What role will electric vehicles play in infrastructure deal? What role will electric vehicles play in infrastructure deal? http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\car-charging-stations-small.jpg June 25 2021 June 25 2021

What role will EVs play in infrastructure deal?

A lot, perhaps. But the bipartisan package has to clear Congress first.

Published June 25 2021
My Content

Bottom Line

President Biden reached across this week with a group of 21 moderate senators from both parties, agreeing on the framework for a bipartisan infrastructure deal worth $973 billion over five years and $1.2 trillion over eight years, including $579 billion in new spending. The S&P 500 rallied to a new record high on this perceived kumbaya moment in Washington, but the equity market’s early euphoria may prove premature.

Bait & switch? This bipartisan initiative addresses much-needed physical infrastructure, such as roads, bridges and tunnels, rail and mass transit, airports, electric grid upgrades, broadband expansion, replacing lead water pipes and electric vehicles. The “pay-fors” include repurposing unspent funds from last year’s $2.2 trillion CARES Act, enhanced IRS tax enforcement to close the tax gap, sale of oil from the Strategic Petroleum Reserve and a mix of public-private partnerships. Importantly, they did not raise corporate tax rates, index the gas tax to inflation or create a new user fee for electric-vehicle (EV) owners. 

The Senate is leaving town shortly for its usual two-week Independence Day holiday, so it’ll have only three weeks or so after lawmakers return from vacation to hammer out final legislative details ahead of House Speaker Nancy Pelosi’s end-of-July deadline. After their critical vote in early August, Congress goes on vacation for six weeks into mid-September.  

The potential fly in the ointment, however, is that this bipartisan physical infrastructure deal ignores the roughly $4 trillion in “human infrastructure” spending that President Biden and progressive Democrats want passed in a separate reconciliation bill. This spending would include free community college and universal pre-kindergarten, child- and elder-care, climate change, expanded Medicare and other antipoverty measures. The proposed “pay-fors” focus on sharply higher tax rates on corporations and wealthy individuals. While it does not appear that President Biden has the necessary votes for this second package among Republicans or moderate Democrats, he is insisting that if the reconciliation package is not passed first, then he won’t sign off on his infrastructure deal, suggesting the potential for increased market volatility later this summer. 

Whither EVs? The Biden administration had hoped to spend $174 billion in its declared transition to EVs, in its coordinated effort to combat climate change. But the bipartisan infrastructure deal allocates only $15 billion. Biden plans to install 500,000 charging stations throughout the U.S. by 2030, which would be about one charger for every 660 people. That’s half the ratio of one gas pump per 330 people, but it’s nearly triple China's current ratio of one charging station per 1,750 people.  As consumer demand for EVs increase, so will the demand for charging stations. There are now 41,000 charging stations in the U.S., far behind Europe's 286,000 and China's 800,000. But we expect private industry, such as the major oil companies (who are looking to reduce their carbon footprint and accelerate their transition into renewables), to recognize this surge in demand and profitably fill the void.    

Early domestic leadership California Gov. Gavin Newsom signed an executive order in 2020 as the first state to declare a full transition to EVs by 2035. His state currently boasts the most EV sales of any state, followed by New York, Washington and Florida. As a nation, plug-in, light-duty electric vehicle sales totaled 1.74 million units through last year, making the U.S the third-largest consumer of the global EV market, following Europe and China. Battery-powered vehicles made up less than 2% of total U.S. auto sales, with more than half coming from Tesla.

Most U.S. auto manufacturers, led by GM and Ford, have announced their plans to go all-electric by 2035. Ford will release an electric version of its best-selling F-150 pickup truck next Spring. With driving ranges of 230 to 300 miles, pricing on the F-150 Lightning will range from $42,000 for the base model to $90,000 for the loaded Platinum model. GM released its Chevy Bolt in 2017 and will unveil an all-electric Hummer in 2022 for $110,000.

Playing catch-up to overseas Europe has been growing steadily in the past decade, with a total of 3.2 million EVs sold as of 2020, and BMW, Mercedes, Volvo, and Volkswagen have declared plans to go all-electric by 2030. Norway is Europe's EV leader, with the highest market penetration per capita globally and, at 75%, the world's largest plug-in segment market share of new car sales. China has the largest number of EVs in circulation, with more than 4.5 million cars on the road, roughly 44% of the EVs in the world.  China is also the world’s largest producer of lithium-ion battery cells.

It’s all about the advancements in battery technology Increasing the efficiency of battery technology is the single-largest challenge that the EV market faces. To be competitive with combustion-engine cars, car manufacturers and charging companies have been continuously improving the capacity of EV chargers and reducing their charging time. 

Charging times now can take anywhere from 20 minutes to eight hours, depending on whether the car is charged with a commercial level-one or a consumer level-three charger. The fastest a consumer can power a vehicle today is a 20-minute charge for 300 miles of additional driving capacity at a commercial level-three charging station. The utopian goal in coming years is to pull into a charging station for a five-minute charge that can restore 500 miles of driving capacity. We’re not there yet.

The current average battery life is 10 years (at 12,000 miles per year) or a total of 200,000 miles, which is roughly the same for gas-powered vehicles. But the current average battery price is $156 per kilowatt-hour, which is more than twice as expensive when compared with $70 per barrel of oil.

EVs cost $12,000 more to produce than standard internal combustion vehicles today, so car manufacturers lose money on every EV sold, which is clearly unsustainable without the federal government’s generous subsidies. But given the rapid technological advances that they’re making, industry executives believe that battery-powered cars will be as profitable as combustion-engine models by the middle of this decade.

Research assistance provided by Federated Hermes’ summer intern Gilles Gouraige.

Connect with Phil on LinkedIn

Tags Politics . Markets/Economy . Equity .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Federated Advisory Services Company

3243822348