In today’s Exponential Investor

  • What do technology pioneers need to do to get out of the first – and flat – part of the curve?
  • What happens to costs of the technology to consumers at that point?
  • Why doesn’t it matter if you missed out on the 2020 bonanza in clean tech stocks?

Electric vehicles (EVs) have generated a lot of exciting headlines and – as readers of Exponential Investor know – some dramatic numbers.

Possibly the most important statistic to come out of the EV industry in the last year is that EVs account for 5% of global car sales.

As EV guru Gregor Macdonald – author of Oil Fall and editor of his weekly Gregor Letter – points out this level is crucial.

According to Gregor, getting to that level of market penetration is a thousand times harder than what comes next. Why? Because previously, the EV industry had essentially started at zero. The industry had no technology, no manufacturing capacity, no supply chain, no designers, sales outlets, specialist workers, brand recognition, and everything else that the incumbents had, along with higher costs and uncertain supplies of raw materials,

A 5% market share is crucial for pioneering technology: why?

To get to 5% of annual sales, the EV industry had to work so hard to reach parity with makers of petrol (ICE – internal combustion engine) vehicles, overcoming all those hurdles.

Now that EVs have account for 5% of the global car market, growth can really take off.

Simply by arriving at the 5% mark, the industry shows that it has a competitive, or even superior, product.

That is to say, a product that is better for our wallet, our planet and our lungs.

It is relatively easy to sell an expensive, low-quality EV to the super environmentalists and technology buffs, who absolutely love it. But you can’t sell it to everyday consumers.

Customers need competitiveness on cost and performance, and now they have it.

So… what happens next?

The chart below shows the evolution of EVs’ share of the global market since 2010:

Surging through 5% in 2021

Source: Jimmy Douglas on Twitter

This chart looks like the first part of the “S-curve of adoption”, a powerful theory for explaining the diffusion of pretty much any new technology into the global market.

Progress is very slow at the start, as costs are coming down, manufacturing is scaling up and the technology is improving. Then, sales accelerate in an exponential fashion as its competitive advantage is spotted by the mainstream. Then, as it reaches saturation in its market, the pace of growth slows again.

So when plotted on a graph like the one above, the curve is flat at the start, steepens, then plateaus, creating the S-shaped curve.

The first cars, phones, computers, and smartphones all followed this pattern. Now solar and wind power, and electric vehicles, are following it too.

Why do S-curves happen?

What matters for EVs is that the third part of the S-curve – when the growth rate really slows – is still some way away.

However, new technologies do not just break out of the first part of the S-curve – where sales are flat – and into the exciting second part of the S-curve just because the technology pioneers have overcome all of the challenges relative to the incumbents.

What is really matters is that the unit costs of the new technology. Consider, solar power, which is a specialty of Ramez Naam – an expert who appeared at one of Southbank Investment Research’s early “Beyond Oil” virtual conferences.

Ramez notes that the cost of one unit of solar power has fallen 99% since the 1970s ($76/watt hour in 1977), to around 5 cents per kilowatt hour (a thousand watt hours) today.

Even just ten years ago, it was seven times higher, at 35 cents per kilowatt hour.

The cost of producing solar power has fallen in lockstep with an increase in manufacturing capacity. This process is called the “learning rate”. Ramez charts solar capacity rising from a few thousand MW to nearly a million MW globally, while costs fell on the trajectory outlined above.

He found that the price of solar power from large-scale systems dropped by 30-40% each time that capacity was doubled.

You can read Ramez’s full analysis here. We have reached the point where, in much of the developed world, it is cheaper to tear down existing coal-fired power plants and to build solar power capacity instead.

Something similar is happening in the wind, battery, and electrolyser markets.

Fossil fuels don’t have this advantage of falling costs.

As another Beyond Oil guest, Kingsmill Bond, put it in a recent piece (here),

Over the past decade, the costs of solar power and wind have fallen by 90 and 60% respectively… Meanwhile, fossil fuel prices exhibit no learning curve. After all, they are a commodity and not a technology.

A commodity can’t have a learning rate. In fact, the opposite is true, as the easier deposits get found and used up, and companies have to dig deeper in more remote locations, at greater cost, to get at the same amount of oil.

This is why fossil fuels are inherently inflationary, while renewables are inherently deflationary.

In a world where central banks are beginning to worry about soaring inflation, that matters a lot.

Until next time,

Kit Winder
Co-editor, Exponential Investor