Electric vehicles – The power problem

EV mania creates an issue for electricity generation.

• While everyone is getting very excited about the electrification of transportation, no one is worrying where the power is going to come from which is a problem being made even more difficult by the current desire to move away from fossil fuels.
• I have very little doubt that once the major problems (range anxiety and access to charging) have been sorted out, that electrical vehicles are going to take off in a big way.
• This is not because people are suddenly more environmentally conscious (although this is a small factor) but because electric cars are far cheaper to own.
• RFM has calculated (see here) that all things being equal, the same mid-range vehicle with the same trim level in its electric form would cost the owner $5,000 per year less to run than its petrol equivalent.
• This almost entirely a factor of the longer life span in terms of miles driven and cheaper maintenance given that there are so many fewer moving parts.
• Combine this with the fact that electric vehicles can also offer supercar performance for a tiny fraction of the price and switching to an electric vehicle rapidly becomes a no brainer that is going to appeal to almost everyone.
• Consequently, I think that sometime in the next 5 years, EVs are going to really take off in a way that no one is expecting.
• This is going to create another problem which is how to supply the electricity that all of these EVs are going to need on a daily basis.
• Around 35% of global oil demand is created by road transportation and this will have to be gradually replaced by electricity.
• RFM, using data from RethinkX, has estimated that in the USA this will cause total demand for electricity to increase by around 18%.
• There are many other estimates some of which are far greater highlighting the fact that no one really knows because there are so many variables in play.
• However, the one thing that everyone agrees on is the fact that demand for electricity will go up and go up meaningfully.
• Electricity grids are built to handle peak demand and given that EVs will generally be charged when electricity demand for other functions will be at its lowest, this means that there is space in the grid to deliver more electricity without building more distribution.
• However, more generation capacity is likely to be needed and this is where the problems begin.
• The cheapest way to generate electricity is to burn coal but with a renewed focus on decarbonisation globally, building more coal-powered power stations is not a good option.
• The same goes for oil and gas although natural gas produces much less CO₂ than burning coal and power stations of this type are still under construction but plans for more are being reviewed.
• Wind and solar are almost completely carbon-free but have their own issues such as not working when there is no wind or during the night.
• Furthermore, while the cold snap in Texas hit all forms of power generation, wind was hit the hardest simply due to the nature of how it generates power and the fact that no facility in Texas was ready for such low temperatures.
• This highlights the requirement to have a stable and reliable foundation for any power generation scheme that uses wind or solar.
• This is currently being mostly supplied by gas, oil and coal-fired power stations to which alternatives are now being sought in the effort to decarbonise.
• This is why I think that nuclear power is so interesting.
• It is fully carbon-free and is very safe but like air travel, on the very rare occasion that it goes wrong, it is a catastrophe.
• Following the leak of radiation from spent fuel rods at the Fukushima reactor in 2011 caused by the tsunami, nuclear power’s reputation was once again badly tarnished, but I think that this is beginning to turn once again.
• In the USA, there is support on both sides of the aisle to have another look at nuclear power and last week China once again emphasised its intention to decarbonise.
• Very often, what China says and what China does are different things, but China currently has 49 nuclear reactors, is building 16 more, and has 39 in the planning stages.
• Furthermore, it has also recently announced an offensive against bitcoin mining a portion of which is concentrated in Inner Mongolia thanks to the presence of cheap, coal-fired electricity.
• Hence, I think China does intend to gradually move away from carbon-based electricity generation and nuclear power seems to be a large part of this move.
• Consequently, I think that the increased demand for electricity coming from the electrification of transportation combined with the growing desire to decarbonise means that a new dawn for nuclear power is coming.
• In contrast to investing in electrical vehicles where valuations are off the chart and there is a wall of money flowing in, there is very little awareness of or interest in uranium which has been in a 13-year bear market.
• Uranium currently costs $27.70 per pound in the spot market down from $140 in 2007 meaning that a lot of the mining capacity available is currently uneconomical.
• This combined with a potential increase in demand for nuclear power over the next 10 years means that there is scope for the uranium price to pick-up significantly.
• I think that this is the best way currently available to invest in the electrification trend.
• I have a long position in uranium, uranium mining and enrichment with a 5-to-10-year time horizon which I think offers a much better risk-reward balance than buying Tesla or the crazy SPACs that its overvaluation has enabled.