ICE Melt
Electric vehicle sales growth trounced ICE in China last year, as the world now moves to the heady phase of the EV adoption curve. According to full year data from CAAM, EV sales rose from 1.206 to 1.367 million units as ICE sales fell from 24.563 to 23.944 million units. The country’s ICE sales are now three years past their peak, when they notched 28.102 million sales in 2017. The cumulative multi-year decline of 14.7% is a preview of ICE’s bleak future. Little wonder that most believe we’re in an EV bubble. But, like many bubbles, a strong fundamental trend underpins the exuberance. Adding in Europe EV sales, which nearly doubled in 2020 from the prior year to 800 thousand units, this “bubble” is at its beginning, not its end. 2020 should be viewed as a rocky recovery year for EV sales in China, with growth advancing at “just” a 13.35% rate. In previous years, EV sales growth has reached 50%, 60%, and even 75%—albeit from a lower base. So with a very strong year dead ahead, coming off very strong China EV growth in 2H 2020, it would not be surprising at all to see EV sales reach the 2.0 million mark.
As important, if not more important, is that EV market share in China has now definitively crossed the critical 5% level. This matters because in growth studies (diffusion of innovation), the 5% level shows up repeatedly as a take-off point. Think of it as a before-and-after marker. Before 5%, new products struggle along for years, or more, fighting incumbency and path dependency. After the 5% level, new technology gains enough of a foothold to kill the growth of the incumbent technology. This has been observed in everything from color TVs to mobile phones. And yes, in the original ICE adoption curve at the start of the 20th century. Accordingly, this year is forecast to see a stabilization of ICE vehicle sales at around 24 million, a portrait of how even in a strong recovery year—indeed, a year which probably begins an entirely new automobile cycle—the incumbent internal-combustion engine manages only to hold the line.
The EV attack on the ICE drivetrain is not limited to passenger vehicles. For a combination of reasons, the adoption of EV delivery vans is going even faster. The ability of a corporation to make such an investment in one fell swoop is one factor. The easier range, and body size/battery weight ratio is another. Bloomberg New Energy Finance forecasted a couple of years ago that utility and delivery van sales, in China, would absolutely storm the gates for new EV. And that’s precisely what’s happened. Something similar is unfolding in the US, even as passenger EV adoption remains slow, as every corporation from Amazon to FedEx quickly embraces EV.
For those already exhausted by the constant attention to Tesla, the forward march of EV SPACs, the endless focus on lithium supplies, and breakthroughs in battery technology, I have some advice: take some time away from the business media because it’s going to be like this, yes just like this, for several more years.
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One of the most stubborn and common intuitions is that millions of EV hitting the road will place enormous strain on national powergrids, and increase the call on coal and natural gas. No, they won’t. Again, take China. Last year the country put 1.367 million new EV on the road. Assigning a quite generous 3,500 kWh of annual power demand to each of those vehicles represents a new call on China’s electricity supply of 4.785 TWh. Now, let’s set the context. China generated a total of 7,166 TWh of power last year. But more pointedly, China grew its solar generation last year by a whopping 46.9 TWh (176.9 TWh to 223.8 TWh) as the country relentlessly deploys renewable energy. In other words, China built in a single year ten times the amount of electricity required to place over 1.3 million new EV on the road—just from solar. This does not even include, say, how much new wind power generation China grew last year. Answer: another 40 TWh.
One broad explanation for these wrong intuitions is that EV simply consume so much less energy than ICE vehicles. Your average person is simply frozen in place when they hear that an EV requires at least 60% less, if not 70% less energy to travel one mile, compared to an ICE vehicle. No way, man. This has not dissuaded a series of hapless heroes who’ve unwisely been granted space in major business publications to advance their nonsense, and bad math. An astute Gregor Letter reader, Aaron in Los Angeles, directed me recently to an absolutely shambolic essay at Seeking Alpha, in which the author incorrectly estimated annual EV demand in the US at a level ten times above the average. Most modelers use about 3000-3500 KWh for an EV in China, and 4000-4500 KWh for an EV in the US. Americans drive more miles, it’s true. (Listen, if someone wanted to use 5,000 KWh for an EV in the US, perhaps that’s defensible). The figure used by the Seeking Alpha author: 55,350 KWh per year. Ouch. That is a special kind of miracle, indeed. You will not be surprised to learn the entire point of the author’s essay is that as more EV hit the road, we are going to need alot more natural gas-fired power generation. Sigh. No, we won’t.
Correction and update: the volume of new electricity created in China last year from solar alone was not 10 times, but rather 15 times the amount of electricity required to place over 1.3 million new EV on the road in 2020. The error comes from using 2019 power data from the 2020 edition of the BP Statistical Review. Unsurprisingly, given torrid year-over-year solar growth, the error actually undersells the point. We now have in hand the preliminary data from China’s 2020 solar deployment and it’s an absolute blowout—far exceeding even the most optimistic of forecasts. Whereas China deployed 30GW of new solar capacity in 2019, leading to the creation of 46.9 TWh of new power, the country deployed 48 GW of new solar last year, which will lead to roughly 75 TWh of new power.
Data sources: For 2019 solar power generation growth of 47.9 TWh in China, see the 2020 BP Statistical Review, and choose the Excel version. For 2020 new EV sales of 1.367 million, see both the original data at CAAM, and/or the latest media coverage of that same CAAM data. For 2020 solar capacity growth, see the first estimates coming through now from China’s National Energy Commission. And a final note: it appears new wind power in China grew by more than 100% last year, over 2019. Wow. In short, a gobsmacking amount of new electricity exclusively from solar and wind stands ready to meet even the most heady EV adoption forecasts in China.
The IEA in Paris estimates that despite very strong global growth in EV sales, concurrent growth of ICE SUVs wiped out any savings from those EVs in last year’s oil demand. Well, given that EV market share globally remains below the key 5% level, that’s really not very surprising. Incumbency and path dependency are still very much at work. The 40,000 barrels per day of savings from new EV hitting the road last year is of course small. If it hadn’t been wiped out by SUV sales, it could have easily been wiped out by a minor uptick in the global economy. As explained in the Oil Fall series, the end of oil demand growth will not transition quickly into global oil demand declines. And that is where we are today. The growth of oil demand has now halted, with 2019 as the peak at 100 million barrels per day. While we are still below that level this year, and probably next, we should expect that level to be approached at least once or a few times before outright decline sets in. But the inflection point couldn’t be more devastating for the oil industry: the end of demand growth feels alot like decline.
Just to remind: the Oil Fall series will receive its update sometime this quarter, and it will be sent out free to all purchasers of the original title.
—Gregor Macdonald, editor of The Gregor Letter, and Gregor.us
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