Electric cars are no longer a niche market. Climate action and consumer pressure are accelerating progress towards a tipping point for clean energy. How can investors get on board?
The UK has begun consultation on bringing the date of its ban on the sale of petrol and diesel cars and vans forward from 2035 to 2030.1 For France, the deadline for banning the sale of cars powered by fossil fuels is 2040.2 Scotland has set its own date of 2032, although hybrids will still be permitted.3 Germany and the Netherlands are aiming for 2030. Norway is more ambitious still, with a 2025 target.4
None of these dates is yet enshrined in law; some are firm intentions, others are hazier 'policies'. But the direction is clear. All these countries intend to ban production of petrol and diesel vehicles. Other major economies, such as China, are still considering their own target dates.
The days of the internal combustion engine are numbered. In its place will come electrification: clean public transport, combined with electric and battery-driven road vehicles. (Hybrid cars, which combine conventional engines with an electric motor, seem set to have a reprieve for now, in some countries.)
The traditional automobile companies can see the writing on the wall – most have their own electric models in development
Climate and cost drivers
It's not so long since electric cars were dismissed with jokes about 'shocking' prices, or the length of the extension cord that drivers would need. Few petrolheads are laughing today.
The speed of the shift has been triggered by various factors, including the pressure on countries to reduce emissions and meet the legally binding 2015 Paris Agreement on climate change.
Transport, responsible for about 23 per cent of global greenhouse gas emissions, is an obvious target for action. Many city leaders are already restricting diesel use, imposing congestion charges and expanding the availability of charging points for electric vehicles.
The recent lockdown also had a dramatic effect of pollution levels, which were down some 30 per cent in the world's COVID-19 hotspots as mobility dropped around the world.5 People have seen knock-on benefits in the reduction of noise, better air quality and the growing prevalence of wildlife.6
At the same time, the cost of the technologies required has been falling, making clean energy more attractive. The cost of producing one megawatt-hour of electricity using solar is now USD50 – less than half that of electricity using coal,7 with the cost of generating renewable power falling rapidly over the past 10 years and renewable energy projects proving cheaper than even the most inexpensive coal-fired power plants.8
Critically, battery costs are also in decline. The cost of running lithium-ion batteries, now seen as the standard for electric vehicles, has fallen by 75 per cent over eight years. Analysts have calculated that each time battery production doubles, costs fall by a further 5 to 8 per cent.9
Consumers buy in
If policymakers have decided that electric vehicles are the future, drivers – and the markets – aren't far behind.
In China alone, 770,000 electric vehicles hit the roads last year, a 50 per cent increase. By 2025, one in every six cars sold worldwide is expected to be an electric vehicle.10 The traditional automobile companies can see the writing on the wall. Most have their own electric models in development. In 2019, analysts calculated that the big car makers were investing over USD90 billion in what remains, for now, a relatively tiny market.11
Giants vs. newcomers
The legacy manufacturers are up against a host of agile start-ups which have gained the attention of investors.
The diverse suppliers of components for electric vehicles are also attracting interest. Like the carmakers themselves, suppliers have had to make a judgment on how far and how quickly to jump into the electric vehicle market.
Ride-hailing companies are entering the market too, many of them devoting parts of their fleets to electric cars. Besides boosting demand, this will have the effect of getting consumers accustomed to using electric vehicles – an important step towards mainstream adoption.
Beyond the car plants, there are opportunities in related fields. Those in the battery supply chain who can successfully feed the growing demand stand to gain.
Electric charging networks will be a growth market too. A host of companies are vying to set them up. A few carmakers are establishing their own networks to help broaden the appeal of their products, rather than rely on third-party providers.
Other innovators are seeking ways to enhance the efficiency of electric vehicles. Vehicle-to-grid technology, for example, could allow parked vehicles to charge their batteries, or to discharge their batteries back to the grid.
Investment in the raw components required by electric vehicle systems, including copper, lithium and cobalt, may be another useful angle to explore. Even allowing for current attempts to reduce cobalt content in batteries, the cobalt demand for electric vehicles is expected to grow 25 times by 2030.12 Mining companies are stepping up production specifically to meet clean transport demands.
Risks and rewards
The opportunity posed by charging networks is also one of the risks: the lack of charging points is seen by consumers as the major barrier to the adoption of electric vehicles.
The development of speedier charging will also be critical, enhancing the appeal by offering long-distance travel. Only a quarter of the 430,000 publicly accessible chargers worldwide in 2017 were 'fast' – that is, taking around 30 minutes to charge.
More widely, the stance of the current US administration on climate change and its withdrawal from the Paris Agreement is a source of uncertainty for the future of this sector. From carmakers to suppliers and grid operators, there are multiple opportunities, but neither newcomers nor traditional players can be assured of success. Those who blend great design and innovation with efficient production techniques are most likely to reap rewards.
In a crowded market, there are bound to be losers as well as winners, so investors need to be selective. Speak to your Relationship Manager about a strategy for investing in clean transport.
1 Govt.uk, Consulting on ending the sale of new petrol, diesel and hybrid cars and vans, February 2020 ↩
2 Reuters, France to uphold ban on sale of fossil fuel cars by 2040, June 2019 ↩
3 AutoExpress, Scotland to ban petrol and diesel car sales by 2032, September 2017 ↩
4 Countries are announcing plans to phase out petrol and diesel cars. Is yours on the list?, World Economic Forum, September 2017 ↩
5 Sciencedirect, COVID-19 pandemic and environmental pollution: A blessing in disguise?, August 2020 ↩
6 News Medical, Improvements in air quality and health during COVID-19 lockdown, April 2020 ↩
7 Lazard's Levelized Cost of Energy Analysis – Version 11.0, Lazard, 2017 ↩
8 World Economic Forum, Chart of the day: Renewables are increasingly cheaper than coal, June 2020 ↩
9 Electric carmakers step up pursuit of enhanced EV batteries, Financial Times, September 2018 ↩
10 One in Six New Cars in the World Will Be Electric By 2025, Bloomberg, November 2017 ↩
11 Global carmakers to invest at least USD90 billion in electric vehicles, Reuters, January 2018 ↩
12 Global EV Outlook 2018, International Energy Agency, 2018 ↩