Perhaps the Riskiest Move Ever Made By a Listed Company
In March of 2021 Volvo Cars announced its decision to stop producing petrol and diesel cars by 2030. The company has for several years increased its commitment to electromobility and the decision to go 100% electric, ceasing to produce all fossil fuel cars, also hybrids, stirred up little debate in the media.
Why Is the Decision Risky?
The decision may be the riskiest decision ever made by a listed company. Here’s why:
Electric cars have received a large amount of publicity in the media and many, including the present author, argue that the future will have to be electric. Yet, few have realised the amount of investment that will be needed by a large number of players in all countries in order to make this a reality. In addition to Volvo Cars, Ford Motor Company has decided to only sell electric cars by 2030.
At present there are less than 20 million electric and hybrid cars on the roads around the globe. This is less than 2 percent of the 1.2 billion cars of the fleets of all countries. Volvo is one of the smaller brands on the global scene, selling about 700,000 cars in 2021, which should be compared to 9.5 million sold by Toyota, the global leader of the car industry in terms of sales.
With only 2 per cent electric cars on the road no country has yet experienced the load that large fleets of electric cars will cause on power grids. No country has the capacity to charge a fleet consisting of 100% electric cars, considering the present production or grid capacity that will be needed, but some countries will need to expand more than others to accommodate electromobility. If all of Europe’s 240 million cars were electric the power equivalent of the production of 100 nuclear reactors would be needed. This is for the summer, but electricity production and grids are dimensioned for times of peak demand and in the case of electric cars these need significantly more electricity to drive 1 kilometre in cold weather than they do in the summer. This means that the power needed to charge all cars will double in the coldest weeks of the coldest winters over a 20-year period. In Northern and Central Europe, the need may double.
Large projects to expand the power supply take more than 10 years to complete, including the time it takes to receive permission to build, which means that the expansions that will be made over the next decade will primarily be the ones that have already been started, or additions to capacity that can be achieved through incremental improvement of existing installations. In many places, for example, power grids will need to be digitised or reinforced to increase the capacity, something that may be done in less than ten years.
Many of Volvo’s important markets face very large investment to go electric. In Germany the power from 21 nuclear reactors will be needed to fuel its cars in the summer, in case all cars were electric, and the need would increase significantly in the coldest weeks of cold winters. In Germany at present that amount of electricity is produced by its 30,000 onshore wind turbines, which stand for 17% of German power production. Significant investment in power production, grids, charging infrastructure, and vehicles will be needed to fuel a large share of Germany’s cars with electricity. Exactly how many that can be charged based on the existing power supply is not known. At present German power production amounts to 600 TWh and a fleet of only electric cars will require some 100 TWh of power. Exactly how much will be needed at different points of this development is uncertain.
In the UK there are 34 million cars that will require some 65 TWh of power per year, or the equivalent of the production of 15 nuclear reactors in the summer. Electricity production in the UK per capita is, however, lower than that of Germany. It amounts to 325 TWh, which means that 65 TWh amounts to 20% of present production.
In other countries the situation is similar, large amounts of power will be needed to fuel all cars with electricity. In the United States there are 280 million cars that would need power from some 120 nuclear reactors to be charged. Luckily the US has access to large amounts of power, some 4,000 TWh annually and there are 93 nuclear reactors in operation. Nuclear reactors produce the same amount of power 24/7 and there are large amounts of surplus electricity at night, so as long as electric cars are primarily charged at night, the power surplus of the United States may go a long way. Charging at night, however, will be the primary option, but with growing fleets of electric vehicles, an increasing amount of charging will have to be done during peak load hours in the day.
In France, Spain, Italy, Poland, all countries with large fleets of cars large investment in power infrastructure will be needed to convert their car fleets to electricity.
The need to invest in power infrastructure is so large that, according to the Wall Street Journal on the 17th of December 2020, the chairman of Toyota Akio Toyoda went public with the announcement that the conversion of Japanese vehicle fleets to electric drive would require investment of between 135 and 358 billion dollars, and he argued that this would make electric vehicles unaffordable for ordinary people.
It is probably not established that electric vehicles will be unaffordable for the majority of car owners once the level of investment in infrastructure is taken into account, but significant investment will have to be made and it is at present not known how rapidly these will be made or how long the existing power supply will be able to support rapidly growing vehicle fleets.
The Number of Electric Cars is Low and It Grows Rapidly Based On Subsidies
As mentioned above, only 2 percent of cars in the world are electric. Norway is the country with the largest share of electric cars. In this country 10% of cars are electric. Norway has the largest per capita production of electricity of all countries on mainland Europe and very low electricity prices. With 5 million people, production amounts to 125 TWh, 40% of the production of the UK with 13 times the population (67 million). Norway also has very strong national finances, due to large oil income and all Norwegian oil companies are owned by the state, so they have the highest subsidies for electric cars of any country, as electric cars are tax free. In Norway petrol and diesel cars are highly taxed, so that with the tax exemption the price of a Tesla in Norway is sometimes comparable to that of a VW Golf. Norway is thus an exceptional country for several reasons.
Sweden has 5% electric cars and the share of sales has increased to more than 50% of total car sales, driven by a generous subsidy of 7,000 euro per electric car. Electricity is relatively abundant in Sweden as well. With 10 million people we have a production of 140 TWh, slightly more than 40% of UK production with 15% of the population+. Electricity is still inexpensive, especially in the north, where most of our electricity is produced.
In some other European countries, the share of electric cars is around 2%. This is the situation in Germany, the UK, and France. There are significant subsidies, but electricity is significantly more expensive compared to Norway and Sweden. This means that it becomes more difficult to earn back the price premium, through lower prices for electricity, over the lifetime of the car in a country with high prices of electricity than in a country with low prices. In Germany, the share of electric cars out of total car sales amounted to 26% in 2021, which represents an important step forward, but the life-time cost of owning and driving an electric car in Germany is still higher compared to that of a diesel car than it is in Norway and Sweden. The sales of electric cars are clearly increasing very rapidly in these countries, but the share of electric cars is still low overall and significant investment will be needed to expand power distribution to facilitate a large-scale conversion.
In the United States, one of the most important markets for Volvo Cars, where the company sells more than 100,000 units every year, the sales of electric cars has not made as much progress. Only 608,000 electric cars were sold in the United States in 2021, out of total sales of 17 million cars, less than 4% of total car sales.
In most countries and especially countries with weaker national finances the conversion to electric cars is at a very early stage. It is difficult in these countries for governments to subsidise the luxury purchases of the well-off when many live in smaller circumstances. In Poland and other countries in the eastern parts of Europe the share of electric cars is still very low compared to the leading countries — sometimes as low as 0.1% of total car fleets.
Other Sources of Demand
In his book “How to Avoid a Climate Disaster,” published in 2021, Bill Gates estimates that the use of electricity will have to double or triple in countries to create a sustainable society. In Sweden several analyses of the need for electricity for purposes that are already planned for indicate that Swedish power production will have to more than double until 2045. From this perspective it is not as if the powering of cars is prioritised by utilities. These needs will have to be covered in competition with other power needs.
In the past two to three years an increasing number of electric trucks and light transport vehicles have been launched on the market. This development is still at a very early stage, and it is uncertain how rapidly the market will grow, considering that the price of a fully electric heavy-duty truck amounts to three times the price of a comparable diesel truck. In some countries, such as Sweden, the government expects rapid growth of these vehicles and start to invest significant amounts of money supporting the expansion of a charging infrastructure for trucks along Swedish roads. It remains to be seen in the next few years how rapidly the demand for electric trucks will grow.
One further source of demand will be the expanding demand from industrial companies as they move from natural gas to electricity to reduce emissions.
Hydrogen is an energy carrier that is expected to grow over the next few years. What most experts and decision makers do not seem to have realised is that the production of hydrogen requires very large amounts of electricity. At present the move to hydrogen for a number of purposes is seen as a way of making use of power that is currently lost during periods of low demand at night and during the day, but the large-scale use of hydrogen for industrial purposes will require significant expansion of power production, on top of the expansion that will be necessary for the charging of electric vehicles and other purposes.
More than twice as much electricity is needed to produce the hydrogen needed to go 1 km, compared to charging a battery-electric car to go the same distance. If many industrial companies were to convert to hydrogen fuelled production, the need for electricity would expand to previously unexpected levels. The conversion of the steel plant owned by SSAB in Luleå in the North of Sweden is estimated to require more than 15 TWh of electricity, more than 10% of current Swedish power production. Some estimates indicate that the facility will require significantly more than this when it will be run fully on hydrogen. The Economics Professor Magnus Henrekson estimates that the two Swedish projects Hybrit (SSAB) and H2 Green Steel, a greenfield steel plant planned in the North of Sweden, will require between 67 and 73 TWh of power in 2045, according to an article published by the think tank Timbro. This amounts to half the Swedish power production in 2020.
Other demand for electricity is created by the growing sector of data centres that power Facebook, Twitter, Amazon, and store all the material that users upload to these platforms. At present data centres use about 1% of all electricity on the planet. Some estimates indicate that demand will grow rapidly over the next few years. In a future with autonomous vehicles the need for computing capacity for these will increase significantly, as each autonomous vehicle collects large amounts of data from cameras and sensors for its digital decisions.
Why All Electric?
In this vast sea of uncertainty, with the market for electric vehicles and the growth of electric vehicle fleets in their infancy, Volvo Cars has decided to go 100% electric by 2030. Normally, large companies are risk averse and try to protect their existing market share before they expand. And when they launch expansion strategies, they tend to be very careful, making sure that they will get rapid pay-back, often in less than a year, on every investment they make. Here we have a global car manufacturer that announces a breath-takingly ambitious strategy to bet everything on the conversion to electromobility, a market in which it had been present for less than a year with a fully electric car when the decision was made.
The only explanation I can come up with is that Volvo is one of the smallest car manufacturers commanding only some 6–7% of the volume of the leading company Toyota and only a fraction of the volume of the majority of its competitors. It is possible that in this highly competitive environment, where competitors are able to spread development and production cost over a much larger number of sold units, Volvo Cars does not expect to be able to afford to maintain leading competence in petrol, diesel, and electric drive areas and that it for this reason has decided to speed up the conversion in the hope that it will be able to grow its sales of electric cars enough to compensate for the possible loss of some of its present market share.
Still, the decision seems to be premature. There are too many uncertainties in the equation described above to make this seem like a safe bet for shareholders. A more conservative approach would include an element of “wait-and-see” and the making of decisions as the development unfolds.
Does Volvo Car Know About the Above?
The big picture of the transformation to electromobility has not been described by many and the present author is one of the few who have published books and articles that detail the transformation and outline the scale it will have to take over the next decades. In my dialogues with automotive companies, I get the impression that they have not calculated the total electricity need or started to see the access to charging capacity as a threat to future growth.
As mentioned above, Ford has decided to sell only electric drive cars in Europe from 2030, apparently sharing some of the unbridled optimism of Volvo Cars.
Over the past two decades I have informed about the necessity and scale of the transformation to electromobility. I started in 2004 to research these matters and my first book was published in 2009 with the title “Global Energy Transformation.” The latest one appeared in 2020 with the title “The Blind Guardians of Ignorance.” The interest in the large-scale aspect of the transformation has been weak. Up until 2019 the interest in the transformation was weak overall and in the past few years the interest has grown and turned into a belief that the conversion to electromobility will be very rapid and completely automatic and unproblematic.
The change is necessary, but governments and companies need to take the financial and physical aspects of large-scale transformation seriously and base their decisions on realistic descriptions of the process and realistic forecasts of the growth of the different resources and markets involved.
Mats is the author of five internationally published books on sustainability, focusing on the large-scale change to electromobility, the circular economy, and energy efficiency. His latest book is “The Blind Guardians of Ignorance — Covid -19, Sustainability, and Our Vulnerable Future” and the first one of these was “Global Energy Transformation.”
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