Jul 13, 2018

The Electrification Game

By Alex Barrera • Issue #32 • View online

Hello everyone! A little late this week but I hope the wait was worth it. This week I’m tackling the challenges and opportunities around the new Electric Vehicle industry. I cover many aspects of it and I hope it gives a 360º view of what’s the current status of the industry. It’s a long read that can be enjoyed during the weekend with a nice coffee or tea. Enjoy!

Read the article on the blog here.

15 minutes read.

Photo by NASA on Unsplash

Our world is changing and changing fast. Some transformations are straightforward. Others are the consequence of the convergence of certain trends.

The electrification of transport and the rise of Electric Vehicles (EV) is one such evolution. EVs are, by no means new. They’ve been around for a time now. However, the confluence of three big mega-trends has accelerated its growth and deployment worldwide.

On one side, we have the continuous trend towards a more sustainable energy footprint. In this case, this means the rapid growth of renewable energies.

Source: IEA Renewables Report 2017

Despite Trump’s EPA perversion, most countries understand the need for a sustainable and clean environment. Renewable energies are becoming critical to achieving such goals. On top of that, clean energies are becoming of enormous importance in the geopolitical arena. Most countries want the break free from the tyrannic shackles of fossil fuels and the political games attached to them.

Another significant trend is one related to health. As major cities keep aggregating population and turn into megacities, traffic, pollution and air quality are becoming crucial for further growth. The need for smarter and cleaner transportation systems is one of the major challenges.

Source: Air World In Data: Air Pollution

The last trend is the final piece of the puzzle, the rise of ride-sharing services and Autonomous Vehicles (AV). As ownership declines and car fleets increase, the need for sustainable fuels grows. In this case, it’s not just a health issue, but an economic one. If I need to maximize miles per day, I also need the cheapest (government incentivized) fuel for the vehicles. And surprise, surprise, those are Electric Vehicles.

As I said before, EVs existed before, but the intersection of these three global trends is supercharging its growth. The fastest adopters will be, as usually happens in innovation, developing countries. And the apparent poster boy is China.

Source: IEA Global EV Outlook Report 2017

Despite the acceleration of the industry, massive adoption is still hindered by several aspects. The first one is the lack of a big offer of EV models. If you want something semi-usable, your choices are pretty limited so far to about ten models.

The second issue is known as range anxiety. The lack of a decent driving range without the need to recharge is still a limiting factor. I recently asked a friend, and he confessed he sold his EV after a year due to this and other complaints.

Range restrictions are a byproduct of battery capacity and recharging stations infrastructure. The current infrastructure is still rather brittle, and it makes it tough to use an EV beyond your neighborhood.

Fast changes ahead

The industry, though, is evolving fast. This year and the next will become significant in terms of new models. All the major automakers will push novel EV models into the market. This new wave will dramatically increase the offering. New versions will come with better batteries (longer driving ranges), and faster-charging capabilities (from 1h charging to 15 minutes).

Battery costs are falling rapidly, and that’s allowing bigger and more densely packed batteries for every maker, not just Tesla. That’s pushing the millage of most models into a decent range, so expect significant gains next two years.

Source: IEA Global EV Outlook Report 2017

The market is already feeling these improvements and sales are growing exponentially. One of the major drives for many is the existence of car sharing EV fleets operating in their cities. The fact that you’re used to driving an EV every day is a great incentive to remove the fear of owning one. The other push is coming from China, who is making EVs a national priority.

Source: IEA Global EV Outlook Report 2017

Charging stations and general EV infrastructure is significantly improving too. The last 18 months have shown a rapid expansion of most charging networks. Not only they’re growing in terms of locations, but also regarding charging speed and available charging stands per station. These rapid improvements are the underpinnings of the quick growth the industry is experiencing.

Source: IEA Global EV Outlook Report 2017

Despite the good news, some demographic segments are still underrepresented. While EVs are becoming nice conveniences, especially in cities, they still make it hard for families. There are no present or future plans to support the needs of family transportation. That is a big chunk of long-range driving. A segment that requires, not only capable EVs, but a supporting infrastructure for kids and not lonely chargers in the middle of a deserted plain.

Infrastructure challenges

But not everything is there yet. Yes, it’s growing, but there are still big roadblocks for significant adoption.

Location

The locations of most chargers for EVs is still a problem. The necessary infrastructure requires three different settings. Home chargers, which are, well, the plug you have at home. These chargers tend to be slow, which is ok if you have all night for charging.

When on the road most EVs need destination chargers. These are charging points you can use at your final destination. Think of your office, a mall, the airport, a hotel, etc. These are a mix. Most are still slow chargers, which depending on the case, might be ok or not. The time we spend in a mall is not the same as the time at the office.

The last location is what I call on-the-road chargers. These would be the equivalent of gas stations in major highways. To be able to extend the EVs range and take them out of the city, we need to have charging stations on the way to long-distance destinations. These, in particular, require fast chargers to avoid long waits and stops.

So far, big cities are more or less well covered with a mix of home and destination chargers. Many of these city charging points, though, have somewhat tricky access. Either they’re private, in hard to reach points or behind closed doors. The accessibility of charging stations should be total if the industry wants to keep growing.

When on the road, the location of intermediate charging stations is also a problem. Most chargers are located haphazardly. The reason is ownership fragmentation. The cost of some charging stations is so cheap and the barrier of entry so low, that any business can set up one. As it’s “unplanned” and there is no follow through, these stations tend to be poorly located, nonvisible and very unreliable.

ChargeMap of Spain

Slow charging stations are excellent for home or long-term waits. But when on the road, there is a need for fast charging stations. These are expensive. They can cost north of 50.000 euros a piece. The steep price and the lack of market traction have been one of the reasons why they’re scarce. Until recently, the only reliable fast-charging network was Teslas.

Autonomy increase per 20 minute recharge depending on the speed (in kW) of the charger station.

Fast charging though isn’t unique to long distance drives. The nascent ride-sharing industry is one of the largest customers. The need to put the shared EVs back into operation as fast as possible is a big operational must. Fast charging is, therefore, a much-needed feature for fleet operators.

Source: IEA Global EV Outlook Report 2017

On top of the random locations and lack of capillarity, most stations have far few chargers. The average station holds two chargers. This is insufficient to serve the growing EV market. Tesla understood this from the onset. They’ve been upgrading their stations and fitting them with 10+ chargers per station. The exciting thing is, they’ve done it ahead of the market growth, not after.

Tesla Supercharging Global Network

Last but not least, most charging stations are emplaced in locations that don’t have much amenities. The fastest charge we can get now is roughly a 20 minutes one. Even if this was the norm, with no services around, it could get frustrating. Stations need to foster a service ecosystem around them, and this part will take time.

Energy problems

While Electric Vehicles consume electricity from the grid, their consumption is small compared to other energy-hungry appliances.

Source: IEA Global EV Outlook Report 2017

However, as the number of ride-sharing companies increases and the markets get flooded with EVs, things will change. One of the current worries is the overload of the low voltage grid.

Most of the home chargers connect to the low voltage grid. This network wasn’t designed to support such a load. If a rapid number of EVs start cropping in the market and pulling from the low voltage grid, they might take it down.

Overview of Swiss transmission & distribution grid

Fast chargers are typically connected to the medium voltage network. This gives them much more power, reduces unreliability and allows for multiple chargers without a loss of power. Nonetheless, this kind of grid connection isn’t always available. It might require permits, or it simply might not exist in certain places.

EV fast chargers might push for a need of a dedicated electrical grid just to support them. Japan’s TEPCO had to create such a dedicated network to support the growing rise of their CHAdeMO fast chargers.

One of the proposed solutions to accelerate the expansion of such fast charging networks is the use of solar energy. As stated before, EVs are not power hungry, but they draw enough to place some strain on the grid. What if we could create an off-grid energy independent unit? It wouldn’t need a connection to the electrical network. It would generate enough electricity to power all fast chargers and store the extra in stationary batteries for its use when the sun is gone.

Source: Fastned

Economics of charging stations

For many years, Electrical Vehicles and renewable energy had the economics against them. As with any disruptive technology, the initial investment is massive. As prices of components go down and efficiency goes up, the overall investment decreases and allows a reasonable return.

We are at that point. Electricity prices, EV’s rising market share and the push and drive of the underlying trends are making this industry profitable.

As with any brick and mortar business, the initial investment is still significant. For a decent fast charging stop with four charging stations, we could be looking at an initial investment of 360.000 euros. Assuming the current average electricity price (in Spain) and a 50% usage of the station, we would break even in roughly two years.

Source: OhmHome - EV Charging Station Cost

There are many If’s in such an equation, but it’s not an outrageous investment. Now, taking into account the upfront cost, it’s understandable that there aren’t that many fast charging networks out there.

Fastned Key Figures - Annual Report 2017

There is still a remaining question. Should we charge drivers for the electricity they recharge? Tesla’s network is free for most of their users, but as many point out, that’s not sustainable. In a way, it resembles companies like Uber which subsidizes an artificial offer of drivers. Tesla has been doing the same with their stations. The question is always until how long. My prediction is that it won’t be much longer for Tesla to start charging every single user. The market is hitting the tipping point, and it’s at a place were, despite charging drivers, the cost is still half of what gas is.

Fastned Revenues - Annual Report 2017

Fastned Key Indicators - Annual Report 2017

Meanwhile, some startups like IMPACTs Spark Horizon is trying a different business model. Why apply the old pay per use model? Why can’t we displace the cost to interested advertisers? That’s Spark’s proposal, one that’s being received with open arms so far. It does make sense. I have the drivers attention for at least 20 minutes. Why not engage with him somehow and create a lasting impression? Not only that, as EVs are digital, it’s easy to tie a user to their online persona and create targeted experiences tuned for them.

I don’t think it will work everywhere, but I can’t shake the notion that in the future we’ll see hybrid business models operating in the space.

Spark Horizon EV Charging Stations

The rise of the competitors

As I mentioned before, Tesla isn’t the only player anymore. For all the criticism Tesla gets, they’ve done outstanding work. Not only were they pioneers in the space. They’ve set many of the behavioral standards.

One of their smartest moves was to deploy a free-for-all fast-charging network. While some debate the long-term sustainability of the system, I would refer back to what I wrote about the difference between finances and impact. Tesla might crash financially, but they’ve set up the norm. And it’s not going away. It’s their moat and lock-in strategy, and they’re winning at it.

Not only do they have the most extensive network, but they also have the fastest chargers, the best locations, and the most pleasurable designs. The whole Tesla experience is orders of magnitude ahead of anyone else.

That said, the war is on. New entrants are picking up ground, and the unsexy market turned into a new format war. The competitors are coming up with new charging standards, all different from Teslas. This standard fragmentation is turning the problem into an even bigger one.

Right now there are, at least, three different standards: Tesla, CHAdeMO (Japan) and the CSS standard.

“The CHAdeMO Association made available the specifications for charging up to 200 kW but - at least in Europe - no vehicles have been announced that support CHAdeMO charging at more than 50 kW. It remains to be seen how CHAdeMO will develop in Europe since the CCS standard is increasing its market share very quickly.”

Everything you’ve always wanted to know about fast charging - Fastned blog

It reminds me of the VHS vs. Betamax wars or if you’re a little younger, the HD DVD vs. Blue-Ray conundrum.

On top of these standards, the latecomers are building their charging networks to try to compete with Tesla. Companies like BMW with their ChargeNow network, E.ON-Clever’s association, Fastned Netherlands network, IONITY Consortium or the independent Porsche’s Mission E network for North America. Some are doing better than others, but what’s clear is that there’s a need for a unified established system across vast geographies.

The truth is, Tesla is still three to four years ahead of everyone else. It’s not only their superior charging network. It’s their holistic vision. Not only they have superior chargers, better driving range, and better design. They have better navigation systems, Autopilot, home stationary batteries and vertical energy integration systems through SolarCity. And this is what we know off.

But maybe, the essential asset for Tesla isn’t their technology, but their brand. A quick look at all the EV online publications shows the big truth. Tesla occupies ¾ of all the news around EVs. That, despite all their innovation, is their biggest strength. One that’s hard to match; one that few are contending.

Smart Grid

Electrical Vehicles aren’t just for driving, though. They are sophisticated digital machines with powerful batteries. This combination might be useful, not only for driving but for energy regulation.

An increasing number of regions are fast forwarding their renewable energy strategies. Oil and Gas dependency is becoming a costly and dangerous drag.

These states are pushing new mandates that mark sharp thresholds for future years. Such is the case in the state of California or the European Region.

One of the problems with Renewable Energies though is their generating intermittence. This inconsistency creates several problems including overgeneration, under generation and very pronounced up-ramp and down-ramp effects.

“Given the intermittent generating profiles of renewables such as wind and solar, unique challenges arise from increasing renewables generation to maintain grid balancing (the matching of supply and demand), which is critical for maintaining the reliability of the electricity grid.”

Clean vehicles as an enabler for a clean electricity grid. Environmental Research Letters. May 2018

Source: Clean vehicles as an enabler for a clean electricity grid. Environmental Research Letters. May 2018

To avoid such effects, there is an increasing need for stationary batteries that can hold the energy during overproduction and release it during underproduction phases.

These need for better control of offer and demand is giving rise to what many are calling the Smart Grid; an electrical network that can self-regulate itself and optimize the energy generation sources.

Smart Grid is a whole world on its own, but Electrical Vehicles might have a predominant place in it. Would it be possible to employ EVs as smart batteries? This is a concept known as Controllable Load. If instead of charging EVs in a dumb fashion (one-way), we could turn them into a two-way street (Vehicle To Grid or V2G), then we could turn them into a Smart Grid appliance.

These V2G operations could, in theory, enable us to regulate the problems arising from peaks and ramps due to Renewable Energy usage.

Source: Clean vehicles as an enabler for a clean electricity grid. Environmental Research Letters. May 2018

This space is only picking up now, but I wouldn’t be surprised if different states start incentivizing the use of Smart Grid devices. Up until now, the incentives were mostly cosmetic. Let’s save the environment. As we increase our sustainable energy footprint though, the motive becomes more of an operational one.

I expect a new wave of startups sprouting in this space with new ideas for smart grid washing machines, dishwashers, Roombas, etc. In this regard, some startups are already working in the area, including some exciting use of Smart Contracts and Blockchain technology. Keep an eye on it, because I expect many more coming up during the next two years.

The Ride-Sharing Tide

One of the most exciting convergence with the whole electrification effort is the rise of ride-sharing companies. The advent of this new consumption model is changing the way we understand transportation. We’re moving away from an ownership model and into a pay-per-use one. The optimizations are rather apparent, but the change has a broad impact on many industries.

The obvious one is the incentive to retrofit ride sharing fleets with EVs. It’s not only the reduction of fuel costs, but also the car-part simplification that EVs provide. Let’s remember that ride-sharing fleets are exposed to much higher use than a regular car. This means that the fewer parts the vehicle has, the lower is the cost of maintenance. So, ride-sharing companies have a big incentive to, not only become the largest owners of EVs but the most prominent evangelists.

The growth of such fleets casts doubts about the personal EV ownership model. While early adopters are buying EVs, I’m not sure the public at large will. Why would you want to own a car when the city is already blanketed with ride-sharing EVs? Even more pressing, is the fact that when using a ride-sharing platform I don’t care about charging issues. The fleet managers take care of recharging the EVs.

The change of model shifts the interest from Owners to Fleet Managers. So, there isn’t much need for home chargers but fast dedicated chargers for the fleet.

Renewable Energy Geopolitics

Another more significant question is how are these countries, cities, states, take care of the new power demands. As I stated before, while the current energy footprint of EVs is rather small, future expansion will be significant.

The need for cleaner energies, and more importantly, the breaking of fossil fuel dependency is high up on most government’s agendas.

The search for new sustainable alternatives is unleashing a significant shift within the geopolitical arena. In the same way, fossil fuel deposits are geographically bounded, so are the capacities for renewable energies.

Source: IEA Renewables Report 2017

Despite the need, not every country can generate the same amount of energy, and this will increase during the next few years. A good example is Japan. Despite how advanced they’re regarding sustainable energy generation, their room for improvement is small.

“Japanese telecom firm SoftBank partnered with Russian, Chinese and South Korean utility firms Korea Electric Power Company, State Grid Corporation of China and PSJC to develop a Global Energy Interconnection (GEI) system.”

Analysis: Japan’s rapidly growing EV market

Source: IEA Renewables Report 2017

Once again, China isn’t only competing for global innovation dominion, but it’s pairing it up with global renewable energy supremacy.

Source: IEA Renewables Report 2017

Opportunities

The EV ecosystem is growing, but there are still major challenges. And where there are challenges, there are also opportunities. The general feeling I’m getting is that more and more entrepreneurs are finally jumping into the field. I expect some innovative approaches to many of the challenges coming up soon enough.

An obvious starting point is the software aspect. From smart navigation to traffic predictions for EVs. I already see some startups competing with Tesla’s navigation system. Intelligent tools for EV drivers like IMPACTs ChargeTrip is an excellent example of this. One, which by the way, is a perfect acquisition target for some of the new entrants.

Another space I mentioned before is Off-Grid energy generation. Over the years I’ve seen several projects in this space. Most of them were aimed at developing regions like Africa. Nonetheless, the creation of alternative grids to support EVs, Autonomous Vehicles (AVs) or drones, is a space that might drive this vertical.

Smart Grid devices, as mentioned before, is another potential vertical. The convergence of IoT and Smart Grid software will start to make sense pretty soon. The space will mature, and the solutions will turn more Plug & Play.

EV ecosystem services is a space that isn’t being worked yet. Yes, until now there hasn’t been much traction, but that will change and fast. Creating services like food delivery, content & entertainment, or family-friendly attractions could become very lucrative.

One last idea that might be worth exploring is smart renewable energy prospecting. In the same way, oil conglomerates or mining rigs have their specialized prospection teams, why not the same for renewables? Where to place an EV charging station that maximizes solar energy production? Where do we set a stationary battery park to supply energy for peak demand? And wind? And geothermal? When? Where? How? Can we take advantage of a region and then sell the electricity to a power-hungry neighbor?

As far as I know, many of these decisions are still made manually. There are plenty of AI-based optimizations that can generate better yields and accelerate the expansion of EVs and renewable energy sources.

The electrification game is real, and it’s moving fast. The tipping point is fast approaching, and we’re about to see drastic changes in our transportation behaviors. Like I stated at the beginning, Electric Vehicles don’t happen in a vacuum. The convergence of other significant trends is the driving force for the change. Don’t look at the EV market in isolation but as a needed tool to deploy other substantial and holistic strategies.

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By Alex Barrera

The Aleph Report

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