Implications of a greater and faster push of electric cars

http://online.wsj.com/article/SB123172034731572313.html

This WSJ article is about the new and low cost electric car F3DM by BYD, a Chinese manufacturer. The main hurdle in making electric car practical and cost-effective is the size, weight and capacity of the battery. This new car could enter the market at the end of 2009, earlier than GM's Chevy Volt.

Yet the broader implication of a faster and wider roll out of electric cars is profound, especially in the power market. Aside from the much talked about implications on the environment and oil markets, where there will be less direct pollution from cars, as the combustion of fossil fuel produces various carbon oxides and other particulate matters. Also, the demand growth of petroleum could slow.

In particular, the greater need for offpeak power, where much of that power is produced by nuclear and coal plants, and to some extent in the future by wind, will drive new dynamics in the environmental and fuels markets. But the biggest impact would likely be coming from coal.

[I] Implications on generation fuel mixes:
(The following discussion assumes some technological improvements along the way, but getting a breakthrough sometime somewhere remains an unknown, so let's not rely on it, especially given the efficiency hurdle and physics that governs the conversion of fuel into energy.)

Some power plants run throughout the day, where they are the primary producer of electricity during the so-called offpeak hours. With plug-in vehicles mostly drawing power overnight, there will be a greater need for consistent production of electricity. Most of these plants are hydro, nuclear and coal plants, with wind coming in the future. Let's examine the impact of each of these generation types, as well as natural gas and oil:

- Hydro: Most locations suitable for hydro generation have already been exploited, so it is unlikely to increase generation capacity. The impact will be small.

- Nuclear: Nuclear could form one of the pillars in supporting the increase of offpeak power generation. The nuclear revival could be coming, although the main impediments remain the construction time, cost overruns historically and regulatory approvals. Construction of nuclear plants are plagued by delays throughout its history. A good rule of thumb is that it takes about 10 years to build, at least in the US, with cost overruns. New developments in nuclear reactors where plants will use the same design, unlike the past, could help shave some time off, but it could be hampered by two other factors:
(i) Human capital and regulatory approvals. Nuclear reactors involve highly specialized technologies. Although there are some plants built around the world, none has been built in over 30 years in the US, except some up-rates (ie, increasing generation capacity) of exisiting plant and one unit in the Tennessee Valley Authority. Over these years, there was a significant drop-off in the training of people skilled in nuclear construction and operation. People already working in the industry will approach retirement age by the time many plants are constructed. This talent gap will certainly delay the advent of a large-scale nuclear revival.
(ii) Regulatory approvals could cause substantial delays as well, among them are the siting, where local residents would very likely oppose new constructions, and disposal of spent fuel rods.

- Wind: New installation of wind turbines will help supply part of the power during offpeak hours. But several factors make them less of a contributor than expected.
(i) Places with strong winds are far away from population centers. Even if wind farms were built, transmission lines will have to be erected to transmit power from, say in the U.S., the Plains in the middle of the country to coastal population centers. The permitting and siting of new transmission lines would very likely elicit local oppositions, access right and other legal issues, which are extensive, since these lines will have to transverse a very large distance. Hence, their construction will be delayed.
(ii) Winds are not so consistent, despite improvements in battery technology that can store power. Although wind, whose strength fluctuates a lot within a short time, is typically stronger at night than during the day, if it dies down, their production drops fast. But demand does not respond to this drop in supply. Batteries will remain too expensive to substitute other forms of generation, unless some breakthrough technology comes along. Therefore, some backup generation that can ramp up quickly will be needed. The most likely candidate is natural gas.
(iii) The high frequency of fluctuation in wind generation will cause other backup generation to ramp up much more frequently. The wear-and-tear to these generation facilities and transmission lines, in addition to the reduced stability of the transmission grid, could drive up the hidden cost associated with wind generation.

- Natural gas: Whether it be a backup to the fluctuating wind generation, or simply serving as next fuel of choice after coal, which is cheaper, the greater demand for power will necessitate the new buildout of natural gas plants. As a cleaner burning fuel as well, the global demand for natural gas will increase accordingly. Usual implication to major natural gas countries applies.


- Coal: What I think will be the biggest surprise driver of future energy and environmental policy could be coal.
(i) With the generation cost of natural gas plants in general higher than coal, coal would have to remain a major fuel that supports the growth in power supply.
(ii) Coal plants are faster to construct than nuclear. To meet demand needs, investors might have to return to constructing coal plants and delaying retirement of old ones.
(iii) The freight business that transports coal will flourish, as coal will be transported from major coal producing countries to consuming countries.
(iv) The drive to mine more coal could test safety standards, when producers would seek to produce more at dangerous places and keep cost low. People's lives are at stake.
(iv) *Most important, the delayed retirement of existing coal plants and higher buildout of new ones will drive up future emission prices. While higher emission prices will add to the marginal cost of coal generation, making natural gas generation more competitive, that coal would remain the backbone power generation will increase emissions, which impacts policy.
-- If the objective to reduce emission is to be held fast, then emission prices (be it a tax or permit) will increase substantially and increase the cost of operations across sectors, which could slow growth. If governments succumb to pressure to lower energy prices and, by extension, emission prices, emission will likely be going up. "Dirty" scenarios in climate change predictions could come true. Rest of the "dirty" scenarios will apply.

- Oil: Oil-fired plants are usually too expensive. With their combustion technology, they are polluting as well, so they are unlikely to help.

- Other renewables: Solar will likely remain expensive; biomass could run into multitude of problems. First generation biofuels, such as those that use corn, will compete with food supply. Another consideration is possibly the rate of regeneration of biofuel sources - ie, how much can be burned and how fast can they be regenerated? Can they meet demand like other fossil generation such as coal and natural gas?

[II] Implication on prices
The load factor, which compares the offpeak load with peak load, will also flatten. It is because the peak load, say at mid-day on a hot summer day, will continue to be driven by factors such as cooling demand (or heating demand in cold winter days), but offpeak power prices will be higher as well, since the demand for electricity due to charges will be higher. Having wind as a major component of power generation will cause spikes in power prices, as a dying down of wind will require higher cost generation to quickly substitute. Net-net, the average power price will increase.

Essentially the above is a brief description of the energy supply picture.


Solution? With these supply-side dynamics, maybe the only good way out of the run-away growth would have to be conservation...