An electricity filling station in front of the Ikea store in Kaarst, Germany. There is growing political pressure to “decarbonise” economies.Photo: EPA

JOHANNESBURG - Electric vehicles (EVs) are an inevitable part of society’s future. The major car companies have invested heavily in developing reliable, long-distance electric solutions.

There is also growing political pressure to “decarbonise” economies, providing a further incentive to adopt electric vehicles. However, the roll-out of this technology is not smooth sailing. One of the main reasons the roll-out of EVs will be held back is that the supply of the major commodities used in the manufacture of EVs is likely to be constrained.

In addition, the reliance on coal power for electricity generation will affect the efficacy of EV adoption. The impact of these two factors will become more acute only as the percentage of EVs in the overall vehicle fleet increases from its current 0.2% share.

Opportunities

However, these factors also give rise to distinct investment opportunities, notably in the areas of the market that are addressing or will have to address these issues. Cobalt, one of the key materials in all types of batteries - from those in your phone to those in your electric vehicle - is a high-risk commodity.

More than 60% of the world’s cobalt comes from the Democratic Republic of Congo, a notably volatile region. As a result, manufacturers have been working to reduce the cobalt content in their batteries.

One company helping to bring about this reduction is Umicore, a major manufacturer of nickel manganese cobalt (NMC) batteries.

NMC batteries use only a fifth of the cobalt found in lithium cobalt oxide (LCO) batteries, which currently make up almost half of the world’s batteries. There are few reasons LCO batteries should remain in favour as NMC batteries have superior energy density and a longer life cycle, while the price of cobalt has risen 150% in 18 months, making LCO batteries notably more expensive.

Another major challenge facing the electric vehicle roll-out is the mismatch between the political impetus to support electric vehicles and the decarbonisation of electricity production.

In recent months, France’s President Emmanuel Macron has pledged to ban the sale of diesel and petrol cars by 2040, while British environment secretary Michael Gove has made a similar pledge.

While these pledges are noble, they present enormous infrastructure challenges. Macron’s timeline would drive electricity demand up by 40% at a time that the French have already committed to reducing the contribution of nuclear to their overall energy supply from 72% to 50%.

Despite these commitments, renewable sources have yet to become reliable enough to be a base source of energy.

In Germany, where a third of the energy supply comes from renewable sources, the government has had to turn to coal as an emergency supply when renewable sources have failed.

France has already committed to not using coal, which leaves the government with only one option: natural gas, which has the benefit of emitting 40% less CO2 than coal. We believe that this reliability gap, coupled with rising demand for electricity, makes natural gas an excellent opportunity for an energy portfolio.

Bottlenecks

It appears there is a real political appetite to support the move towards greater usage for EVs and the outlook for the industry, while exciting, will throw up many challenges. Consequently, as we see with any area exposed to strong growth, bottlenecks and increased margins will be experienced and exploited.

The two that we find most compelling are the shortfall in commodities traditionally used in batteries and the reliability gap in the electricity supply. However, the roll-out of EVs will provide an energy fund with many interesting opportunities for some years to come. 

Richard Robinson is the manager of the Ashburton Global Energy Fund.

- BUSINESS REPORT