LOW-COST ELECTRIC CARS: A NEW ERA?

A century ago Henry Ford revolutionized the automobile market. By focusing on simplicity and scalability, he was able to pioneer large-scale automobile manufacturing. In this Private Report CERA explores how in the next decade and a half the potential for a second wave of mass car production, chiefly in emerging markets, is becoming a reality. Greater and faster technological advances combined with simplicity and high fuel efficiency will foster the emergence of low-cost cars (LCCs). This approach will not only reach a large customer base, but will also be a scalable platform for future drive train technologies. Among these, electric vehicles (EVs) could shift from limited manufacturing and demonstration-type programs to a thriving market-driven industry.

• The fast technological pace of the EV industry in combination with the cost and design advantages of LCCs could pave the way toward a clean EV world. The reduced costs associated with the scale of mass car production in addition to fast EV innovation will create a low-cost, high-technology car.
• Higher income, urbanization, and economic growth are leading to a greater need for motorization. Electric low-cost cars (ELCCs) would provide millions of people with the mobility that matches a lifestyle of higher economic growth, urban migration, and increasingly higher incomes. ELCCs will also satisfy motorization needs with no tailpipe emissions.
• Some technological, infrastructural, and commercial challenges must still be overcome, but the outlook is promising. The pace of the move to EVs depends on an adequate and readily available electrical infrastructure and on rapid EV commercialization. Breakthroughs in these domains are changing the picture, however. An immediate challenge is the global financial crisis, which could slow down investment in EV development in general and reduce income growth in emerging markets.

The uncertainties caused by the recent financial turbulence have now migrated into the clear acknowledgment that Europe and the rest of the world are in recession. Companies with solid balance sheets have a clear competitive advantage over their smaller competitors, which could bring further consolidation of the industry. Growing involvement from government may lead to tension with industry as the implications of this involvement on decision making become apparent. The impact on the European energy industry is likely to have many facets:

• Delays in new infrastructure. Difficulties finding financing and a wait-and-see attitude on the part of investors will lead to delays in the many energy infrastructure projects currently planned. In some markets these delays may lead to a period of volatile prices as spare capacity shrinks.
• Increased role for government. The need for explicit government backing or support for some projects will increase the role of government in the energy industry. Decisions on major capital projects may no longer be taken by industry alone. Government involvement may lead to investments being evaluated across the full value chain rather than as a number of standalone commitments.
• Changing focus of European energy policy. As governments are forced to focus on "must have" items, the push to develop a competitive energy market may recede in the face of the twin and generally complementary goals of reducing greenhouse gas emissions and increasing security of supply.

A GROWING SENSE OF GLOOM FOR GLOBAL ENERGY MARKETS

There is a growing sense of gloom in most energy markets, arising from the spreading crisis in financial markets and expectations of a global recession. After five years of the best economic performance in a generation, the world economy now faces one of the most severe economic crises in many years—the kind of world that CERA described in our Global Fissures scenario more than two years ago. Too much of the world economy was living on borrowed time—or, more accurately, borrowed money. The unraveling has been swift and painful. We are already seeing three major shifts in this upside-down world.

• The pendulum between market forces and government controls is swinging strongly toward government controls. Although resource nationalism has been growing in recent years, the current moves by governments to partial nationalize their financial sectors push government controls to new levels and into new areas.
• Energy markets are moving rapidly from the supply anxiety that has dominated the industry for several years to demand angst. This is most clearly felt in the oil sector, but there are declining prospects for natural gas demand—although it is too soon to say gas has switched to a buyer’s market. The power market is more balanced. Lower-carbon technologies may face difficulties getting financial assistance to move to commercial scale.
• Governments are integrating climate change programs into their economic plans. Restrictive climate change programs have, so far, been mostly unaffected. Commitment to climate change amelioration targets will be tested going forward, as will the viability of lower-carbon fuels. In some cases governments are supporting lower-carbon fuels as part of broader economic stimulus packages or as revenue generators.

NORTH AMERICAN POWER: SOFT SALES, HARD COSTS

The ongoing financial turmoil and the resulting government and private sector responses have profound implications for the electric power business. The turmoil affects the power business in five key areas.

• Power companies face soft sales and hard costs.
• The cost of capital has gone up and will likely stay higher than what we have experienced over the past several years.
• Expect political shifts.
• Current market valuations provide buying opportunities.
• There is a silver lining for electric power.

NEW COAL POWER DEVELOPMENT: BALANCING POLITICS AND ECONOMICS

Decisions on coal-fired power generation have always been driven by a delicate balance between changing and interacting economics and politics. Since 2007 political opposition to coal-fired generation has intensified in North America due to concerns about carbon dioxide (CO₂) emissions. The economic competitiveness of new coal power relative to combined-cycle gas turbine (CCGT) power has become murky and overshadowed by the unfavorable politics, resulting in the slowdown in new coal capacity development. A return to favorable economics’ prevailing over political hurdles is essential for new coal power to regain momentum. The return requires a confluence of low-enough CO₂ prices and favorable fuel and capital costs of coal-fired power relative to CCGT.

• High capital costs diminish the economic competitive edge of new coal projects. Potential legislation and regulation could result in high costs for CO₂ emissions and put coal at an economic disadvantage relative to other fuels a few years from now.
• The net effect of the balance of economics and politics on new coal power varies by region and in some cases by plant. This results in geographic unevenness in new coal capacity construction.
• CERA expects that the current slow development will result in less than 5 gigawatts (GW) of new coal capacity additions between 2013 and 2015, following 19 GW expected to come onstream between 2008 and 2012. The success of these projects will likely require specific and localized benefits and/or enforceable commitment to offsetting/mitigating the power company’s total CO₂ emissions.