By Colin McKerracher
Head of Advanced Transport
Bloomberg New Energy Finance
The global automotive industry is entering a period of profound transformation. The combination of supportive policy and improvements in lithium-ion battery technology have enabled electric vehicles to gain a toehold in a market that has been dominated by the internal combustion engine for over a hundred years. Meanwhile, tightening fuel efficiency regulations and urban air quality concerns are putting increased pressure on automakers to improve the rest of their fleet.
Global passenger electric vehicle sales will hit about 1 million in 2017, up from one hundred thousand just a few years earlier. There are now almost 3 million electric vehicles on the world’s roads. But before we get too excited about this progress, it is worth bearing in mind that the global fleet of all cars is around 1 billion. Reductions in emissions from road transport will be a key part of meeting climate targets, but an average vehicle is on the road for 12-15 years, creating significant lock-in to our current transport system. So, just how far can EV adoption go and what would this mean for energy and automotive markets?
Technology is changing
Lithium-ion battery prices per kilowatt-hour dropped 74% between 2010 and 2016 and their energy density is improving by around 5% per year. This puts electric vehicles on a path towards being fully cost-competitive with their internal combustion counterparts, a point that will be reached in different countries from 2025 onwards. In response, automakers around the world are ramping up the number of electric models they offer – there are 150 different plug-in hybrids and pure electrics available today, and this is set to rise to over 240 by 2021. Groups like VW, Daimler, Volvo and Nissan have made aggressive plans to electrify their vehicles over the next 10 years.
China is pushing the hardest here. China’s 2025 auto plan calls for internal combustion sales to flatline and EVs to make up all vehicle sales growth over the next 7 years. Its recently introduced ‘New Energy Vehicle’ quota requires automakers to sell a set percentage of electric or fuel cell vehicles, which it will ratchet up over time. China is doing this not just to reduce oil imports and improve urban air quality, but also for industrial policy reasons. As the vehicle mix shifts, China wants to position its domestic automakers to leapfrog established international brands. A thriving, globally competitive auto sector is a major source of employment, investment and innovation. Nobody wants to see their national champions left behind.
A view to 2040
Each year at Bloomberg New Energy Finance, we publish a comprehensive global Electric Vehicle Outlook, in which we look at all the technology, policy and economics factors that could influence EV adoption over the next two decades. In this year’s report, we concluded that 54% of the world’s vehicle sales would be electric by 2040, with Europe, China and the U.S. the largest EV markets. Some countries will get there much sooner. In Norway – the leader on EV adoption – sales are already above 40% and the government is aiming fully to phase out traditional vehicle sales by 2025. Our forecast would mean 530 million electric vehicles on the road in 2040, or around a third of the total fleet. This is a dramatic change from today and would require significant scale-up in the battery manufacturing supply chain, in materials, and in charging infrastructure. This many EVs would displace around 8 million barrels per day of oil demand, and would increase global electricity demand by around 5%. The power system can accommodate the additional demand, but smart-charging systems will be needed to ensure vehicles are not contributing to demand during peak periods. CO2 emissions would also fall. Even with power generation emissions in different countries factored in, EVs still have a lower CO2 footprint per kilometer driven and this gap is set to widen further over time as the amount of renewable power generation grows.
So what holds back further adoption? Charging infrastructure is still a major barrier, particularly in urban areas with limited off-street parking. Low average vehicle purchase prices and power grid issues and in emerging economies also play a role. Supply constraints for key materials like cobalt, lithium and graphite could still slow down an extension of the battery cost declines seen in recent years. Governments will need to recoup some of the lost revenues from fuel taxes levied on gasoline and diesel, while consumers will need to adjust how they refuel their vehicles.
Accelerating the transition
Of course, there are several factors that could cause things to move much faster. Our analysis is based mostly on economics and current technology trajectories, but a step-change in battery density or an improvement in charging technology options would hasten the transition. National governments in the UK, France, the Netherlands and even India have indicated that they want to phase out internal combustion engine sales altogether. While these targets typically lack specific measures, they show just how quickly the landscape is changing. In the world’s largest cities, urban dwellers are becoming increasingly concerned with poor air quality and could force municipal governments to move even faster than their national counterparts. Policy has a big role to play here.
On top of all this, new mobility business models such as ride hailing and car sharing are gaining traction around the world. Some customers are opting to buy kilometers of mobility rather than a vehicle of their own. Autonomous vehicles are set to debut in the 2020s and would accelerate this trend. At high utilization rates, electric vehicles have much lower costs per kilometer and could be ideal for these types of applications.
The automotive sector will change more in the next 10 years than it has in the last 50. We are heading towards a cleaner transport system with benefits for the environment and for consumers around the world, but much work remains to be done.
This opinion piece originally appeared in Climate Action’s publication for COP23 in November 2017; you can download the original version here.