologies/strategies, and actively managed mutual funds that invest in clean energy.  I’ve taken  a bit of time and summarized these investments broken out this way.  I have also shown their year-to-date returns (10/5/2010) ex dividends so I can compare them with other alternative investments.

The six broad based ETFs are:

The six ETFs tracking clean energy verticals are:

And finally, the mutual funds are:

For comparison, I’ve computed the returns for some broad market indices which are easily accessable to investors via any US brokerage:

These are a lot of numbers but a couple of observations jump out:

• Only one clean energy ETF out of the 16,  with the smallest market capitalization, has managed a positive return.  In comparison, all the broad market indices are positive.  Government support for clean energy hasn’t translated into positive returns, at least this year.   Without policy support, results would in all likelihood be worse.    Any waivering in govenmental policy is definitely a sell signal.
• The sector is starting to attract sufficient investment for ETF and mutual fund sponsors to stick around.  Whether the breakeven market cap for an ETF is $50 or $100 million,  over half the ETFs are big enough to reward the ETF sponsor.
• Two of the mutual funds are large enough to be sustainable.  Firsthand, with only $5.4 million in assets, will either grow or shut down.  With it’s 1.85% expense ratio on $44.4 million in assets ($0.8 million in fees) GAAEX may be large enough to be an ongoing proposition.
• On the active versus index comparison, I’m not seeing much value added by the active managers when compared to the broad based ETFs.
• There is clearly a first mover advantage in the ETF business.  Powershares was first to market with Wilder and currently has the three largest broadbased ETFs.   Claymore was first to market with a vertical and currently has the largest vertical fund.

Whether you think Cap and Trade or a Carbon Tax is the way to manage this greenhouse gas, you can invest in allowances via two vehicles.    It took forever to come to market but the AirShares ETF is now trading under the symbol ASO.   The older alternative, the iPath ETN (GRN) has been on the market since last July.   Of course, when you invest in an ETN you are buying an unsecured note of the issuer….so given recent events this might be a consideration.

In our company research section we track the four major “emission credit” companies.  We have also just added the the return computations for ASO and GRN to our comparables page.

The Camino solar index has fallen 5.8 % since last Friday continuing its adjustment driven by concerns about slowing market demand.   In addition to plunging 76% YTD, SOLAR is also the most volatile of the sustainable energy sectors we track and approximately twice as volatile as the S&P500: 

Examining similar data shows that Renewable Generation, Fuel Cells, and LED & Lighting may have passed their peak volatility.    Biofuels, like Solar, may not have started to decline.  

A daily volatility tool has been added to the site for subscribers to access at PurePlay Indices>Daily volatility.  Up-to-date plots can be created for the Camino Indices, broad market comparables, and selected sustainable mutual funds and ETFs.

How epic has this correction been?  The answer is worse than the 1987 programmatic crash (S&P -32%) but not as bad, to date, as the 1973 oil crisis (S&P -48%) or the dot-com bubble (S&P -49%).   For an excellent graphic of these events and the current housing bubble (S&P -45%) visit here. 

But for sustainable energy the correction has been even more severe.   Our graph from the October 7, 2007 S&P 500 peak to now shows the changes to the four sectors we have been tracking since the S&P peak.   At their minimums the four indices were down between 65 – 80%.

The month of October was particularly bad for sustainable energy where 100% of the companies in our indices had negative returns.

So what am I optimistic about?  Simple, I’m optimistic the sustainable energy industry will continue to exist and at some point prices get so low that the stocks represent attactive buys.  I think this is particularly true for solar as the statistics below show for 10 of the US traded companies I track in the Camino SOLAR idex (detail here).

SOLAR growth rates would have to slow dramatically to make the companies overpriced at current levels.   Even if their earnings growth slows by a factor of 4 these ten companies would still be fairly priced.  And I don’t see many reasons to expect such a slowing.  Modules prices are expected to fall which should boast sales and improve customer ROI.  Retail electric prices are virtually unaffected by oil prices in many economies so the basic economic benefit of solar isn’t going away.   Subsidies are locked in in the US.  Financing should be available with the massive governmental pushes to create liquidity while lowering rates.   And the technology continues to improve further driving down costs and improving solar’s competitive position. 

There may be other bargins in the sustainable energy sector but the solar sector is a good place to start with plenty of potential investment targets.

Mark has positions in JASO, SOL, CSIQ, STP, SOLF, and LDK

I’ve stumbled on an exciting investment idea. I found a company that has no need for financing for the next 2 years, is doubling capacity by 2010 using existing funds and cash flow from its profitable operations, has its capacity contracted for 10 years, has a 30% US federal tax credit for its product for the next 6 years, and is in an industry targeted by the US presidential candidates as very important.  The shares are reasonably valued with a forward PE of 3.25, a PEG Ratio of 0.11, and cash and equivalents equal to about 20% of market cap.

Apparently I’m in the minority thinking this is an attractive opportunity.  LDK Solar Co Ltd’s (LDK) stock went down 5.95% today.

In my screens I have identified at least 5 other solar companies with similar characteristics. Having watched solar stocks for the last two years, I have never committed funds due to their lofty valuations or their extreme volatility.  But after the recent massive correction that has driven Camino’s SOLAR index down 75.0% YTD, I think many solar company valuations are compelling.  I don’t know if an investment in these companies will perform tomorrow or next week, but unless there is a total meltdown in solar industry demand these valuations have my attention.

Mark has a position in LDK