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Electric dreams

9 Nov 2021

Governments want more electric vehicles on the road and investors are willing to fund it, but is the world ready to dump petrol and diesel? Mark Dunne reports.

The internal combustion engine is an endangered species. Its death warrant was signed by prime minister Boris Johnson last year when he banned the sale of new petrol and diesel vehicles from 2030. Any new car or van sold in Britain from this date must be powered by electricity, although some petrol-electric hybrid models will get a further five years grace.

The move is part of the government’s plans to decarbonise the UK economy by 2050. The public appear to be behind the strategy, with sales of electric cars jumping 186% during 2020, or by 108,000, according to the Society of Motor Manufacturers and Traders.

There are reported to be around 200,000 electric cars driving on Britain’s roads today and their number is expected to accelerate. In May, 6.5 million people told energy watchdog Ofgem that they intend to buy an electric vehicle within the next five years. This is one in every four (24%) of British households, and their motivations for ditching petrol for battery-powered vehicles is clear.

Cars, vans, trucks and buses in developed economies are responsible for almost a third (30%) of the world’s harmful gas emissions, the United Nations believes. In the UK, the government puts the figure at 27%, so failing to make our roads cleaner greatly reduces the chances of the UK achieving carbon neutrality. To help make this transition easier, Johnson has committed £2.8bn to the strategy. But is this enough?

Having sufficient infrastructure to facilitate a switch to battery-powered cars within nine years is ambitious. Unless the high cost of vehicles, not having charge points close to every home in Britain and batteries that are only powerful enough to drive short distances are tackled, the government is unlikely to see widespread use of electric vehicles.

Another concern is whether the national grid will have the capacity to satisfy the increase in demand. This has been given more weight in the debate considering the rises in energy prices this year caused by a supply-demand imbalance.

“The UK’s 2030 target could be achievable,” says Rebecca White, a responsible investment analyst at Newton Investment Management. “But the devil is in the detail as to how we get there. We face notable challenges.”

Three challenges

Boosting the number of electric vehicles on Britain’s roads will mean removing the three barriers mentioned earlier. The largest of which is the high cost of battery-powered cars, which is deterring 59% of those questioned by Ofgem from buying one. “It is costly to switch to an electric vehicle,” White says. “Lower income individuals will be priced out of the market because, outside of China, there are no low priced EVs.”

However, as part of the government’s 10 Point Plan for the Green Revolution, £500m of the £2.8bn package has been earmarked to reduce the asking prices of some electric vehicles. This means covering £3,000 for vehicles worth less than £50,000. Yet, is this discount deep enough to drive higher sales?

Indeed, a SEAT e-Mii will set you back £16,000 for what is a small car that only has the capacity to drive 135 miles before needing to be recharged. At the other end of the price spectrum, you can expect to part with almost £120,000 for a Tesla Model S.

A short battery life was a reason behind why 38% of respondents may not buy a new car after 2030. Who can blame them? The RAC are unlikely to rescue you on the hard shoulder of a motorway with a fresh supply of electricity. Or perhaps one day they will have vans designed to do just that.

Part of what White calls “range anxiety” is the slow speed of vehicle charging, which can take from 30 minutes to 12 hours, but this “will improve going forward”, she says.

Before working on improving the speed of charging a car battery, governments need to build charge point networks to ensure that there is one close to every household, in town centres, rural areas and along motorways. Having nowhere to charge their vehicle close to their home was noted by 36% of the drivers the regulator spoke to.

This is a big job. Accountancy giant Deloitte estimates that by 2030 the charging infrastructure needs to be 10 times greater than it is today and could cost between £8bn to £18bn.

The UK Committee on Climate Change, an independent body that advises the government on emissions targets, estimates that 280,000 charging points are needed in the next nine years to avoid a decline in the sale of new vehicles.

Sin stocks

Yet the biggest challenge for auto companies could be convincing investors and consumers that their green products are as green as they say they are. They want to show that “dieselgate”, where Volkswagen’s green cars were programmed to activate their emissions controls only when tested, was a one off.

This is important as it is not just about selling cars but attracting investment, too. “Legacy issues such as EV infrastructure and charging speed need to be watched closely,” White says.

This is not just a reference to the Volkswagen scandal. “The auto sector, it is fair to say, often lags other sectors on ESG. This is not just a hangover from ‘dieselgate’,” White says.

Auto is the worst-performing sector in the Corporate Human Rights Benchmark, where two-thirds of companies score zero on due diligence indicators.

The sector also does not perform particularly well on the World Benchmarking Alliance, which compares performance on the UN’s Sustainable Development Goals. “It is a sector where ESG improvements and the need to demonstrate sustainability is apparent,” White says. “There is a significant runway for improvement.”

And there is plenty of room for that with electric vehicles. Investors should not fall into the trap of believing that they produce no carbon footprint and are examples of sustainable excellence. The weak link here is the battery supply chain.

Many of the components in these batteries are made from nickel, lithium and cobalt. There are significant environmental impacts of mining those materials as well as the social challenges of child labour and human rights abuses.

There have been efforts by institutional investors through engagement strategies to make developing world miners more responsible, but there is still a lot of work to do. “The social impacts of the transition will be a challenge if we want to shift to a greener economy,” White says.

Hard targets

To meet political targets and an expected rise in demand from sustainably-conscience consumers, auto-makers have set some steep targets. Volkswagen, for example, wants 20% of its sales to be electric cars, up from 3% in just four years.

White believes there is the capacity in the industry to meet demand. She is seeing companies retrofitting existing plants, while some are constructing purpose-built factories, which are designed for one aim. “The ultimate goal now is that we have the technology to decarbonise vehicles, and scale up facilities to bring costs down, so that electric vehicles become widely accessible and more profitable,” White says.

But this is not just about changing the vehicles that auto companies are making. Some are changing their structures to position themselves for broader industry changes.

Volkswagen, for example, has launched a mobility services division. “You could criticise that as simply marketing, but per- haps it is more about focusing on changing consumer travel habits and building a model that is resilient to that,” White says.

This changing and growing market is what institutional investors are backing and current figures show that they are doing just that. Electric carmaker Tesla’s market cap hit $1trn in October and traditional car companies have issued green bonds to fund their electric plans. Toyota, for example, has successfully issued six.

Then there are the market penetration figures. “In September, EV sales in China were almost 20% of the country’s auto market, while in Europe it was in the mid-teens,” White says. “We are seeing significant news-flow in this space that indicates that there is interest here,” she adds.

Backing such companies is part of pension schemes’ remit to protect savers from climate risk. “The green premium they are attracting can be significant and proves there is growing interest in this space,” White says.

But it is not just about environmental benefits. There are structural motivations, too. “If decarbonisation is something we must achieve over the longer term, then investing in companies that are well positioned for this shift will ensure a level of resilience over the next five to 10-plus years,” White says.

Cheese and wine

Electricity is not the only alternative to petrol and diesel. Prince Charles hit the headlines in October when showing off his 50-year-old Aston Martin, which he explained is largely powered by “cheese and wine”.

Yet some claim bioethanol made from food stuffs, which can include palm oil, does, although cleaner than burning fossil fuels, damage the environment.

Greg Archer, a director of clean transport campaign group T&E, was quoted by The Guardian as saying: “On a large scale, biofuels do more harm than good, driving deforestation and land use change that worsens the climate crisis.”

While White acknowledges that it is challenging to produce biomass sustainably, it could still be an alternative in areas where emissions are harder to tackle as batteries will not work, such as air travel.

Hydrogen, an alternative to natural gas, needs perfecting. “The technology is not quite there yet and there are many shades of hydrogen…blue, grey, green,” White says.

The point is that, as yet there is no perfect alternative to fuelling cars, planes and trucks. “There are other options, which are not without their challenges,” White says, “and these challenges could be more significant than batteries from an environmental perspective.

“There are more sustainable fuels than petrol, but they are still problematic in terms of their environmental impact,” she adds.

The long game

Solving the problems that have featured in this article are essential if we want to decarbonise the global economy. There is no other way. We must overcome these barriers to wider adoption that many consumers and manufacturers are facing.

“We have to think about EVs as part of the sustainable solution,” White says. “Like all things we consume, it is not just about getting sustainable products, but also tapping sustainable means of consumption. There is a bigger picture to think about.”

It is a picture that governments, manufacturers, consumers and investors need to buy into to make this revolution a reality.

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