The recent liberalisation of the energy markets in Mexico has been widely reported for the opportunities in opening up Mexican oil/gas fields to foreign oil companies for the first time. However the opening up of the market for electricity provision is also a huge opportunity, if not a bigger opportunity. Not only is there an opportunity to build a new energy system based upon renewable power generation assets, gas & cogen assets, energy storage and microgrids to serve the current electricity market, connect the 3m offgrid Mexicans and reduce the cost of electricity but to also supply a growing demand for charging Electric Vehicles.
Bloomberg predict that oil demand could soften globally by 2040 to the tune of 12% as Electric Vehicles demand rises to 30-50% of new car sales. How would a large global fleet of EV’s affect global oil players? Clearly demand reduction on this scale would reduce prices and could render the extraction of difficult offshore oil uneconomic, especially without major technology innovation to bring down costs. Some of Pemex’s fields enable it to produce some of the lowest cost crude in Latin America at $7-$10 a barrel. Even the new onshore/near shore fields should have production economics of sub $30 a barrel. In December the government will auction deep offshore licences and given the price range of $60-$90 extraction costs per barrel, it will be very interesting to see how successful these auctions will be. Will big oil companies attract the investment for offshore exploration and high cost extraction in today’s oil market? I should also point out that Pemex did make a $30bn loss in 2015 but they do have a $5bn cost reduction plan which should help them get closer to profit or back contributing to the Mexican government revenues again.
If electric vehicles scale rapidly then it would lead to a 10% rise in the demand for electricity by 2040 (using BNEF figures). This again presents a unique opportunity for Mexico, as the recent auctions showed with record low solar prices for a project built in 2018 ($35pMW for Enel’s Coahuila project in Northern Mexico) Mexico possess some of the best solar, wind and geothermal resources in the world to create a low cost energy system that could be a platform for considerable competitive industrial advantage.
Why should Electric Vehicles scale rapidly?
(1) Batteries – towards capital cost parity with ICE
EV’s will scale as they follow the normal technology experience curves such as silicon chips and photovoltaic cells. Battery density and range will increase and costs will fall. Lithium ion batteries reduced by 35% last year alone and current projections are saying that when Tesla, Panasonic, BYD and LG Chem launch their new giga plants in 2017/18 lithium ion battery production capacity will triple. This would lead to further reductions and forecasts of around a total 77% reduction in a battery cost in the period 2010-2018. As batteries make up 25% of the cost of an EV, this will put EV’s on the path to overtake internal combustion engine ICE cars in terms of comparable capital cost per segment by 2022-2026.
EV cars have significant lifetime cost advantages due to less components (3000 versus 7000), less moving parts, cheaper energy conversion (electricity per mile is roughly 33% of fossil fuel) and less wear on brake rubbers (regenerative braking). EVs also accelerate smoothly and quicker, are quieter and can be configured more comfortably, they will be the perfect urban car. As Tesla have proven it’s possible to produce highly desirable EV’s that will be attractive for every segment (Tesla 3launched on 31st March 2016, sold $11bn orders for 275,000 cars in 3 days, for a car due at the end of 2017. Note the Tesla 3 is a 5 seater $35,000 EV with a range of 350km). The EV platform and drive train gives greater flexibility for car designers to optimise safety, increase comfort and space. For example the Tesla 3 positions the driver further forward, creates more space and is a better product.
VW’s Dieselgate has revealed the hidden cost of diesel to health ministries and our lungs. EV’s especially those powered by an increasingly renewable energy supplied energy grid will greatly reduce urban toxins and in the smog filled ever growing cities of India and China, this will be hugely politically powerful.
(4) China wants EV’s to Scale
China will soon become the largest car market in terms of demand and supply. In addition China is viewing the Electric Vehicle as a future industrial strategy and seek global dominance just as it has done with the wind turbine and pv module sectors. It wants to be a global leader and so it will create a large domestic market and China could furthermore reduce its oil import bill too (335m tonnes of crude oil imported in 2015).
(5) Early adopter segments
Michael Liebriech, Chairman of Bloomberg New Energy Finance predicts that owners of houses with garages and driveways (for charging), who have a second car and live in/near the urban environment will be a significant early adopter segment. Some 60% of households in the US have a 2nd car. Indeed other segments such as taxis, car clubs and even silent electric delivery trucks (who will also have a considerable advantage for late night deliveries).
(6) Going Auto Auto – the rise of the Self Drive Robot
Electric vehicle platforms will also accelerate the rise of autonomous self drive cars (or as I call them Auto Auto’s). As Google/Facebook/Apple invest in what they view as “new connected platforms” the autonomous car will present a new S curve and opportunity for new entrants. The technology already exists for self drive, cost effective sensors and lidar systems are coupled with GPS and IT to turn cars into moving lounges or offices. Several US states (California and Michigan) are already vying to host large self drive testing centres and the US Federal government has earmarked $4bn for R&D into the sector.
These cars will be highly disruptive, as Anand Shah of Albright Stonebridge recently detailed people spend (waste) a lot of time driving in cars. Self driven cars are safer than humans (and could reduce the 1.5m people who die in road traffic accidents annually, reduce the huge road accident health bill and they will also greatly disrupt the car insurance market). In the recent Germanwings air disaster in Europe considerable questions were asked about why the human pilot was allowed to overrule the self drive in the plane – could the same occur in cars?
Self drive cars and trucks (that form synchronised tailgate convoys) can use the road more effectively at higher speeds. Indeed in an urban environment self drive cars + uber could even lead to an instantaneous doubling of roads by the conversion of onroad parking into additional lanes as well as significantly reduce the costs of personal urban mobility. Mr Shah pointed out that local governments around the world effectively subsidise the car industry to the tune of billions in the provision of roads and highly expensive urban real estate is given over to parking.
In the West a car is typically used only 4% of the time which is an incredible waste for a very expensive machine. In emerging markets a driver means a rich family’s car is used throughout the day from commute to school run to grocery shopping. Autonomous cars would provide one with the same benefits of a driver, the car could go and collect kids from school and transport to their next activity (I will certainly be an early adopter!). However the biggest disrupted industry is likely to be the car industry itself with a self drive uber model likely to be able to provide the convenience of personal mobility but with only 25% of the current car fleet required (read car sales plummet by 75%!).
Given all of the above it is clearly in Mexico’s interest to be at the forefront of the EV revolution and accelerate the adoption of electric vehicles. EV’s will protect and future proof the remaining jobs in the Mexican car industry, reduce the toxicity of Mexico’s cities and enable the new electricity system to be planned accordingly. An accelerated EV car market will even improve the competitiveness of Pemex in a world of slowing oil demand.
1200 other senior energy executives will join Anand Shah and Bloomberg New Energy Finance and who will be speaking at MIREC Week, the leading event for building Mexico’s new energy system.