The general opinion regarding the possibility of another energy revolution, moving from fossil fuels to alternative fuels in transportation, has clearly shifted. Just two years ago, when I began writing on the subject, many were highly skeptical and doubted there even was such a possibility. Today the main question seems to have become not if it will happen, but rather when.
Two trends lie at the heart of this change in perspective. The first is the continuing growth of alternative energy, which is accelerating as costs are falling. The second is the shift of the auto industry to electric, autonomous and shared vehicles, which is also gathering pace. Together, these two trends have created an expectation that future transportation will be fully electric and charged from renewable sources, rather than powered by petroleum using internal combustion engines.
Because battery technology for both electricity storage and electric drivetrains has improved substantially over recent years, the general expectation is that cost improvements are imminent.
This trend has motivated investors to line up for opportunities in alternative energy investments, and the battery industry in particular. The reality of today is, namely, that battery technology improvements will be needed to overcome the current cost disadvantage of electric vehicles, spurring fierce competition to solve these challenges.
Because battery technology for both electricity storage and electric drivetrains has improved substantially over recent years, the general expectation is that these improvements are imminent. Amid today’s investor excitement, it is worthwhile to remember the enthusiasm surrounding nuclear energy back in the 1950s and 1960s, so that similar missteps can be avoided.
What to learn from nuclear’s letdowns
Back in the 1950s and 1960s, nuclear technology was considered to be on the verge of delivering improvements that would drastically reduce the cost of the production of electricity. As a result, the nuclear industry was supposedly set to dominate the power generation industry. Clearly, nuclear failed to deliver on this expectation. As it turned out, the expected technological breakthroughs never occurred. And instead of costs declining, they have actually gone up, leaving many investors to pay a heavy price.
The reasons for nuclear technology failure to deliver the improvements that would drive down costs have been extensively studied. What could investors in today’s alternative fuels landscape learn from nuclear’s experience?
One of the most important reasons for nuclear’s underperformance was expectations becoming too inflated. To a large extent, the excitement surrounding nuclear was built by government research papers that cited industry projections regarding efficiency improvements and cost reductions. This research, in turn, cited other government research papers that referred to industry estimates. This spiral of optimistic projections led to expectations that were, as we now know, unrealistic. In other words, nuclear in the 1950s and 1960s was a classic bubble where emotion reigned, causing facts that supported rosy scenarios were given prominence while facts that challenged established wisdom were ignored. The same can of course happen in the alternative transportation sector. Some experts are apprehensive that expectations are already too lofty regarding battery technology.
Since the nuclear industry primarily applied new knowledge to deliver “better” reactors, which were more complex, the costs associated with this added complexity canceled out most of the reductions achieved by economies of scale.
As the nuclear industry grew, its focus turned to scale rather than cost, providing another reason why nuclear technology failed to deliver the anticipated improvements. Since every new nuclear reactor project became bigger than its predecessors, the complexity increased, too, greatly adding to the cost (on a per MW basis) to build, operate, and maintain the plant. In a similar vein, batteries could become too large. If the battery industry becomes overly focused on “range anxiety” and its energy storage equivalent, a “bigger is better” attitude may prevail. Thus, the cost competitiveness of electric vehicles and alternative energy-based infrastructure could in this case also end up suffering. The nuclear industry also failed to translate the lessons it learned into cost reductions. Since it primarily applied new knowledge to deliver “better” reactors, which were more complex, the costs associated with this added complexity canceled out most of the reductions achieved by economies of scale. Something similar could transpire in the battery industry if it becomes overly focused on issues such as charging time.
What’s more, the nuclear industry ended up suffering greatly from a supply chain that was too narrow and tight. Due to a lack of standardization in reactor design, customized materials—for which there were too few vendors—were rife, leading to massive cost escalation once demand for nuclear energy rose. The rise of alternative fuels in transportation will lead to increased demand for numerous materials, among them lithium, cobalt, graphite, and rare earth metals, which if unaddressed could cause supply shortages and price increases that cancel out the positive impact of technology improvements and lower costs.
The path forward
The quick pace of development in the alternative transportation sector is no doubt good news, but the industry needs to be balanced in battery R&D and innovation and not go to extremes in terms of complexity.
The quick pace of development in the alternative transportation sector is no doubt good news, but the industry needs to be balanced in battery R&D and innovation and not go to extremes in terms of complexity. In other words, it needs to address real customer needs. The current battery tech in fact already meets most of the customers’ real needs, with the exception of cost. The standard range for current batteries is 250 miles, which can meet most motorists’ requirements, meaning that the car can be topped up overnight such that one starts every day with the 250 mile range. “Range anxiety,” for the most part, only applies to a small group of car users. Against this backdrop, as the world is on the cusp of a transportation revolution, one that can spur true fuel diversity and reduce oil dependence, it is important for industry, along with regulators, to manage expectations and position capital investments in the right places so that its fate does not go the same way as the nuclear sector.