Reaching the EV Tipping Point

Colin McKerracher :

And generally what happens to used vehicles is they go down in value over time. That's not what's been happening around electric vehicles for the last 18 months. Used EVs have been going up in value, and up in value quite significantly, and more so than other used internal combustion engine vehicles. So those two data points tell you that demand is strong and getting stronger.

Michael Torrance :

Welcome to Sustainability Leaders. I'm Michael Torrance, chief sustainability officer with BMO Financial Group. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment, business practices and our world.

Speaker 4:

The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries.

Michael Torrance :

Hello, and welcome to another episode of Sustainability Leaders. Today we'll be speaking with Colin McKerracher who leads the Bloomberg NEF research team that focuses on policy, technology, and economic factors shaping the future of road transport. Colin's team recently published a fascinating report, looking at the transportation industry and the trends around adoption of electric vehicles. I'm also joined by my colleague at the BMO Climate Institute, Katie Shuter, who's looking at decarbonization pathways for key industries and has recently penned a report on EV adoption and the challenges ahead. Welcome to you both.

Colin McKerracher :

Thank you, Michael. Great to be here.

Katie Shuter:

Thank you, Michael. And obviously really excited to be joining along someone like you, Colin, who is such a wealth of knowledge.

Michael Torrance :

Colin, can you start off by telling us a little bit about yourself and Bloomberg NEF? What does your team focus on?

Colin McKerracher :

Yeah, so my team at Bloomberg NEF is looking at everything to do with the decarbonization of transport. So we're a team of industry analysts and data researchers, and we serve all of the industry participants in everything from the automotive market through to aviation, through to energy, oil and gas, raw materials, and really helping companies and governments navigate this transition to a low carbon future.

Michael Torrance :

And you recently published the Bloomberg NEF2022 electric vehicle outlook. How did you set up that study? What were you setting out to explore? And can you just tell us about what your key findings were?

Colin McKerracher :

We've done this for several years now, and really what it grew out of is that we noticed that the only groups publishing long term outlooks about the future of road transport in particular were oil and gas companies. And they generally had this view that nothing is going change, or if anything else comes in, it will play a very minor role. So what we wanted to do was explore a bit, what are some of the factors that might drive change in that?

Colin McKerracher :

And so our initial forays into this were really just looking at passenger electric vehicles. but over the years we've expanded it and we now look at all segments of road transport in this report.

Colin McKerracher :

And within it, there's two different scenarios, if you will. The economic transition scenario is best understood as technology driven, economic forces driven as close to as what you might think of as a business, as usual case. And then there's a second one that's called a net zero scenario, which is more of a back casting exercise that looks at, okay, that's the trajectory we might be on, what do you have to do to get onto the net zero trajectory? What has to happen to road transport to get on track for net zero by 2050?

Michael Torrance :

And just on that point. Are we on track towards net zero in your assessment?

Colin McKerracher :

No, we're not. And I think that won't surprise anybody. Getting to net zero is a really Herculean task. But one of the things that's interesting that we've found in this, is that different segments are significantly closer than others to achieving the net zero trajectory. So things like two and three wheeled vehicles and municipal buses, passenger vehicles and light commercial vehicles, they're actually on a pretty positive trajectory. But then the one that's really not on track for the net zero scenario is medium and heavy commercial vehicles. And that's where you really haven't seen much progress yet on zero emissions alternatives like battery electric or fuel cell trucks.

Colin McKerracher :

Now, even within some of those segments, there's quite a variation around different countries. So in say the passenger vehicle segment, you have large parts of Europe, China, they're actually also getting pretty close to the net zero scenario in passenger cars. Then you have some other countries that are lagging significantly, so most the emerging economies are where the transition hasn't really started yet.

Michael Torrance :

And in terms of the uptake, particularly of personal vehicles, you've talked about the numbers around that and it's growing, it's pretty substantially, but I've also seen some commentary around, it's not often phrased this way, but it's almost like a tipping point idea. Can you talk a little bit about what that means and what the current adoption levels tell us about what future adoption levels could look like?

Colin McKerracher :

Yeah, definitely. And tipping points are really fascinating thing to study when you look at consumer dynamics and the tricky thing is there's no really set definition of exactly when or what constitutes a tipping point. But one of the things we can say quite confidently after looking at this across many different countries is that it takes a very long time to get to 5 to 10% adoption. And then when I say adoption, I mean share of new vehicle sales. But then after that, it starts to go quite quickly. So if you look at quite a few different European countries or China, it took a very long time to get to this 5 to 10%, and then suddenly within a year and a half after that, they're up in the mid twenties.

Colin McKerracher :

The tricky part is that there's also a lot of policy impacting the market right now as well. So in Europe that takeoff also coincided with when Europe tightened its vehicle CO2 regulations. That led auto makers to bring a lot more EVs to the market, increased the supply of the ones that they had, and then you saw this big spike in demand. So it looks like it's around 5 to 10%, but we have to acknowledge that that has also happened when there's been some policy levers pulled as well.

Michael Torrance :

Katie I'd, I'd like to turn to you now, you've been doing some research as part of the BMO Climate Institute on EVs. What's your research telling you?

Katie Shuter:

The Climate Institute is currently looking into how we can successfully scale EVs through the development of industries that can really support that full EV value chain and auto dealers obviously play a huge role there. You know, the majority of Canadians still buy their cars at dealerships, and it's still one of the best ways to engage with prospective EV buyers. So with that context in mind, the key findings from these insights were really threefold.

Katie Shuter:

So firstly, we found that EVs are a lot cheaper than we think, while the upfront sticker price of an EV is still of course, a huge barrier for a lot of customers, the total cost of owning an EV over the lifetime of vehicle actually nets out cheaper than a gas powered vehicle, mostly through savings in operating costs. So think fuel maintenance and other financing costs. Of course, the problem is that the average person doesn't really think about costs like this, they don't think about long term costs 10 years down the line. So it's really important that dealers understand this and can communicate to prospective EV buyers.

Katie Shuter:

The second thing that we found is that the EV transition will of course result in significant changes to traditional business models in the auto industry. So it's really important for dealerships to increase investments in EV sales and EV after sales to meet their customers' expectations. And then lastly, there are massive cross-selling opportunities for dealers and just the auto industry more broadly to capitalize on the transition and they can really play a major role in accelerating the adoption of EVs in north America.

Michael Torrance :

Well, Colin, I'm interested in your thoughts on the total ownership cost topic. How much does that factor into your research and have you drawn any conclusions about the difference between ICE and zero emission vehicles in that respect?

Colin McKerracher :

Our research is very much in line with what Katie has brought up. And I think that dynamic between upfront price and total cost of ownership, is something that is in flux right now and I think both of them are driving that spike in demand and interest that we're seeing.

Michael Torrance :

So Katie, on the topic of total ownership cost, how do you think of that? You've noted, it's almost like an incentive to purchase EVs. Can you just talk about what is total ownership cost and how do you factor that into your research?

Katie Shuter:

At its core, total cost of ownership in the context of an EV at least, is the upfront cost of the car, plus how much it costs to operate over the average lifetime of the vehicle and then also the mileage on the car. And predominantly this is referring to things like fuel, repair and maintenance costs, as well as lifetime capital costs. So what we found is from a cost perspective, research is overwhelmingly in favor of owning an EV. I think it was one study that found that while a Chevrolet Bolt is $8,000 more to purchase upfront than it's gas powered equivalent, the bolt costs $15,000 less to operate over equivalent lifetimes, so you actually end up saving $7,000. And these are based on pretty conservative estimates, I would say, only an eight year lifetime and 20,000 kilometers per year.

Katie Shuter:

And the main reason for these findings is twofold. One, electricity is much cheaper than gas and not as volatile or subject to price shocks. And then two, EVs are just on average, more reliable than gas powered vehicles and they just require less maintenance. So I think the key takeaway for us is that it's really important for auto dealers to know the exact margin of operational savings between a chosen gas powered vehicle and their comparable EV counterpart, because it could be a really huge selling point for customers and it could really drive EV adoption. And if you pair that marginal total cost of ownership savings with reductions in the sticker price from provincial state or federal incentives and rebates, you could actually really make a really compelling case to the customer.

Michael Torrance :

So it seems like the trend is definitely towards EVs becoming a bigger part of the market. Can you elaborate on that thought and what you think it means?

Katie Shuter:

Yeah, of course. There was really two ways that we explored this question. One, is impacts to margins and frontline sales and then two, is fundamental changes to traditional business models. So the first point is really just indicative of how climate change and the transition will impact so many businesses and the importance of being prepared and thinking ahead. So to that point, an example, electric vehicles lack many systems that are essential to gas powered vehicles. There's just less moving parts. It means that they require less maintenance and therefore less repairs. And as a result, auto dealers and other auto servicing industries are likely going to experience a decline in after sales parts revenue, because customers are just less likely to require a visit to the dealer. And this is especially true because EV maintenance is primarily delivered through online software updates.

Katie Shuter:

So with this shift in revenue, will then also come shifts in sales processes, because now you have a wider range of skills that are required to service EVs, both in terms of electrical engineering, computing and software, but also just in terms of the knowledge of frontline sales peoples on the benefits of EVs, the marginal savings of EVs.

Katie Shuter:

And the second point is about how the EV transition will change traditional business models. So currently manufacturers produce the cars and historically depend on dealers to sell and service their vehicles. But manufacturers are increasingly shifting toward online direct sales for EVs. Which of course has massive implications for how dealers can operate their business.

Michael Torrance :

So you've touched on a lot and one of the themes that I keep hearing is around this ecosystem, that's going to be developing and the broad economic implications of that. Can you tell us your views on the types of opportunities we can expect to see with this transition to zero emission vehicles?

Katie Shuter:

Yeah. Happy to. So for dealers specifically, I'll start there, there are a lot of potential cross selling opportunities as EV adoption ramps up. And this is really so important to emphasize when we talk about those fundamental changes to a business, because there's a lot of upside to be captured here. So for example, while EVs might experience a decline in repair and maintenance after sales revenue, they could instead sell at home charging stations or work with manufacturers to sell replacement EV batteries. So there are really strategic approaches to selling EVs that not only benefit the dealer, but also actively contribute to the scale and deployment of EVs and EV infrastructure in North America. So it can be a very symbiotic process and it's important for us to develop out that part of the value chain.

Michael Torrance :

Fantastic.

Katie Shuter:

I have a question for you, Colin. So in your report, you touch on the trillion dollar opportunity or challenge for charging infrastructure. Can you expand on this and also expand on how EV adoption can be impeded until we reach a critical mass of charging infrastructure?

Colin McKerracher :

Yeah. And this is an important thing that we highlight. The way we model it as we think of how big is the fleet and then how much charging do you need to deliver that? The needs today are not exactly the same as the needs in the future. So more and more of the charging that you see in the future is going to happen at as a percentage at public stations, but the bulk of kilowatt hours delivered overall, is still going to be people topping up at home and often at night. We do highlight the total amount of investment that's needed, and it is a significant amount of money, but there's also some room for optimism there.

Colin McKerracher :

One of the things that we're seeing right now in European countries, where adoption is a little bit higher than North America, is that you're already seeing situations where the public fast charging stations are profitable. They're generating returns for investors, they're getting high utilization and that's allowing those groups to then go out and build more. So that's a sign that once you get to a certain number of vehicles on the road, you get higher utilization and the economics do start to work.

Colin McKerracher :

Now there's a bit of tension there, because if you get too high utilization, that's also means that people are showing up to a station and aren't able to use it because it's blocked and they have to wait, somebody else is using it essentially. So the tension there is you want high utilization enough to make a return on the asset and be able to build more, but not so high that the consumer experience suffers because they're waiting a lot. And this is something that's still a dynamic that's playing out right now.

Colin McKerracher :

I think where it might get a bit more tricky is around some of the workplace charging for example. What we've seen is that there's pretty good business models for groups putting in five, maybe even 10 charging bays at a parking lot of an office building say. But whether that scales all the way up to say 50 or a 100, they might provide the first 10 as a perk, but obviously the site costs start to go up as you put in more and more chargers in terms of grid connection and in terms of the site works. Is there a business model that pays for that? But overall, I'm still pretty optimistic that the infrastructure follows the vehicles.

Michael Torrance :

Can I just ask a follow on to that question? The demand on electricity grids, we've seen recently that vehicle owners have actually been asked, I think in California recently to not charge their vehicles, because of the over demand of electricity and under supply, I guess you'd say. Is that going to be another bottleneck to the adoption of EVs in your view?

Colin McKerracher :

I don't think it is. The aggregate number of kilowatt hours delivered isn't a huge percentage of overall electricity demand.

Katie Shuter:

Another finding in your report that you had mentioned is that batteries are set to lead for heavy trucks. So can you speak to that and break down the hurdles around decarbonizing heavy trucks?

Colin McKerracher :

So it looks like electric is sort of the winning technology for smaller commercial vehicles and for larger commercial vehicles that go short distances. The one open question has been what happens to heavy duty, long haul trucks, so a big 18 Wheeler, a big semi doing long distances? And the view there for a while has been that batteries will kind of struggle there and that hydrogen fuel cells will win. And we're quite skeptical of that view. And there's a couple reasons for that.

Colin McKerracher :

One of the comparisons that you often see is, a hydrogen fuel cell vehicle specs optimized versus battery specs today. And that optimized hydrogen fuel cell vehicle is still several years out from commercial mass production and batteries are still getting better and more dense every day. And also there's a lot of work right now to sort of truckify lithium batteries to pick optimal mixes and battery packed designs that are designed specifically for trucks rather than just borrowing cells and designs from passenger cars. So our view is that you're going to continue to see enough improvement in lithium ion batteries on the density front to enable more and more advanced applications of batteries in heavy trucks.

Michael Torrance :

Colin, going back to the policy levers, one of the recent developments was the inflation reduction act in the US. What does that mean for electric vehicle uptake in your view?

Colin McKerracher :

Perhaps the biggest impact of the IRA will be, yes, it will boost EV adoption, the EV tax credits as more vehicles become eligible for them, more consumers will want to tap into that. That will boost adoption in the latter half of the 2020s. But the biggest effect it's probably going to have is to bring the battery supply chain and manufacturing process much more back on shore and into North America. And I think you'll see more announcements in the coming weeks, months and years ahead confirming that.

Michael Torrance :

So that would have clearly an economic benefit for north America as this ecosystem develops. But there's also challenges related to supply chains, not only the batteries themselves, but the minerals that go into them. Can you talk a little bit about your findings with respect to supply chains? Is that a limiting factor for the uptake of EVs? How is that going to be overcome? Is on shoring some of that going to help solve those issues?

Colin McKerracher :

And just to stay on the economic point for a minute. I think it's worth remembering that the automotive sector, it throws off a lot of high quality, blue collar and white collar jobs. They're major sources of innovation, and it's a big part of GDP in the countries that manufacture vehicles. On the raw material side, so we've done a lot of work on this and the conclusion is that if you go by what's scheduled to come online today in terms of raw material supply of critical materials, like lithium, cobalt, nickel, manganese, we are heading for some deficits in the 2020s. Now what happens after that, depends a bit about what you think about market forces. So I'm a bit of a resource optimist, if you will. I think what we have seen over a hundred years of commodity price cycles and things, is that when you get a bit of a supply crunch, you end up with high prices and those high prices are what bring on more supply.

Colin McKerracher :

Whenever you hear talk of imminent shortages of something derailing an industry, you should look at both the supply side response to those high prices that will create and also the demand side substitution effect. And people usually get surprised by that demand side substitution effect. Certainly they have been in the battery industry as batteries with no cobalt have risen and will continue to rise in the years ahead. So raw materials requires huge amounts of investment over the next decade to keep up with growing demand from EVs. But I think there's still room for optimism that we can probably solve some of those bottlenecks with the right investment signals and the right price signals.

Michael Torrance :

It really goes to show the power of the market that if there's a problem and a challenge, but if there's sufficient demand and economic incentive, that that kind of thing can be overcome. In terms of the uptake trends, the story of this summer was really around high gas prices and energy price inflation. What could that mean for your analysis? I assume that you were doing a lot of this research maybe before some of that was happening. Does that change your view at all in terms of maybe the pace of change?

Colin McKerracher :

It's a tricky one, because there's different things pulling in different directions. The net effect that we have seen so far of this, is that it is increasing demand. So we are seeing higher levels of demand for electric vehicles than we've ever really seen before. And that manifests in two ways. So it's easy to say that, but how do you kind of test that? One of them is around waiting times for new vehicles. So there are very long wait lists for any of the most popular vehicles. Some of them stretching into summer 2023 before you can buy a vehicle.

Colin McKerracher :

The other thing is around residual values of existing used EVs. And generally what happens to used vehicles is they go down in value over time. That's not what's been happening around electric vehicles for the last 18 months. Used EVs have been going up in value and up in value quite significantly and more so than other used internal combustion engine vehicles. So those two data points tell you that demand is strong and getting stronger. And so we're left in this situation with, it's actually hard to know exactly what the real level of demand is, because there's such a backlog. Because at some point such a long backlog to buy a new vehicle, the consumer starts to say, well, I'm not going to do that. But it's an open question how much of that demand is being deferred versus actually destroyed?

Michael Torrance :

Can you tell me about what your research shows the analysis of the auto makers themselves is in terms of this market? This is going to be a big shift in terms of their business models.

Colin McKerracher :

Yeah, I think different parts of the automotive supply chain, the move to electric mobility is disruptive for different parts of the men in different ways. And I actually think the core automakers themselves, the big names, it's probably not as disruptive for some of them as you might think. The smaller parts suppliers, the sort of 10, 20, 50, a 100 person companies, that's a real challenge for them, because they will make one very specialized part of an internal combustion engine. So it's a very, very disruptive for them and a lot of them will simply disappear.

Colin McKerracher :

On the other end of the process. If we think of that as the sort of big end of the funnel that goes around making a car and we think of the dealers as the other end of the funnel, it is disruptive for the dealers, because of what you said around lost revenue from potential service And also because a lot of these electric vehicle startups are choosing a direct to consumer approach. So the automaker themselves, it varies depending on the automaker and that's where we've seen very different strategies from some groups. Some groups going for it right away, generally the ones at the premium end of the market, where they have higher margins, where their consumers can pay slightly more, those ones are tending to go electric faster.

Colin McKerracher :

But something else we're starting to see, particularly in markets like China, is actually the bottom end of the market is going electric as well. So that's things like mini cars and very, very small cars in urban areas. Those are all going electric very fast. So there's almost this pincher maneuver coming in those markets, where the top end's going electric, the bottom end's going electric, and it's really squeezing towards the middle. And that's where groups like Toyota and Volkswagen play mostly in that market. The ones we think are best positioned are the ones that are making large platform investments and that they're building many different electric vehicles on top of, and that are also the ones who are securing large amounts of battery supply to feed those vehicles.

Michael Torrance :

Colin, going back to the topic of electrical grids, one of the fascinating parts of your report was vehicle to grid infrastructure. What does vehicle to grid mean and how does that fit into your overall analysis of the economics of electric vehicles going forward?

Colin McKerracher :

Yeah. So vehicle to grid is the ability of an electric vehicle to send power back up to the grid. And there's different flavors of this. There's a sort of more immediate close flavor of it, which is that just you can plug things into the vehicle. This is sometimes called vehicle to load. Then there's vehicle to home, which says in a blackout, you power your home from the vehicle, get a couple of days worth out of, depending on how much your electricity loads are. And then there's the more, the full version if you will, which is vehicle to grid, which is you're sending power back up to the grid and getting compensated for that.

Colin McKerracher :

Now we've been a bit skeptical. I will say, of vehicle to grid for some time, mostly because we didn't really see enough value to consumers to put their vehicles into these programs. The amount of money was relatively modest and there was some concerns around battery warranties and wearing out the vehicle. Now what's kind of changed our view on that is that one, batteries are performing very, very well. So some level of vehicle to grid participation looks like something that an automaker could factor into their battery warranty and factor into the cycling that they're expecting of their battery. The other one is really just the rise of fleets. So we're seeing more and more fleet purchases of EVs. And some of those fleets are really well suited to doing vehicle to grid. So the early applications of this are going to be on the fleet side and things like say an electric school bus or a fleet of electric school buses, it's used twice a day. Other than that, it's a big battery that's just sitting there. And there's a potential revenue stream there instead of just an idle asset that's sitting around.

Colin McKerracher :

So the work that we did actually this time was to look at how much of a role it could play in integrating renewables, in cutting total investment in the power system, and how much value it could return to consumers. And in both of those we came out a little more optimistic than we went into it. Saying, actually it looks like you could increase the amount of renewable generation on the power system and reduce the cost of the power system and reduce the CO2 emissions of a power system of a given country with even relatively modest participation of vehicle to grid.

Michael Torrance :

Great. Well, one final question, Colin. If you were speaking to a room of CEOs and investors on what should they be watching around the EV market, what would you tell them?

Colin McKerracher :

I'll go by the areas that we're getting kind of the most interest in right now. And that's really around two of the things we've talked about today, which is charging infrastructure and around battery raw material supply and battery recycling. So I think these are the two areas that we flag in the report that are both opportunities and challenges. There are fortunes to be made and lost on this. And I think you do need a lot of targeted investment, but with the right targeted investment, you can also get pretty significant returns. And you're seeing that right now in the battery supply chain, you're seeing some of the minors and the refiners making very large amounts of money. So I think those are kind of the two we would say to really keep an eye on, because that's where the biggest challenge and also the biggest opportunities still sit.

Michael Torrance :

Excellent. Well, thank you so much Colin, for your time.

Colin McKerracher :

Thank you, Michael and thank you, Katie. A pleasure to chat to you today.

Michael Torrance :

Thanks for listening to Sustainability Leaders. This podcast is presented by BMO Financial Group. To access all the resources we discussed in today's episode, and to see our other podcasts, visit us at bmo.com/sustainabilityleaders. You can listen and subscribe free to our show on Apple podcasts or your favorite podcast provider and we'll greatly appreciate a rating and review and any feedback that you might have. Our show and resources are produced with support from BMO's marketing team and Puddle Creative. Until next time, I'm Michael Torrance. Have a great week.

Speaker 4:

The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries. This is not intended to serve as a complete analysis of every material fact regarding any company, industry strategy or security. This presentation may contain forward looking statements. Investors are cautioned not the place undue reliance on such statements as actual results could vary. This presentation is for general information purposes only and does not constitute investment, legal or tax advice, and is not intended as an endorsement of any specific investment, product or service. Individual investors should consult with an investment, tax and or legal professional about their personal situation. Past performance is not indicative of future results.