Mass-market electric vehicles create new challenges for the grid
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The Super Bowl in 2000 has gone down in history as the peak of the dotcom bubble. Advertising slots during the game are the most expensive on US television, and the fact that 14 dotcom companies were able to air commercials that year was a clear sign that there was too much capital chasing too many fashionable but questionable business propositions. Not many of those 14 advertisers are still extant today. The failures, including the notorious flop Pets.com, which went bust before the year was out, are more numerous.
The adverts in the 2022 Super Bowl, held last Sunday, similarly seemed to capture a zeitgeist. Two products emerged clearly as the hottest of the moment: cryptocurrencies and electric vehicles. General Motors, BMW, Polestar, Kia and Hyundai bought space solely to promote electric models, while Nissan and Porsche ads also included EVs. There was also a commercial for Wallbox EV chargers. President Joe Biden put out a statement saying: “The ads during last night’s Super Bowl were clear: The future of the auto industry is electric.”
The parallel with the dotcoms in 2000 might suggest this is a strong “sell” signal for the EV industry, and some people have taken it that way. But while the Super Bowl ads in 2000 may have signaled in the short term that the bubble was about to burst, they also correctly pointed to the internet as the technology would dominate the first decades of the 21st century.
The position of EVs today seems similar. Manufacturers are investing heavily in capacity to produce EVs, making it inevitable that their market share will rise. In Wood Mackenzie’s base case forecast, EVs are expected to be about 6% of passenger vehicle sales in North America this year, rising to 26% in 2030, 63% in 2040, and 78% in 2050.
That is a profound shift in the energy system: a more fundamental change in surface transport than anything since the introduction of the motor car. It will create a new set of challenges for electricity supplies. The likely consequences of the advancing electrification of road transport include not only increased demand, but also new patterns of consumption through the day, new strains on the grid, and new questions over cost allocation and fairness.
Electricity demand in developed countries had generally plateaued before the pandemic hit. US electricity sales in 2019 were just 1.5% higher than in 2010. The rise of electric vehicles is set to transform that position, reigniting growth in power demand. Up until the early 2030s, the majority of the growth in demand for power on the US grid is likely to be offset by improvements in energy efficiency and increases in distributed generation, says Samuel Berman, a principal analyst in Wood Mackenzie’s power and renewables practice.
Beyond that, however, the impact of EVs could start to become significant. Over the period 2019-50, electricity sales in North America are projected to grow by about 39%. By 2050, EV charging could account for about 17% of the total demand for electricity. Meeting that increased demand will require substantial investment in every part of the electricity system: generation, transmission and distribution.
The shape of demand through the day is also set to be different: most people are likely to want to charge their cars overnight, when demand is currently weakest. Peaks in demand are expected to rise in line with total energy consumption. Peak regional demand in California, for example, is projected to rise from about 58 gigawatts last year to about 84 GW in 2050. Those peaks are likely to be reached in the evening, creating particular problems for grids that rely heavily on solar power.
The need for investment to provide additional generation and match new patterns of demand means the cost of electricity from the grid is likely to increase. This is our forecast of off-peak power prices in California out to 2050, showing the wide seasonal variation and much higher rates that we expect in the winter.
The shape of demand through the day is also set to be different: most people are likely to want to charge their cars overnight, when demand is currently weakest. Peaks in demand are expected to rise in line with total energy consumption. Peak regional demand in California, for example, is projected to rise from about 58 gigawatts last year to about 84 GW in 2050. Increased demand in the evenings and overnight creates particular problems for grids that rely heavily on solar power.
The need for investment to provide additional generation and match new patterns of power supply and demand means the cost to consumers of electricity from the grid is likely to increase.
Those increased costs could put an extra burden particularly on consumers on lower incomes. “People who are able to have rooftop solar and home energy storage are going to be able to insulate themselves to some extent from increased electricity bills,” Wood Mackenzie’s Berman says. “People who don’t will be exposed to the impact of rising costs.”
Time-of-use rates, charging more for electricity when the cost of generation is higher, could add to that burden. Rates in the evenings, when people have the lights on and solar generation is zero, could be even higher because of the increased load from charging EVs. Regulators will need to think about the impact on lower-income households without residential storage. The California Public Utilities Commission has moved recently to address the equity issues raised by distributed generation, setting off an intense debate, and the rise of EVs will sharpen those arguments.
It is worth remembering, too, that all these changes are coming even in Wood Mackenzie’s base case, representing our view of what is most likely to happen. To meet the goals of the Paris climate agreement, EV adoption would have to be even faster. The US market share for EVs would probably need to be around President Biden’s goal of 50% by 2030, rather than the Wood Mackenzie forecast of 29%.
In our new scenario for how the world could reach the Paris goal of limiting global warming to 1.5 °C, EVs are 65% of the US passenger vehicle stock by 2040, as opposed to 35% in our base case forecast. Getting on that Paris-aligned pathway would make the additional demand for electricity correspondingly greater. EVs’ dominance of the Super Bowl advertising showed they are clearly moving into the mainstream in terms of public awareness. The implications and associated challenges are not yet so widely understood.
US E&Ps emphasise capital discipline
Reporting season for the listed independent E&Ps is well under way, providing some answers to one of the big questions in global oil markets right now: is the US tight oil industry going to return to rapid growth to take advantage of WTI crude above $90 a barrel? The answer so far, from companies including Pioneer Natural Resources, Devon Energy, Marathon Oil and Continental Resources, is no.
Continental, for example, set out a 2022-2025 target centered around flat spending, with low-mid single digit production growth annually. Pioneer raised its dividend and its spending on share repurchases, and expects to bring 475 to 505 wells into production this year, compared to 534 last year. It is projecting annual production up just 1%-5% this year.
Devon also increased its dividend and stepped up its share buyback programme, and cut its debt by $1.2 billion last year. Under its fixed-plus-variable dividend plan, Devon will distribute up to 50% of its excess free cash flow after the fixed payment is covered. Its targets for annual oil production growth will be up to 5% a year.
Wood Mackenzie’s Robert Polk said the comments from Continental were typical for the sector. “While diversified companies like ExxonMobil, Chevron, and ConocoPhillips can grow Lower 48 production by reallocating capital from elsewhere, the US-only E&P’s will continue to resist big bumps to capex or organic double digit production growth,” he wrote.
Conflicting signals about Russia’s intentions towards Ukraine have driven volatility in oil prices this week. Brent crude began Tuesday at about $96 a barrel, dropped to about $92, then by Wednesday afternoon had rebounded to close to $96 again. Anthony Blinken, US secretary of state, told the UN Security Council on Thursday: "As we meet today the most immediate threat to peace and security is Russia’s looming aggression against Ukraine… The stakes go far beyond Ukraine. This is a moment of peril for the lives and safety of millions of people."
Another geopolitical factor influencing oil prices this week has been the negotiations over Iran’s nuclear programme, which could lead to sanctions being eased. Reuters reported that it had seen a draft text of a possible deal between the US and Iran. The potential agreement would include a relaxation of curbs on Iran’s oil exports, although not as a first step.
As they look for ways to alleviate the pain for US consumers of the rising cost of living, Democrats have been considering a temporary cut or suspension in the federal gasoline tax. The idea has come in for widespread criticism.
European gas prices were also volatile this week. Benchmark TTF futures for March 2022 started the week at €83.60 per megawatt hour (equivalent to about $28 per million British Thermal Units), then dropped to about €68.50 per MWh on Tuesday, recovering to about €71 / MWh by Thursday night.
SoCalGas, a California utility, has proposed a green hydrogen infrastructure system that would be the largest in the US if it gets built. The company said the proposed hydrogen pipeline system, called Angeles Link, could “significantly decrease demand for natural gas, diesel and other fossil fuels in the LA Basin”. Gavin Newsom, California’s governor, said of the plan: “I want to salute it as a step in the right direction.”
BlackRock, the investment management group, has sent a letter to lawmakers and oil and gas executives, saying it will “continue to invest in and support fossil fuel companies, including Texas fossil fuel companies”, despite its pledge to support the goal of net zero greenhouse gas emissions by 2050. The fund manager said it was possibly the world’s largest investor in fossil fuel companies, and “we want to see these companies succeed and prosper”. The letter follows a call from Dan Patrick, lieutenant governor of Texas for BlackRock to be placed “at the top of the list of financial companies that boycott the Texas oil & gas industry”. Texas last year passed a state law imposing a “prohibition on investment in financial companies that boycott certain energy companies”.
West Virginia and other US states with significant coal and coal power industries are looking at nuclear power, and small modular reactors in particular, to replace aging coal-fired plants that are being shut down.
Researchers backed by the US Department of Energy are exploring the possibility that California could be “the Saudi Arabia of lithium”.
The Biden administration has launched a series of initiatives intended to cut carbon emissions from US industry, including support for hydrogen use and carbon capture and storage.
The production of corn-based ethanol in the US has failed to meet government targets for cutting greenhouse gas emissions, and has “negatively affected water quality, the area of land used for conservation, and other ecosystem processes”, a new study from a group of academics has concluded.
Australia’s largest coal-fired power plant is on course to be closed by August 2025.
Manufacturing has started on the world’s largest marine reactors, which will be used to power a new generation of Russian icebreakers, intended to keep open Arctic shipping routes.
And finally: back to the future in EVs. The DeLorean sports car has long been a cult favourite because of its starring role as the time machine that took Marty McFly back to 1955, but not much more than that. Now there is a new attempt to revive the marque, this time as an EV. The company that now owns the brand did not make a flashy ad for the Super Bowl, but did release a short teaser video featuring the car’s signature gull-wing doors. It was subsequently confirmed that there is a plan to launch an electric DeLorean, and to hire 450 people in San Antonio to build it. Details about the putative new car are still sparse, and DeLorean does not look likely to give Elon Musk any sleepless nights any time soon. But if you have always wanted to say “where we’re going, we don’t need roads” before you put your foot down, you should keep an eye out for further news.
Quote of the week
"What I think all European countries need to do now is get Nord Stream out of the bloodstream, yank out that hypodermic drip feed of Russian hydrocarbons that is keeping so many European economies going. We need to find alternative sources of energy, and we need to get ready to impose some very, very severe economic consequences on Russia.” — Boris Johnson, prime minister of the UK, urged European countries to diversify their energy supplies to reduce their dependence on Russia as a result of the escalation of tensions with Ukraine.
Chart of the week
This comes from our latest Horizons report, by Alex Whitworth, Yanting Zhou, Xiaoyang Li and Shirley Zhang, about China’s boom and the energy transition. It shows global price ranges for wind turbines and solar modules, with Chinese manufacturing prices shown by the green triangles. What is striking is that China’s costs remain right at the bottom of these global ranges. Those costs are also likely to drop again next year. As the authors put it: “Just as China’s boom year played its part in pushing up clean energy costs for the rest of the world, China’s manufacturers are already helping to drive them down again.”