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How to use 1/5th the amount of batteries and reduce emissions!
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It became clear earlier this year when I wrote Are You Going to Pay for That, the long-term trend of decreasing Li-ion battery (LIB) prices was not only slowing, but ran the risk of increasing. With supply chain bottlenecks, increased demand, inflation of many key inputs, and rising energy costs, predicting higher costs for batteries was definitely a slam dunk. In that piece I further investigate drivers for battery prices such as supply/demand dynamics, geopolitical risk, recycling, and even fiscal policy.
There isn’t enough stock (current available supply) of lithium, nickel, cobalt, manganese, copper, aluminum, etc. to build the battery cells we will need moving forward. There is extensive mining infrastructure that needs investment in order to increase flow (aka fresh supply) to match the increasing demand from electric vehicles (EVs) and grid storage.
Benchmark analysis shows that $42 billion of new capital investment is needed if the lithium industry is to meet 2030 demand. This works out at approximately $7 billion a year between now and 2028 if the industry is to meet lithium demand by the end of the decade. With batteries set to account for over 90% of 2030 lithium demand automakers continue to flirt with a move upstream.
7 billion a year for just lithium — which is extremely important but there are many other materials that have similar supply side constraints. In fact as vital as it is, it accounts for only 1% of the materials in a LIB by weight. This means the total investment in mining and processing infrastructure for many different materials will be much higher than only 7 billion. This is a tremendous price tag on an emerging industry going into a tighter monetary environment.
By far the most important demand driver in the battery price equation is EVs. Also in February, I put out an article that merely outlined the ambitious electrification targets of the major car manufacturers in my piece with the play on words, EVs - Enormous Ventures. The White House wants 50% of new vehicles to be EVs by 2030 and on average the car manufacturers have followed suit in their vision. At 8 million new cars (of ~16million total new car sales on average in US), and assuming a 1000lb battery pack, that’s 8 billion pounds worth of new LIB each year.
In order to achieve the targets outlined above, the flow of new battery materials will have to be increased through tremendous spending on raw material mining and processing infrastructure. As stated above it will take billions in new mining infrastructure which often takes years to come online. When supply cannot be changed, it is called supply inelasticity. The elastic scenario would be if we could drastically increase the new flow of materials. Unfortunately, supply is more towards the inelastic side as it takes big investment, years to flesh out new mines in most cases, and NIMBY/environmentalism in the US blocking domestic production. Benchmark noted that the cell production capability is increasing much faster than the raw material supply.
Battery capacity is currently growing at twice the speed of lithium raw material supply, however.
A total of 6 TWh of annual battery production would require around 5 million tonnes of lithium, according to Benchmark. Production of lithium last year was around 480,000 tonnes of LCE.
The other option is demand destruction. If supply cannot be met due to inelasticity, prices will shoot up causing people and businesses to not want to front the high costs which lowers demand. If the adequate investment is not undertaken then demand will simply not be met, prices will be higher, and the targets will be failed.
It’s also a lose-lose from the standpoint that the investment is inherently inflationary. It is a common misconception that EVs and electric charging will be much cheaper than combustion vehicles. The argument can be compelling on the surface and over a long enough time horizon it may be true. Over the short-medium term for sure this is hardly the case. We currently have a relatively stable gasoline price (yes its going up, but so is electricity/energy). Plus, the amount of spending required on mining and processing infrastructure, cell production buildout cost, charging infrastructure, and batteries being less energy dense than gasoline contribute to it being inherently inflationary movement. Why doesn’t the current increase in gas prices nullify my argument here? Three main reasons — energy input, energy density, and product order. Higher energy costs hurt batteries and gasoline. Gasoline is more energy dense than batteries. Third, gasoline is a 2nd order product (mining, processing, ready) where battery EVs are a 3rd or 4th order product (mining, processing, cell production, assembly+charging, ready) which means higher material and energy costs effect more steps before use.
The current White House administration is trying their best to spend their way out of the problem. The infrastructure bill, build back better that didn’t end up passing, and the defense production act (DPA) all have, had, or will likely have large spending on climate goals and thus batteries. I wrote about the issues with the DPA, but since then they made adjustments to remove any financial constraints and essentially give it unlimited funding if need be. Creating new money via central bank is a main driver of inflation and these policies (and most government programs now) are not funded by tax receipts, but new money. In addition, government funded programs tend to drive up the prices of things (ie. healthcare, education).
So what’s really more likely, the money gets spent or automakers miss their targets? Or maybe they spend a lot of money and still miss their targets. They’ve started down this path and everyone thus far is still saying they will reach their goals. There have been big delays due to supply chain breakdowns causing Tesla to halt orders and other companies to delay EVs themselves.
From the article above,
As a result, Wells Fargo analysts downgraded General Motors and Ford, as the US companies would “likely be forced to sell money-losing compliance [battery electric vehicles]”, to meet ever-stricter regulatory targets.
Since cost parity of EVs is not expected to let up within the next few years at least, electric vehicles will be money losing ventures according to Wells Fargo. This reeks of the malinvestment that I talked about recently in The Real Climate Catastrophe Pt 2. In order to achieve arbitrary targets set by the government, companies are investing billions into full EV production and infrastructure that will lose them money in the final product with grim hopes of raw material supply recovering to a satisfactory level such that they will be profitable until a few years out at least.
It would surprise me to see automakers achieve their slated electrification goals, and practically seems like an odd allocation of money and productive capacity. If emissions are the objective, it makes more sense to use the limited battery resources for hybrid vehicles instead of purely EVs. First, the inflationary pressures would be mitigated as less stress on the raw materials would be induced. Second, the average person drives 29 miles per day and average work commute is even less. Having a plug-in hybrid vehicle with an electric range of 30-40miles would likely cover the majority of miles driven. Using the same calculation as above assuming a 200lb battery, we would need 1.6 billion pounds of LIB to make 50% of new vehicles plug-in hybrids. This is one fifth the amount needed for full EVs. You could actually make 100% of new cars plug-in hybrids and it would only be two fifths of what is needed for full EVs. Practically, from an emissions, business, economic, and supply chain perspective hybrid vehicles make much more sense than full electric vehicles.
Unfortunately, the government is getting in its own way in reducing emissions by setting the EV targets in the way it has. The path we are on is not great as we are unlikely to hit the full EV targets and the emissions outcome will most likely be worse than if we just went with the plug-in hybrid proposal. Furthermore, businesses and the economy will take a hit and the spending required will be an inflationary burden on average people. No, hybrids will never get rid of ALL emissions from vehicles, but neither will full EVs when we consider the full impact of this radical battery demand. Completely zero emissions is a nonstarter, so we might as well have reasonable expectations and policy for cars and businesses.
-Grayson
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