The Promise of Electric Vehicles

Diarmuid O'Connell, Vice President of Business Development, May 12, 2011

On May 5, 2011, Tesla Motors, Inc. was invited to testify at the Congressional hearing entitled “The American Energy Initiative:  Challenges and Opportunities for Alternative Transportation Fuels and Vehicles.”  Part of a multipart series of hearings on Energy issues sponsored by the House Energy and Commerce Committee’s Subcommittee on Energy and Power, this hearing reviewed the status of alternative fuels and vehicles.  Diarmuid O’Connell, Vice President of Business Development at Tesla Motors, provided testimony on behalf of the Electric Vehicle industry.  An abridged version of the testimony paper filed with the Committee is provided below with the full copy and Webcast recording of the hearing available here.

The Problem – The Oil Monopoly in Transportation

As a nation, we have arrived at a place where we are no longer control our own destiny. Due to a convergence of geopolitical, economic, and environmental issues, we find ourselves overwhelmingly dependent on a dwindling natural resource controlled by inimical foreign actors, under conditions of increasing competition. Oil, the natural resource upon which the strength and growth of our national economy and global dominance was built, is now the source of our greatest vulnerability in terms of both national and economic security.

The facts are clear. Where once we were a surplus producer of oil, since the 1970’s, we have become a net importer. The delta between our limited domestic supplies and increasing demand continues to grow. More broadly, most projections for the known attainable global supply of oil suggest that we are at or near the historical peak of discovery and production. Both our increasing dependence on foreign sources and peak production are occurring at a time when literally billions of new consumers are emerging out of poverty in China, India, and other parts of the developing world. These new consumers are demanding the basics of a modern middle class lifestyle including the universal totem of freedom: independent travel via the automobile. Moreover, their governments are supporting and even encouraging this demand. Competition for increasingly scarce oil is accelerating at an alarming pace. While the competition has expressed itself in largely economic terms thus far, there is every expectation that competition will increasingly manifest itself in kinetic and mortal terms - if it hasn’t already. Our national economy is subject to the wild swings and volatility of oil prices as experienced during the oil shocks of the 70’s, the price spikes of 2008, and today as a fragile economic recovery hangs in the balance. And yet the economic implications of dependence say nothing of the adverse environmental impacts of the proliferation of oil and gasoline combustion in the tens of millions of new cars that hit the road every year, as well as the risks and consequences attendant to the exploration and production of oil in increasingly remote and challenging venues.

To say we do not have a strategic problem is to bury one’s head in the sand and deny basic realities and plain facts. And while one might argue (as some do) that policies such as the increase of domestic production (“Drill Baby Drill”) can improve the basic equation of supply and demand in the short run, such measures are pitifully marginal in the global scheme. Such overly simplistic solutions just kick the can down the road for our children to address. In the best case scenario afforded by increased domestic production, our children will have diminished economic opportunities and compromised lifestyles, or in the worst case, will be forced into armed conflict in the far and hostile reaches of the world to compete for an ever diminishing resource.; But a real solution exists: we can be proactive and responsible now.

The Opportunity – Electric Vehicles

Against all of this doom and gloom, there is (as always) a sound, analytical and strategic fashion to approach and redress the problem. . In the U.S., over 70% of all oil consumption takes place in the transportation sector. Within that sector, more than half of that oil is consumed as gasoline (or like derivatives) in passenger cars and light trucks. A sound strategic approach thus focused on this sector creates a point for the greatest leverage: if you can radically reduce oil consumption in this class of vehicles, you will have the greatest catalytic and accelerative impact to reducing oil consumption. There are a host of potential alternatives to the traditional petroleum-dependent internal combustion engine (ICE), including biofuels, fuel cells, hybridized drivetrains, battery electric vehicles, and so-called “clean diesel technologies.” The hands-down winner among these alternative technologies based on cost analysis, mechanical efficiency, emissions reduction and overall capability is the battery powered electric vehicle (“EV” or “BEV”).

EVs are not a new technology. There were, at the advent of the automobile, nearly as many EVs on the road as ICEs. EVs have many advantages. An EV motor is as much as four times as efficient as ICE engine due to the radical reduction of moving parts. EVs do not burn oil as they operate, equating to zero emissions. Even when upstream sources of electricity are considered, EVs are cleaner than ICE counterparts: if plugged into even the dirtiest sector of the national grid, an EV still produces the lowest emissions per mile travelled compared to other vehicle technologies. The distribution of electricity is pervasive and ubiquitous, even more so than gasoline stations. A properly engineered EV can be easily charged in the home environment, obviating the need for massive infrastructure investment by either public or private entities. Finally, the torque profile of an electric motor makes for a better, more exciting automobile: 100% torque is available from the instant one steps on the accelerator.

The limiting factor of meaningful market penetration has been the lack of battery technology capable of storing sufficient energy for long range driving and/or rapid refueling. Fortunately, there have been radical improvements in recent years. Owing to the global demand for mobile rechargeable electronic devices such cell phones, laptop computers, and video devices, new classes and chemistries of batteries have emerged. One such technology is lithium ion. With increasing demands by advanced electronics, lithium ion batteries have had to keep pace. With the pervasive nature of the electronics market today, lithium ion batteries are now produced as a commodity item. In fact, competition has resulted in stronger batteries with greater energy storage capacity. These batteries have radically improved our ability to store large quantities of electrical energy for long periods of time.

Tesla Motors is the pioneer in transitioning these new battery chemistries and form factors to the automotive industry. We are commercializing our technology advances by pursuing the proven technology introduction model that has led to the widespread commercialization of airline travel, laptops, cell phones, flat screen televisions, air bags, antilock brakes and electronic stability control systems. Under this proven model, first generation technology is introduced at high price points and in limited quantities. Consumed by early adopters, these technologies prove their functionality. Subsequently, the technology undergoes iterative capability improvements, followed by lower price points achieved through economies of scale. We firmly believe that Tesla is enabling the mass adoption of a new generation of EVs. Our mission is to catalyze the development of a mass market for electric vehicles and to do so as rapidly as possible.

Creating a Mass Market for EVs: Tesla Motors as the Technology Leader and Market Catalyst

Tesla Motors designs, develops, manufactures and sells high-performance fully electric vehicles and advanced electric vehicle powertrain components. We have intentionally departed from the traditional automotive industry model by both focusing exclusively on electric powertrain technology and owning our vehicle sales and service network. We were the first company to commercially produce a federally-certified, highway-capable EV, the Tesla Roadster. This revolutionary vehicle combines a market-leading range of 245 miles on a single charge with attractive design, driving performance and zero tailpipe emissions.

Introducing the Tesla Roadster required us to develop a proprietary electric powertrain that incorporates four key components—an advanced battery pack, power electronics module, high-efficiency motor and extensive control software. We believe the core intellectual property contained within our electric powertrain will form the foundation for our planned future vehicles. Since our team combines the innovation and speed to market characteristics of Silicon Valley firms with the experience of leading automotive companies, we believe that we will be able to rapidly and cost effectively introduce additional vehicles, such as our planned Tesla Model S sedan, and stay at the forefront of the electric automobile industry.

We operate in a fundamentally different manner and structure than traditional automobile manufacturers to pursue an historic opportunity — the creation of an integrated company that successfully commercializes EVs without compromising range, performance or styling. In addition to designing and manufacturing our vehicles, we sell and service them through our own sales and service network. This model is radically different from the incumbent automobile companies in the United States who typically franchise their sales and service. We believe our approach will enable us to operate more cost effectively, provide a better experience for our customers and incorporate customer feedback more quickly into our product development and manufacturing processes. We are continuing to expand our distribution network globally and as of May 1st, 2011, operated 18 Tesla stores in North America, Europe and Asia.

What Policy Works

Introducing an early stage technology product to the market and obtaining traction is always a challenge. But when the incumbent technology enjoys a duration of primacy, an imbedded low cost infrastructure and market penetration such as that enjoyed by the petroleum based transportation system, the challenge is indeed daunting. Moreover, when one adds in the fact that oil and gas interests have a virtual monopoly on the energy and transportation policy and regulatory arena, the task looks virtually insurmountable.

Tesla Motors was launched out of the purest of free market financing models – the application of risk capital to a promising new technology – venture capital. Our long term success will only be insured by the adoption of our product by paying consumers and our ability to make and sustain a product while delivering it on a profitable basis. However, for this and other promising early stage energy technologies to gain a foothold in a market monopolized by the large incumbents, policy makers and legislators must take action and create breathing room for these new technologies to gain a foothold in the commercial marketplace. This must happen if we ever have a hope to achieve the larger national and economic security advantages of a diversified transportation energy sector. So what can be done?

Economists would tell you that the strict application of objective principles in support of a diversified energy sector would involve the application of a tax on the incumbent technology – a gas tax. At a philosophical level, this would have the effect of pricing in the moral hazard associated with low cost gasoline and more explicitly reflect the externalities that are not priced into the cost of gasoline at the pump. Moreover, there is empirical evidence that such policy works. The application of meaningful gas taxes in Europe and Japan have resulted in the emergence and meaningful market presence of multiple advanced technology vehicles. These include hybrid technology in Japan and clean diesel vehicles in Europe. In both cases, these societies have recognized their vulnerability as non-petroleum producers and have taken active steps to spur alternatives. For the same reasons, China has recently announced plans to mandate the development of an EV market as a response to their poor domestic oil supplies and their crushing problems of environmental degradation. But politicians quickly point to the fact that a gas tax will never to happen in the U.S., or at the very least not until we are faced with a pressing national security or economic crisis.

Where that leaves us is the implementation of modifications to the tax code with the goal of ameliorating the initial high cost of early generation vehicles. With more EVs on the road, more consumers will try them, like them, and producers will to be able to better justify the billion dollar investments in design and tooling for newer, better, cheaper EVs. This is a model that worked successfully to spur the market for hybrid technology. The income tax credit for the purchase of a hybrid was designed to phase out over time and when certain volumetric milestones were achieved. There is currently a similar EV tax credit on the books, but it is imprecise in its methodology and does not fully incentivize the desired technology development. Its flaw is that it caps the available credit value at a battery pack size of roughly 17 kilowatt hours (KwH) – a pack that delivers less than 40 miles of range. By contrast, given the fact that the more KwHs of on-board energy storage result longer range, a well-constructed tax credit would not cap the KwH credit and instead would reward each onboard KwH. This tax code change would incentivize the uptake of extremely capable electric vehicles and would address the most important and currently most expensive component in the car – the battery.

Access to low cost capital that would incentivize manufacturers to invest in the development and manufacture of EVs and other plug-in technologies is also of critical importance. In this respect, the DOE’s Advanced Technology Vehicles Manufacturing Program is a model for how the federal government can accelerate the development of viable EVs through commercial style loans. Such arrangements are “win-win” situations. The companies seeking these loans, which must be paid back with interest, must first undergo rigorous scrutiny to ensure sound business models. Finally, there are a number of low cost local market policies that can help to encourage the adoption and trial of EVs. In this regard, access to HOV lanes on commuter arteries and free parking in densely populated areas already serve to incentivize EV adoption in places where they are applied.

What’s the Point?

If you don’t believe there is anything wrong with the monopoly that oil has on our transportation sector, if you don’t believe that we spend at least $75B in our national defense budget every year on securing access to foreign sources of oil and associated supply routes, and if you believe it’s okay that the average American household, spending roughly $4,000 per year on gasoline, is left vulnerable to dependence on this increasingly scarce resource, then there is nothing that can be said in support of Electric Vehicles that will sway you to support the development of a market for this technology.

If, however, you believe in the power of American innovation to fundamentally change and improve our individual lives and our larger societal interests, then there is no question the time is right to step up and support the development of a viable EV market in the U.S. and to encourage in word and deed the American companies fighting to establish EVs in the marketplace. If we do not take swift action, the proverbial frog will continue to sit in the pot as the water surely and inevitably rises to a boil.