In power, there's a big difference between cost and value

In power, there's a big difference between cost and value

by Martin Livermore
article from Monday 2, October, 2017

I WAS INTERESTED to see the seemingly ubiquitous Sir James Dyson announcing that his company is developing a novel electric car (Dyson to make electric cars from 2020). Since a prototype does not yet exist, this is a pretty ambitious goal but if anyone can do it, it’s probably Dyson. And bullish statements like this are not uncommon in this new sector; Elon Musk is perhaps a role model in this case.

What this new car will look like is anyone’s guess. According to the report, “Important points that are undecided or secret include the firm's expected annual production total, the cost of the car, or its range or top speed. Sir James said about £1bn would be spent on developing the car, with another £1bn on making the battery.”

This is a very different company from Tesla, of course. Tesla was set up solely to make electric cars, albeit it has now branched out into selling batteries for domestic energy storage. It is still far from making a profit, but retains the confidence of the market and a share price to match. In many ways, it is analogous to Amazon or Google; a dynamic start-up that many people see as a future leader.

Dyson has little in common with Tesla, other than being fronted by a high-profile public figure and being engineering - or technology - based. It is very profitable, holding a strong position both in vacuum cleaners and hand dryers. It sells other products, such as hair dryers and air circulators/heaters, but only the vacuum cleaners and hand dryers are truly mass-market items. Even these are at the premium end of the market, but a £300 hair dryer is in a different league again. As others have said, they make Apple products look cheap.

Not surprisingly, then, Sir James said that the car would not be aimed at the mass market, and promised it would not be cheap. If it sees the light of day, it will compete with the likes of the Tesla model S and, most likely, offerings from marques such as Mercedes and Porsche. How it fares will then depend on what it does better than the competition. As a leader in cutting-edge engineering and design, the new Dyson car will probably do reasonably well, but in a niche market segment.

Even assuming lack of charging infrastructure, range problems or some other factor do not dampen demand, there are only so many prosperous first adopters in a position to pay a premium for these new cars. There are, of course, plenty of lower-priced alternatives, but they will still be out of reach of many car buyers.

Take the Nissan Leaf, one of the cheaper small family cars and the best-selling all-electric car worldwide to date. The base model Visia has a list price of £21,680, a significant premium over other similar cars. The cost of electric cars becomes more apparent when we see that this price is after the government (ie taxpayer-funded) grant of £4,500 has been taken into account. When an economic price for a small, basic car with a nominal range of 124 miles is over £26,000, the cost base for this sector is obviously very high.

To set against that, low running costs will certainly bring overall ownership costs down (until, that is, the government of the day finds a way to recoup the lost revenue from foregone fuel tax…). On the other hand, there is a rather large elephant in the room: resale values plummet much faster than for most conventional cars. The numbers of early adopters are not matched by second hand buyers.

All in all, it is difficult to see the ambitions of governments in a number of European countries to facilitate an accelerating switch away from the internal combustion engine being realised. The economic realities of life for most people mean that the transition will be in favour of hybrid vehicles rather than all-electric ones, in the absence of very significant falls in price and improvements in functionality. Electric cars are currently not only relatively expensive, but also offer poorer value for money.

There will doubtless be greater economies of scale when electric cars become more popular. Given that they are mechanically a good deal simpler than their petrol- or diesel-powered equivalents, there should also be some manufacturing cost advantages in the equation. But much of the higher cost resides in the batteries. In the case of the Nissan Leaf, the base model is also available without paying for the batteries up-front, for £5,000 less. The owner then pays for the batteries via a lease arrangement.

It’s useful to bear this in mind when hearing that developers of the newest (and largest) offshore wind farm planned in the North Sea (Hornsea 2) have settled for a strike price of just £57.50 per MWh (‘world’s biggest’ wind farm secures Yorkshire coast contract). This compares to the £92.50 per MWh secured for the Hinkley Point C nuclear plant. On the face of it, why would anyone bother with nuclear when wind energy is so cheap?

The answer lies in the value rather than the price. The Hinkley Point scheme is more expensive than necessary because of the choice of a design that has not yet been successfully built to completion. But, when built, it will produce at a rate of over 3GW, day in, day out. The Hornsea scheme has permission for up to 1.8GW of installed capacity, but the Contract for Difference is for 1386MW.

This is the rated capacity, reached when the wind is blowing at the right speed, but in practice the output will be lower (often very much lower) for most of the time. Smoothing the output over modest timescales using batteries would be prohibitively expensive, which means that thermal generating capacity to cover the full rated output would be needed. In practice this would be gas, because of the need to ramp up and down quickly.

Because Dong, the wind farm developers and operators, have no responsibility for delivering a secure supply of electricity, the additional costs accrue elsewhere in the system and, ultimately, are borne by the consumer. Dong can operate on a strike price of £57.50 per MWh because that is enough to cover their direct costs in this instance. The headline price may look low, but this project certainly doesn’t represent good value to British consumers. Given a free choice, they might very well choose Hinkley Point C over Hornsea 2, if they knew the full picture. 

Martin Livermore writes for the Scientific Alliance, which advocates the use of rational scientific knowledge in the development of public policy. To subscribe to his regular newsletter please use this link.

 

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