Caught Speeding: The Rise of Electric Vehicles & the Impact to the Energy Sector
Electric vehicles (EVs) are primed to disrupt the energy sector in the coming years. Learn more about the adoption of EVs and how the Mackenzie Bluewater Team is preparing for this massive shift.
HAN TACOMA, Investment Director, Equities, Mackenzie Bluewater Team: It’s difficult to imagine a world without gas stations and without gas-powered vehicles, but that’s about to change. Right now, we are cognitively and physically anchored to oil. We drive home from work; we fuel up our cars at a gas station. It’s part of our normal life and 44% of oil consumption is to power passenger vehicles – the cars that you and I drive. Now if that were to drop off, then that’s going to significantly impact and we project that that is in fact what’s going to happen.
The adoption of electric vehicles appears primed to be a major disruption to the energy sector. So when you think about any innovation, whether it’s CD players, computers, you name it, there is a slow early adoption, then it quickly ramps up and it’s something that we know as the S curve of adoption. We’ve seen this before in the original introduction of motorized vehicles. If you look at the year 1900 and you were to look at a picture of New York City, you’d see that there were hundreds of horse drawn carriages and if you looked really closely, you might spot the one motorized vehicle that was there. Fast forward 15 years and you look at the same area of New York, and you’d see hundreds of vehicles, motorized vehicles, and if you looked really closely, you might spot the one or two horse drawn carriages. It happens really quickly, the adoption curve.
For electric vehicles, the limiting factors right now are the costs of the batteries and the range of these batteries. When you think about where battery costs have come from, they’ve come down from about $1000 per kilowatt-hour down to $227 per kilowatt-hour. Now in the past four years, battery prices were basically halved and in the past six years, the price has come down by 80%, so pretty significantly. The Holy Grail is to get to $100 per kilowatt-hour and at that point you’re at price parity for combustion engines.
The range of batteries has been a concern. Everyone’s heard of range anxiety, but the efficiency of batteries has been growing, on average, seven to eight per cent every year. For the majority of us, we use our cars on a daily basis to get to work. In fact, 80% of Canadians drive to work. The latest census shows that the average drive to work is 25 minutes and so charging is really not a factor for urban travel. Most people will get to work and back and be able to charge their cars in their garage overnight when it’s cheapest to do it, but there is concern about the infrastructure and the build out of charging stations. While that’s a legitimate concern, that’s happening right now. The build out is happening right now. In fact, in Japan, they have more charging stations than they do petrol stations.
The Bluewater Team is focused on free cash flow growth. When you consider that we’re looking about 10 years out when we discount our cash flows for the companies that we own, we are not giving our portfolios meaningful exposure to the energy sector. The demand factor is going to be significantly impacted when we do make the change over from internal combustion engine to electric vehicles, which we think is going to happen any time between 2020 to 2030, but perhaps lean on the earlier side of that.