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Business News/ Mint-lounge / Mint-on-sunday/  The final frontier in Germany's great energy disruption
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The final frontier in Germany's great energy disruption

Dieselgate, carbon taxes and the question of batteries

Photo: BloombergPremium
Photo: Bloomberg

In early 2014 a small group of researchers from the relatively low-profile West Virginia University in the US discovered something that would go on to become arguably the greatest recent scandal in automotive history. They attached a mobile emission testing system to two Volkswagen cars that. Which is common enough practice in the sector. But what the WVU researchers did differently was to run these machines while the cars were in motion. This is quite unlike standard emission testing methods, which take place when the automobile is stationary. 

They discovered that the emissions recorded when the cars were on the highway were a whopping forty times higher than those reported by the US Environmental Protection Agency (EPA) in their stationary tests of these same cars. This was rather strange—while a car in motion does use more energy, the EPA analysis is meant to account for these factors. What was causing such a large discrepancy? It almost seemed like the Volkswagen cars were intentionally doing significantly better in stationary tests. 

As it was later discovered, Volkswagen had been using “defeat devices" in their vehicles—software algorithms that artificially lowered emissions whenever their cars were being tested. This was not merely a mistake or a design flaw—it was wilful deception, carefully planned to make their diesel vehicles pass tests. In fact, emissions were not always low when these cars were stationary with engines running. They only performed up to the mandated clean air standards when they were being tested for emissions. 

Later investigations even found that the company had been using dozens of code words and fake phrases such as “acoustic software" to obfuscate the use of cheating algorithms. Volkswagen admitted that 11 million of its cars worldwide had these defeat device algorithms. The uncovering of this deceit sent shockwaves through the automotive industry, and has since led to larger investigations, the firing of Volkswagen CEO Martin Winterkorn, billions of dollars in fines, a massive vehicle recall, arrests of Volkswagen engineers and much more. 

Later still it was discovered that the rot ran even deeper.. In early 2017, the German government ordered that the sales of a particular model of German Porsche cars be cease immediately as it too had been using the same cheating software that Volkswagen did. The Volkswagen scandal two years earlier clearly did not make other automakers immediately wiser. 

This diesel scandal has its roots in a decision that German automakers made decades ago. In the 1980s, the auto industry in Germany bet on diesel as a fuel as it had lower carbon dioxide emissions than petrol. However, little did they know that they would not be able to meet emissions targets easily with diesel engines, which is why cheat algorithms had been deployed in the first place. 

There have even been accusations and investigations by the European Commission that Volkswagen, BMW, Audi, Mercedes and Porsche, the five largest German auto manufacturers, colluded in several aspects of their businesses. This included diesel technology, and almost certainly led to the German automotive industry cartel being locked into diesel engines while other nations—such as Japan—were researching and investing in hybrids and alternative fuels. 

As a consequence of this diesel lock in, many German cities—in particular Stuttgart, which is the automotive capital with the headquarters of Mercedes and Porsche—have poor air quality. To deal with this problem, Stuttgart reduces the prices of public transport whenever air pollution exceeds a certain limit, which is often every day. And as recently as July 2017, a German court banned diesel in this "motor city". 

Naturally, all this has triggered a backlash from the government and the public at large. In order to recover from this scandal, Volkswagen decided to double down on clean mobility. Being one of the world’s largest automakers, it has even changed the outlook of the industry at large. Thus far, with the exception of Tesla and Nissan, automotive majors had reduced electric mobility to minor vanity projects. 

Volkswagen has since announced that it will “leapfrog" its competition and become the world leader in electric mobility by 2025. The company hopes to sell 1 million electric cars by then. In comparison, US carmaker Tesla sold fewer than 80,000 units in 2016. Volkswagen will invest €70 billion and bring 300 new electric car models by 2030. Other German carmakers are also beginning to pursue aggressive electric vehicle targets. 

Decades after electricity and heating started undergoing transitions, the early days of disruption may have finally dawned upon the German automotive industry. Change in this industry has hitherto been slow. There were no affordable alternatives to internal combustion engines, which are the dominant vehicle platforms in use. Indeed, transport at large and the automobile sector in particular is the final frontier in the transition towards low emissions. This transition will come with many challenges, chief among them being the availability, use and impact of vehicle batteries. 

The lithium rush 

Contrary to popular opinion, the primary obstacle to greater EV adoption will not be the presence of charging points. That’s a solvable problem, especially in a country like Germany, which has well laid out private and public parking spaces. The key issue is the availability and costs of batteries themselves, and of the materials that go into the production of them. 

Volkswagen predicts that it will need more than 200 gigawatt-hours (GWh) of battery production capacity if it is to meet its goal by 2025. This is five times as much as is produced in the world’s largest battery production unit, which is Tesla’s Gigafactory . 

Globally, Bloomberg New Energy Finance (BNEF) forecasts that 1,300GWh of battery capacity will be needed by 2030. At the moment, 270GWh of battery production capacity is being planned by 2021, while the current capacity is only 90GWh. However, Benchmark Mineral Intelligence, a global price data and information provider for the lithium-ion battery supply chain, states that by 2025 only 625GWh battery production will be in place to serve electric vehicles. 

The falling of prices due to increases in capacity have been the primary reasons why the electric vehicle revolution has accelerated. Lithium-ion batteries—which is the dominant battery technology that powers phones, laptops and now cars—have seen price drops of over 70% since 2010. 

Battery prices may need to significantly drop from today’s levels to be able to beat traditional vehicles in cost and mileage. BNEF forecasts that falling prices could make electric cars cheaper than internal combustion engine cars sometime between 2025 and 2029. From $1,000 per kilowatt-hour (kWh) in 2010 and $300 per kWh in 2016, battery prices may fall to $75 per kWh in 2030.

A related factor that impacts an electric vehicle future is the energy density of batteries. Energy density refers to the amount of energy stored per unit of volume. The greater energy stored, the greater the range of the vehicle would be, thus becoming another factor that could also help reduce the costs. In many ways, electric cars are batteries on wheels, and the Energiewende in this field is a transition towards greater energy density in batteries. 

Unfortunately, batteries have not followed a Moore’s law-style improvement—energy density in lithium-ion batteries have only improved by about 5% to 8% each year. 

The batteries used in production vehicles are largely lithium-ion batteries, which are made of nickel, cobalt, graphite and lithium. In fact, it is nickel, not lithium, that’s the largest single raw material cost in these batteries. 

Securing the supplies of these elements has become a key concern for electric vehicle manufacturers. In the case of nickel, prices are still low and global supply has been able to meet demand. The prices of lithium hydroxide and cobalt, on the other hand, have been rising as a result of the boom in electronics sales worldwide. Automotive companies are therefore scrambling to secure supplies of these elements, sometimes negotiating with mining companies directly. 

As is often the case with mineral resources, reserves are often restricted to a few countries. For instance, Chile, China, Argentina and Australia account for most of the lithium reserves globally. Therefore, concerns over import reliance will continue even after Germany moves from oil to electric transport. In fact, German automakers will have to compete with Chinese ones, who have the advantage of having adequate reserves at home. China has already become the world leader in electric vehicle production and is taking further strides in mainstreaming these vehicles into the economy. 

China is also moving fast to secure lithium supplies outside China, as the government has instructed state-owned companies to do so. Accordingly, Chinese companies are doing deals in South America and Australia to control supplies, even as they are in a position to tap the Chinese market at will. In the next few years, China is expected to wield significant influence over the global lithium supply chain. German automakers will have to swim against this tide.

Further, many of the countries where these reserves are located do not have strong regulatory institutions. For instance, with production of 50% of global supplies, the world’s largest cobalt producer is the Democratic Republic of Congo, which has a low per capita income and a weak state. As a result, there are often human rights violations and child labour involvement in the extraction of minerals that make up batteries. 

Unicef reported that in 2014, around 40,000 children were working in these mines. Miners—both children and adults—work in poor conditions without adequate protection, leading to irreversible lung diseases and death. Deaths and injuries are rather common, although the real number will never be known as there are no credible reporting mechanisms in place. There are also deaths related to birth defects in areas surrounding the mines. There is an undeniable human cost to the global rush to electrify its transport, and automotive and electronic companies will have to go beyond lip service to ethically source raw materials. 

Additionally, countries are already beginning to grapple with battery waste, which is turning into a major environmental issue. In the coming years, as electric vehicles boom, tens of millions of tonnes of lithium-ion battery waste is expected to be generated, as battery recycling infrastructure is largely non-existent in most markets. In the EU, only 5% of lithium-ion batteries are recycled. The rest of them end up in land-fills, emitting toxic gases and leading to contamination of groundwater. However, this is not an unsolvable issue, and EU regulators are already encouraging collaboration between vehicle manufacturers and battery recycling companies, but it remains to be seen how effective this turns out to be. 

The final frontier of the Energiewende is therefore not a panacea to the problems with energy use today, even though it is desirable. A lot more will need to be done to ensure more ethical sourcing of minerals, battery recycling and ensuring that the energy that feeds into these batteries is generated through low-emission sources. 

A common refrain among critics of electric vehicles has been that they are only as clean as the grid: that if the electrical grid is powered by fossil fuels, then electric vehicles merely shift the source of the pollution from the tailpipe to the power station. However, studies show that electric vehicles emit much less greenhouse gases even when the electrical grid is largely powered by fossil fuels. This can be further made cleaner by installing solar powered car-charging stations. 

Of course, the most effective solution to emissions is ultimately greater public transport use. German cities and towns already have a dense and safe public transport system—ones that can be used through the day and much of the night, ensuring that the need for private transport is minimal. Various modes of transport are also well integrated with each other, prompting Germans to make over 100 trips per year by public transport on average, far more than most in the world. (How many times did you use public transport last year?) 

And yet, adequate and affordable public transport has not eliminated and can not eliminate private transport, which necessitates the need for a push towards electric vehicles. In German cities with over 100,000 people, 37% of the residents use private vehicles, although this number has been marginally falling since it reached a peak of 44% in 1998. 

The number is even more stark when the measure of “passenger kilometres" is considered, which refers to the total number of kilometres people have travelled. With this metric, 85% of all passenger kilometres travelled have been in cars. Undoubtedly, to ensure a successful Energiewende, it is necessary to ensure greater usage of public transport, while also ensuring private transport weans away from diesel. 

As a bird flies

There is, of course, yet another frontier in transport that needs disruption: airplanes. Fuel efficiency gains have been made over the years using various methods including a switch from turbojet to turbofan engines. However, an electric revolution in airplanes is far away in the future. Electricity powered flights are still in their early stages of research and development. For this reason, the only solution to airline emissions in Germany is to ensure greater usage of the country’s extensive railway system. After all, per passenger kilometre, trains emit 20 times less CO2 compared to airplanes. 

However, low-cost carriers often render airplane tickets in Germany (and Europe) cheaper than train tickets. The incentive structures will have to change and the railways will need to become more cost effective to compete with budget airlines. Unfortunately, that is hard to do because railways are capital intensive and employ far more people, which inflates costs. Further, there is low or no competition in the railway sector, which reduces incentives to cut costs. 

Of course, there is another way to change relative costs: making air travel more expensive. This has grounding in economic theory, whereby taxes can be imposed on trades which impose costs on third parties. Such a tax would be called a Pigouvian tax, named after English economist Arthur Cecil Pigou. A tax on carbon emissions is one such tax. These taxes even have support from free market economists and institutions, but have not been implemented in Germany yet.

Instead of such carbon taxes, policy makers have preferred “emissions trading" as a means to reduce carbon emissions. This is built upon the seminal work of economist Ronald Coase. Emissions trading schemes put an upper limit on how much industries can pollute, and then let these companies trade emissions with each other. For instance, if manufacturing unit X has low emissions in comparison to Y, Y can buy some certificates from X to meet requirements and compensate for its excessive emissions. This gives incentives for both X and Y to reduce emissions overall. 

In Europe, this scheme is called the EU Emissions Trading System (ETS), and it has been in force since 2005. It governs greenhouse gas emissions in 31 countries from 12,000 power and manufacturing plants and has been successful in reducing emissions. However, due to the very nature of this scheme, it does not apply to airlines, leaving intact the price difference between budget flights and trains. 

While it is not likely that Europe will put in place a tax on carbon any time soon, interestingly, the very creator of the first ever emissions trading programme now prefers the carbon tax solution to the trading one. 

Can you feel the energy? 

On a spring morning in 2017 in the German town of Leipzig, a small group of interdisciplinary researchers met to discuss their experiences in a niche field of study that they titled "sensory governance". The workshop was called "Can you feel the energy?" The idea was to explore the sensory dimension of energy technologies and systems, and to discuss how best to govern and regulate the energy sector to minimise problematic "feelings" such as sore sights, sounds, vibrations and strange (but non-lethal) smells caused while producing energy in a distributed form, such as cooking gas from locally sourced animal manure. 

This field of inquiry deals with "mild" externalities from distributed energy sources. Unlike harsh externalities from coal mining and use, renewable sources of energy such as wind and biofuels often do not have lethal consequences. A strange smell or a low humming sound may all you have to encounter—but such sensory issues need to be minimized too. 

This has been made necessary and possible because of the very success of the Energiewende, as energy production has moved from a few industrial clusters to the rooftops and backyards of hundreds of thousands of homes. This geographical redistribution of energy systems is an important facet of the Energiewende. 

Through human history, the geographical concentration of energy has followed an inverted-U curve, moving from greater geographical spread, to concentration, to greater spread again. Initially, as humans moved from wood to coal and oil, energy production began to cluster. Instead of individuals collecting and using wood locally, fossil fuels made large corporations possible, which could provide energy to far larger areas. 

In the past many decades, decentralized energy production—especially in the form of German energy cooperatives—has ensured that energy production spreads out geographically. This has also ensured that instead of large scale (and sometimes lethal) externalities, there are milder sensory issues that sometimes need to be dealt with. 

A second—and related—aspect of the Energiewende is the change in ownership of energy, and therefore the change in market power. For reasons similar to those that impacted the geographical spread of energy, ownership through human history has moved from individuals, to corporations or the state and then to individuals again, although to a smaller but significant degree. Of course, the reason for the concentration in the first place was not due to a nefarious agenda, but due to the technology in use, expertise and economies of scale. For this reason, energy ownership will never truly fragment to pre-industrial levels—and nor is that desirable. 

This is especially true if the "Energy Trilemma" problem must be successfully met. This term refers to the threefold problem in energy policymaking that governments must deal with. These three aspects are security of supply, energy equity and environmental sustainability. 

The security of supply here refers to uninterrupted physical supply of energy in whatever forms the economy wishes to consume. Energy equity refers to affordability of the supplied energy for the population at large. And environmental sustainability, while it has many angles, usually implies low pollution. Often, these three characteristics are at odds with each other, which means balancing them out is not an easy task.

The third aspect of the Energiewende deals with this strand of the Trilemma. The energy transformation in Germany (and elsewhere) has been one where "externalities" are being increasingly dealt with. The gravest of these externalities of course are greenhouse gas emissions, which contribute to a changing climate and have consequences on human health. The movement from fossil fuels towards non-emitting sources is a step in this direction. However, Germany’s “twin exit" from both nuclear and coal based energy is undoubtedly slowing down the fight against lower emissions.

A fourth aspect of the Energiewende is the shift towards fuels with greater energy density. This process has been in motion from the very start of human civilization, as it moved from wood burning to coal use, and then towards the greater adoption of oil and natural gas, and then nuclear. Of course, the “twin exit" comes into play here as well, since Germany is exiting nuclear too. 

Wind and solar energy are unique here, as they are not “fuels" in which energy is “stored". Electricity produced by these sources must be consumed immediately, unless it is stored in batteries first. Lithium-ion batteries currently have lower energy densities than fossil fuels, but that is expected to change in the coming decades with greater adoption and research. In many ways, this is the key Energiewende challenge: making batteries more efficient and economical to use. 

The paths of these various changes have not been linear. Our policy and political choices govern the trend as much as technological development does. However, technology does form the gravity that determines the long-term direction of our energy systems. 

Ultimately, there is no question of whether the Energiewende is desirable, even as we debate the specifics and experiment with the processes in our own national backyards. In the aftermath of Dieselgate, the head of research and development for Volkswagen said , 

“If the technologies had been reversed, it would be hard to conceive an engineer now successfully proposing that combustion engines replace electric cars. Imagine that person would say, ‘Rather than having maximum torque available from the start like an electric car, it had to ramp up over time.’ Imagine he then said it involved a device where thousands of tiny explosions occur every minute using a toxic and highly flammable liquid that had to be stored in the vehicle somewhere. And then imagine him saying that this fuel came almost entirely from crisis regions. What do you think his boss might have said to him?"

Indeed, a move back to internal combustion engines from electric motors, or to incandescent bulbs from LED ones, or to coal from natural gas seems ludicrous. 

The Energiewende is multifaceted—describing the changing nature of fuels, technologies, policies, politics, culture, regulation, governance, and the relationship between state, citizen and industry. Not every aspect of it has been a universal success or indeed even arguably desirable, but there is no doubt Germany would rather be where it is today, than at any point of time in the past—at least insofar the energy economy is concerned. And that is the success of the Energiewende.

Siddharth Singh, a researcher of energy and the economy, wrote this series of articles as a German Chancellor fellow and a visiting fellow at the Wuppertal Institute in Berlin. His Twitter handle is @siddharth3  

Read Siddharth's previous Mint on Sunday essays here.

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Updated: 03 Feb 2018, 11:26 PM IST
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