Tom Konrad CFA
There are many proposed solutions to
the liquid fuels scarcity caused by stagnating (and eventually falling)
oil supplies combined with growing demand in emerging economies.
Some will be good investments, others won’t. Here is where I’m
putting my money, and why.
This second part looks at hydrogen and electrification strategies for
replacing oil.
In Part I of this series, I listed four potential substitutes that have
been proposed to replace oil as limited supply and growth in developing
markets draw oil away from traditional users. I’ve since added a
fifth to my list of potential substitutes:
- Biofuels and Biochemicals
- Vehicle Electrification
- Hydrogen
- Natural Gas
- Coal and Gas to Liquids
Part
I looked deeper into
the potential for biofuels to displace oil, and made some
recommendations as to which stock might benefit most from this
trend. In this article I’ll look at vehicle electrification
(including traditional hybrid electric vehicles (HEVs) such as the
Prius, plug-in hybrid electric vehicles (PHEVs) and pure electric
vehicles (EVs)), and hydrogen vehicles, since they have many
similarities.
John Petersen on PHEVs and EVs in One
Paragraph
Readers of AltEnergyStocks.com will be familiar with John
Petersen’s cost-related arguments that PHEVs
and EVs are over-hyped bad policy and
are unlikely to form a substantial part of the vehicle fleet anytime in
the next decade. From an economics perspective, the core of his
argument is that batteries are a limited and valuable resource, and
they can be used most effectively to reduce dependence on fossil fuels
in HEVs, rather than PHEVs or EVs. While PHEVs or EVs can use no
gas, they require as
many
batteries
as
ten or more HEVs. Ten hybrids will each
save 20-50% of a normal car’s gas consumption, for a total gas savings
equivalent to taking two to five normal vehicles off the road.
For a single PHEV or EV to save more gas than two to five normal
vehicles, it will have to be driven two to five times as much as a
normal vehicle when powered by electricity. This means the large
battery packs of PHEVs and EVs will only make sense for vehicles that
are driven much more than normal vehicles, and which can be recharged
multiple times per day.
You can find another take on the economics of PHEVs and EVs direct from
a Lawrence Berkley National Laboratory battery researcher here
and here.
He
reaches
the
same conclusions as John, but includes interesting
technical discussions of the technological barriers to making batteries
small and cheap enough for widespread adoption of PHEVs and EVs.
cellspacing=”2″>
 |
| Charge port for Nissan Leaf EV |
What Vehicle Electrification Means for
Stock Market Investors
From an investment perspective, the above discussion is most useful in
that it highlights batteries as the critical, high-value component that
makes vehicle electrification possible. Some industry observers worry that
scarcity of rare earth
metals may make the electric motor in an HEV too expensive to be
practical. If electric motors become more expensive, the
economic solution will be to make each electric motor do more, and and
build more PHEVs and fewer EVs. In either case,
batteries will remain a critical component that limits the supply of
electrified vehicles for the foreseeable future. Hence, the best
investment in vehicle electrification will be investments in batteries.
Another lesson from the above discussion is that, if PHEVs and EVs are
currently over-hyped, then the batteries used in PHEVs and EVs (almost
exclusively Lithium-ion) are probably over-hyped as well, at least
relative to the batteries used in HEVs (Nickel-metal hydride as well as
Lithium-ion.) Some classes of mild HEV also use advanced
Lead-Acid
batteries. In other words, I end up agreeing with John that while
Lithium-ion batteries have an extremely bright future, investors would
do well not to dismiss the cheaper and more mature battery
technologies. Here is John’s list
of
battery
companies, organized by battery type.
Hydrogen
I don’t see current hydrogen technology as a viable alternative to oil,
but I thought I should mention it since it does have its
proponents. The main barriers to the hydrogen economy are
- The price of hydrogen fuel cells
- Lack of hydrogen infrastructure
- Inefficiency of hydrogen electrolysis
A hydrogen fuel cell converts hydrogen stored in the Fuel Cell
Vehicle’s (FCV) tank into electricity, which is then used to power an
electric motor. Because fuel cells are extremely expensive, it
makes sense to use as small a fuel cell as possible. This can be
accomplished by configuring the FCV as a PHEV, and using the fuel cell
constantly while the vehicle is in operation keeping the batteries
charged for when extra power for acceleration is needed. Hence,
even if I am wrong about FCVs being the wave of the future, battery
investors are likely to benefit as well as investors in other vehicle
components.
The lack of hydrogen infrastructure and inefficiency of electrolysis
(making hydrogen) both point to the conclusion that PHEVs are superior
solutions for displacing oil than Fuel Cell Vehicles. There is
already an
electric grid everywhere in the developed world, so a charging
infrastructure only requires the installation of charging points, not a
new set of hydrogen pipelines as well. And if you have
electricity and want to use it to propel a car with an electric motor,
your car is going to be able to go much farther if you simply charge
the car’s batteries than if you first convert the electricity to
hydrogen using electrolysis, then convert it back to electricity with a
fuel cell, losing energy in each conversion step.
Conclusion
Vehicle electrification does have potential to displace a
significant amount of oil demand, but it will come mostly in the form
of
more HEVs, at least in the short term. PHEVs, EVs, and especially
FCVs are likely to only be viable in niche markets, at least for the
next decade. Hydrogen does not have much
potential to displace oil, but if it does, the high cost of fuel cells
means that FCVs will also need batteries. The best investments in
vehicle electrification
are batteries. The hype about PHEVs and EVs means that companies
with less sexy battery technologies are probably better bets than
Lithium-Ion companies, simply because you should be able to buy such
stocks at a more reasonable price.
DISCLOSURE: None.
DISCLAIMER: The information and trades
provided here are for informational purposes only and are not a
solicitation to
buy or sell any of these securities. Investing involves substantial
risk and you
should evaluate your own risk levels before you make any investment.
Past
results are not an indication of future performance. Please take the
time to
read the full disclaimer here.