Electric Vehicle Market Predictions: Hocus Pocus or Sound Logic?

It doesn’t take long from the first mass production EVs to start hitting the streets before people start to predict where they will be in 10 years time. Professionals, academics, industry speculators and politicians have started to begin quoting likely EV market penetration rates over the next five, ten and fifteen years. Barack Obama recently stated his (and by extension, America’s) desire to have over one million plug in vehicles on US roads by 2015. Some predictions have been somewhat conservation predicting EV sales to amount to 5% of the market by 2015 whilst others predict a large expansion between 2015 and 2020 with sales rising towards 20% of the market. The range of these predictions shows the uncertainty that currently prevails in the market.  Why are these predictions so wide of each other, is it related to a variation or flaw in the methodologies used or the assumptions made? I will not pretend to have critically appraised all of the market predictions made but will talk here about how I would go about making a prediction based on reasoned and rational thinking rather than guesstimation.

To jump straight in, we know from previous research that vehicle costs are a big factor with consumers. Currently, EVs attract a price premium linked to their advanced technology making them relatively more expensive compared to their conventional counterparts. Now if we assume that conventional vehicle prices will remain constant at best or perhaps decline in the future, one way to boost the demand for EVs would be to decrease their price relatively faster. Recently, industry experts have stated that scale is not an issue with reducing the costs of producing EVs with more gain expected from technological breakthroughs. So, if we assume battery technology will advance at an increased rate in the future then this will assist EV market penetration. Similarly, if there is an increase to the purchase cost of conventional vehicles (a sales tax for instance), this will also assist EV demand. EVs currently require rare earth materials in their manufacturing with the extraction of these raw materials almost completely conducted in China. The Chinese Government has recently imposed a 90% restriction of the export of rare earth materials thus restricting the supply of a key factor of EV production to automotive firms. R&D has been switched on in an attempt to find substitutes for these materials but, if nothing economical can be found, this may prove a real barrier to mainstream market deployment of EVs.

Operating costs are considered important (if less so than purchase costs) by consumers and are governed by non linear tradeoffs. By this I mean that instead of a steady and predictable consumer response to increases in operating costs there are thresholds and tipping points that greatly influence consumer behaviour. In the US the current thinking is that $4 a gallon for gasoline represents one of these thresholds that will generate a shift in consumer behaviour. From this we can assume that if oil prices rise substantially in the future and cross these tipping points then this will assist EV demand. Currently (in the UK), no transport tax is levied on electricity used to power vehicles but is this situation likely to remain in the future if EVs start the represent a meaningful percentage of the market? The UK Government generates a great deal of tax revenue from fuel duty and we can predict that as EVs further penetrate the market a fuel tax will be levied on electricity used in vehicles which will hinder EV demand. On a similar theme, people often assume that electricity prices are more stable compared to oil prices and that it will continue into the future however this faith may be misplaced. With the need to rapidly deploy low carbon energy generation combined with the EU cap and trade scheme relation to carbon emissions from energy generation the electricity price of the future will, with a high degree of certainty, be higher than it is today and perhaps more variable also.  

It is sometimes easy to think that EVs are the only game in town with relation to Low Emission Vehicle technology. 5 years ago people were singing a distinctly different tune with Hydrogen fuel cells seen as the future of personal mobility. A lot of good work is also been conducted in the biofuel industry coming up with more efficient and less environmentally damaging production mechanisms. If there was a sudden (and therefore unpredicted) breakthrough in fuel cell technology this could be a game changer shifting the balance away from EVs towards Hydrogen. How can you account for this? Well there is the use of expert panels to attempt to determine the likely pace of technological development but this cannot account for genuine moments of inspiration that fundamentally alter the situation.

I’ve already stated about half a dozen variables that can make or break the future for EV demand. Making assumptions about these variables is fraught with uncertainty and the predictions made about EV market penetration are highly dependent of these assumptions being in balance. How you go about turning these assumptions about important variables into predictions (the methodology you use) is equally as important. For me, I’m going to attempt to stay clear of market penetration estimates and instead opt for scenarios detailing likely market penetration of EVs subject to certain requirements met in the market. This seems like a much more controllable form of estimation and one I would endorse for the entire industry.