TODAY’S STUDY: AN INVESTOR’S GUIDE TO PLUG-IN VEHICLES

Because it is not the case that lipstick will make a barnyard oinker more desirable, the decorations the car companies put on their gas guzzlers will not, in the long run and as gas prices inevitably rise, make yesterday's personal transport attractive to tomorrow's car-buying public.

That explains why GM and Nissan cannot keep their dealers adequately supplied with the new plug-in vehicles they brought out last fall. It is also why Toyota, Cadillac, Acura, Renault, Lexus, Honda, Puegeot, Audi and Dodge – among many others – will bring battery electric vehicles to showrooms by 2014.

This does not mean - as the report highlighted below demonstrates - that the path to market acceptance for plug-in vehicles will be smooth. Challenges remain, especially in the battery technology-vehicle cost nexus.

But solutions are already emerging and will advance inexhorably because - as the only presently viable path to fueling personal transport with New Energy-generated electricity - the battery electric vechicle is crucial to the transition to a New Energy economy and the domestic economic expansion, energy security and safe environment it will bring.

Supported by governments all over the world who see oil dependence as a fool's errand as well as the undeniable logic of New Energy, massive armies of quiet, dedicated researchers are determinedly improving battery energy density. At the slow, unwavering pace of Moore's Law, plug-in vehicles' cost is coming down and their ability to go farther on quicker charge-ups is advancing.

Pay no attention to the loud, misleading voices of oil industry lackies. Their noise may stand out like barnyard pigs wearing lipstick but their message is as meaningful as "oink." Pay attention, instead, to what the auto industry is doing. It is preparing to dump the pump and plug in.

Electric Vehicles: Perspectives on a Growing Investment Theme
23 February 2011 (Ceres and Citi)

In collaboration with Ceres, the Investor Network on Climate Risk, Baum and Associates, the Rutgers University School of Planning and Public Policy and the University of Michigan Transportation Research Institute, we conducted an overview of the current state of the dynamic electric vehicle (EV) industry, with a focus on individual company product plans, key technological issues, and latest government policies that may influence the development of this industry. The report is designed to provide investors with an educational overview of this important automotive theme.

.. Automaker EV Product Highlights — Traditional automakers, as well as a number of start-ups, continue to establish inroads into the EV market, which currently comprises ~3% of U.S. sales volume. General Motors headlines a new class of electric vehicles with the recent launch of the Chevy Volt. Toyota remains a key player as it develops a suite of EV vehicles around the popular Prius name, and Nissan is staking its claim on full electrics with the mid-size Leaf. Of the nontraditional manufacturers, Fisker and Tesla's plans appear the most advanced, with significant technological and financial resources in place.

.. Hybrid & Electric Vehicle Sales Outlook — By 2015, Baum & Associates forecasts over 100 models available in the U.S. market covering the four technology groups (including fuel cells), but many of these products will sell only in modest volumes. The forecast outlined in this report anticipates that sales will grow from approximately 2.5% of the total market this year to 6.3% in 2015 with total sales of over 900,000 units. Regular hybrids will remain most prevalent in both number of vehicle offerings and volume (approximately 55% of projected volume); with plug-ins and full electrics each representing about 20% of projected volume.

.. Key Developmental Issues to Address — Critical technological issues include the status and cost of battery technology and infrastructure support. Increasing volume, technological advancements, and creative business models (battery leasing) all promise to improve the value proposition of electric vehicles over time. Government regulation and policy are also influencing the industry through measures such as the Federal Corporate Average Fuel Economy (CAFE) standard and emissions requirements, the California Low Emission Vehicle Program, and its zero emissions vehicle standard, and other state and regional fuel standards.

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Overview

Background:

Established auto manufacturers, as well as a number of start-ups, remain committed to gaining a foothold in the fast-growing electric vehicle market. Additionally, governments at all levels are supporting this growth with a variety of incentives to spur production, measures to support charging and parking infrastructure, and programs to encourage consumers to adopt electric vehicles. This report provides an overview of this fast-changing field. Specifically, this analysis will address the following: (1) the current state of the industry.’s products and likely sales volumes in 2015; (2) the technological barriers that must be overcome for the industry to reach its potential; and (3) the relevant governmental incentives and regulations that are currently in place.

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Electric Vehicle Product Plans:

As the electric vehicle industry continues to evolve amid ever changing technology and policy updates, auto companies continue to develop diverse approaches to compete in the market. Toyota remains the industry leader, building upon its high volume Prius model. Toyota also offers a variety of other hybrid vehicles including the Toyota Camry and Highlander and the Lexus RX, GS, and the hybrid-only HS. At the same time, Toyota remains more conservative on plug-in hybrids and full electrics, concerned that a failure to meet consumer expectations regarding these vehicles could damage the entire electric vehicle market. Nevertheless, Toyota does not want to be left behind and so is developing plug-in and full electric vehicles, both independently and with partners including Tesla.

Ford is already active in the hybrid market through the Escape, the Fusion, and now the Lincoln MKZ. Ford will also be expanding into both the plug-in and full electric markets with the launch of the Focus and other products. To date, Nissan has been a modest player with a hybrid version of the Altima based on Toyota technology. Carlos Ghosn, CEO and President of Nissan and Renault, has made clear his skepticism of hybrids, and has strongly committed both companies to the full electric market, exemplified by the global launch of the Leaf. GM has been a modest player in the hybrid market with two rather unique technologies, the mild hybrid (used in midsize vehicles) and the Two Mode Full Hybrid (used in large trucks). The company has widely promoted the Chevrolet Volt (which will also be marketed as the Opel Ampera in Europe) as a means to position the company as an industry leader in the growing plug-in market.

Other established automakers have been more conservative. Consistent with its overall strategic approach, Honda has been cautious in its approach to electric vehicles. Chrysler (now with Fiat.’s influence) and Mazda have elected to participate in a modest way in the market, and are planning to be more active in diesel-powered products rather than electric-powered vehicles. Likewise, some of the European-based manufacturers are conservative in their approach to electrics, preferring to focus on their already strong position in diesel, with Volkswagen the possible exception in its plans for a variety of electric vehicle products. BMW has or will have a number of products, although the expected volume is limited.

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Among the non-traditional players, Tesla and Fisker are the leaders, both producing vehicles in limited volume at higher price points. Both companies have committed to reducing vehicle costs and thereby increasing their volumes with more mainstream offerings. A number of other firms are also seeking to enter the market, with investors and government funding supporting their launches, though not all of these companies are likely to succeed.

By 2015, Baum and Associates forecasts over 100 electric vehicle models could be available in the U.S. market covering the four technology groups (including fuel cells), but many of these products will sell only in modest volumes. The forecast anticipates that sales will grow from approximately 2.5% of the total market this year to 6.3% in 2015 with total sales of over 900,000 units. Regular hybrids should be the most common in terms of number of entries and volume (approximately 55% of projected volume); with plug-ins and full electrics each representing about 20% of projected volume.

Toyota is anticipated to be the market leader, with a variety of other companies splitting the balance of the market. Volume in the market is somewhat skewed in favor of products that will be sold in high volume, with almost 40% of the total volume based on only four models, each with sales of 50,000 units or more annually by 2015. These four models are the Toyota Prius hybrid, the Nissan Leaf, the Chevrolet Volt, and the Toyota Prius plug-in.

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Key Technological Issues

The traditional hybrid vehicle is the current industry standard. Growth in plug-ins and full electrics will require dramatic improvements in cost, packaging, and chemistry in the underlying battery technology. The industry is shifting from nickel metal hydride to lithium ion (the technology used in cell phones and portable computers). Private and public investments are also supporting a number of potential successor technologies. Energy density is the leading measure of efficacy, allowing the best combination of power and (lack of) weight. Of course, battery cost reduction remains a critical issue, and while manufacturers continue to make progress on that front, it remains a key industry focus.

The growing vehicle market has led to increased interest from companies seeking to supply batteries, with a number of both large and small players joining Panasonic and Sanyo (acquired by Panasonic). These new players include A123 Systems, Compact Power, Dow Kokam, EnerDel, Johnson Controls, LG Chem, and Sony. Equally important is the development of a charging infrastructure to support the batteries and provide convenience to users who will need to continuously charge their vehicles at home, work, and other locations. The provision of high voltage charging sources is important so that charging time can be minimized (particularly when drivers are not at home). Designing charging stations that will accommodate a wide range of vehicles is critical and a number of trade groups and companies are addressing the issue.

Beyond the direct technology issues, the industry must address other vehicle systems and components challenges, including advances in motors (that will provide power to vehicle systems that previously relied on the engine), major improvements in electronics, and enhanced cooling systems.

Even with these improvements, the electrification of the vehicle will require adjustments across the supply base, with reduced vehicle weight (including the weight of most vehicle subsystems) and increased aerodynamics necessary for improved performance from battery powered vehicles. The use of electronic brakes and steering systems are necessary and will require improvements in the vehicle.’s electrical system. Finally, the availability of lithium and certain rare earth materials is a debatable concern, as these supplies are concentrated in a small number of countries including China.

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Government Policy

The United States has seen a steady increase in government support for the electric vehicle industry that is designed to not only catalyze manufacturing of the vehicles but also to support infrastructure development and consumer preferences. This support comes at all levels of government: municipal, state and federal. Additionally, it includes a complementary suite of measures that comprises a mix of .“carrots and sticks,.” including fuel standards, subsidies, financial credits and tax incentives, and non-financial incentives such as access to HOV lanes and preferred parking.

Financial Incentives

Government has provided financial incentives both to influence consumer demand and commercial availability of advanced EV technology. These financial incentives are offered at the state and federal level with the federal government providing the largest source of resources. In particular, the American Recovery and Reinvestment Act (ARRA) has not only applied a significant level of resources to EV deployment but also has deployed those resources to a diverse range of policy areas including incentives for EV and component part manufacturing, consumer purchase, and charging infrastructure installation. A majority of ARRA.’s funds have been directed towards grants, tax credits, and loans for both vehicle and component part manufacturers, including for new .“start up.” operations as well as expansion of existing EV portfolios. Other public sector strategies designed to grow the market include consumer tax credits for the purchasing of electric vehicles, and requirements or incentives for vehicle purchases by government entities. Tax credits and sales tax deductions aimed at consumers and businesses are designed to defray high purchase costs.

Monetary grants to date have been to a wide variety of recipients, including major automotive manufacturers as well as emerging companies. Traditional auto suppliers have been active in seeking and receiving funds, while a variety of less well-known specialty firms in the areas of battery development and components and/or supporting technology for batteries have also been awarded funds. The federal strategy, to date, has been to distribute funds to a variety of companies and technologies, with the expectation that the market will ultimately determine the most cost-effective approaches.

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Regulatory Thresholds

Considerable efforts are underway at the state and federal level to develop market-based regulations that, while not directly prescribing EV deployment per se, support and foster a market for EVs. Key regulatory actions include the new Corporate Average Fuel Economy (CAFE) requirements, and the California electric vehicle requirements that will provide incentives (and penalties) to automakers for meeting (or missing) regulatory requirements. Electric vehicles will also receive “bonus points.” within the CAFE system to encourage development over the long-term.

Over the past 20 years, the California Zero Emission Vehicle (ZEV) program has had a significant effect on developing advanced technology vehicles, especially zero-emission vehicles (ZEVs). The ZEV regulations, which have been modified several times since 1990, have spurred new low and zero emission technologies in a series of interactive steps. These zero emission vehicle standards in California (and also adopted by the northeastern states), have encouraged electric and other advanced technology vehicles and have given pure ZEVs significant credits towards meeting the standards. However, under the new ZEV requirements, plug-in hybrids and pure electric vehicles look to be heavily favored. And since over a dozen other states either have the California Low Emission and ZEV programs or are in the process of adopting them, the number of such vehicles may increase for the nation as a whole.

Additionally, the emergence of state and regional fuel standards intended to favor lower carbon fuels may potentially emerge as a driver of growth in the EV industry. For example, California.’s Low Carbon Fuel Standard (LCFS) requires fuel providers to reduce the carbon content of their products sold in California gradually over time by mixing lower carbon fuels into their product portfolio, or by buying credits for the sale of lower carbon fuels. Various permutations of the LCFS are under design or consideration in 26 states and four Canadian provinces.

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Non-Financial Incentives

A wide variety of non-financial incentives are emerging, particularly at the state and local level. These incentives, including the use of HOV lanes, parking privileges, and reduced inspection fees and requirements, cannot singularly drive major EV market deployment, though the convenience they provide can help win inroads into consumer preferences. Also important for some is the status symbol that owning a .“green.” vehicle represents, a phenomenon especially directed at higher income consumers who are more likely to purchase EVs.

Definitions

As shorthand throughout this report, the term .“electric vehicles.” or EV will be used to refer to the three electric vehicle variants listed below, plus fuel cell vehicles.

Battery Electric Vehicles (BEVs) or Full Electric Vehicles (FEV)

Pure electric cars are propelled by electric motors that run on batteries with no internal combustion engine present. FEVs therefore produce no tailpipe emissions. A number of car manufacturers and other companies are developing these vehicles with some already on the road. The cost of vehicle operation is modest, although there is a lack of infrastructure for charging the vehicle both in homes and in other places. In addition, vehicle cost is quite high as this is a nascent industry.

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Hybrid Electric Vehicles or HEVs

Hybrids are vehicles that typically include a traditional internal combustion engine and one or more electric motors. Although there are a number of technologies, most hybrid vehicles charge their batteries by regenerative braking. Engines in a hybrid can run on gas or diesel or potentially other fuels. In general, the size of the internal combustion engine is smaller than if the batteries were not .“on board,.” resulting in higher gas mileage and lower emissions. The cost of these vehicles is relatively high, since two propulsion systems are included in the vehicle.

Plug-In Hybrid Electric Vehicles or PHEVs

Plug-in hybrids are gasoline-electric hybrid vehicles that can be recharged from the power grid, allowing increased range and thereby reducing the cost of operation. A traditional engine provides additional driving range as needed after the batteries have been depleted. PHEVs are best suited for relatively short commutes, thereby limiting the amount of gasoline used. The inclusion of two power plants (just as in the HEVs) adds cost to the purchase price of the vehicle (although leasing and a separation of the cost between the batteries and the vehicle are two ways to reduce the upfront cost).

Fuel Cell Vehicles or FCVs

Fuel cell vehicles run on hydrogen gas and emit no greenhouse gases. A number of automakers have test fleets, but the technology remains under development. The need for supporting infrastructure is particularly important. FCVs contain a fuel cell stack that converts hydrogen gas from the vehicle with oxygen from the air into electricity that powers the electric motor that propels the vehicle. A hydrogen storage tank is the heart of the system where the element is stored at extremely high pressure…

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EV Sales & Production Forecast for 2015

The market for electric vehicles is complex and evolving. As described above, a variety of automakers are marketing and developing a range of products to meet regulatory requirements and consumer demand. Beyond the mainstream automakers, a variety of start-ups are active in the marketplace. Sales of hybrid vehicles are just under 300,000 units, or ~ 3% of the market, with 2011 figures expected to remain fairly consistent. Continued economic slowness and low gas prices have reduced demand for these vehicles in the short term, but we do expect an increase in volume going forward.

This section includes volume forecast for the calendar year 2015. The forecast is derived from, and is consistent with, a broader forecast from Baum and Associates that includes sales and production volumes for all vehicles in the North American market at the vehicle nameplate and powertrain level. The inclusion of a powertrain forecast provides the detail necessary to differentiate models that are offered in both internal combustion and electric form (e.g., Ford Escape). This forecast and the data in this document incorporate a variety of factors, including:

􀁸 Assumptions on the growth of the overall economy, focusing upon gross domestic product;

􀁸 Interest rates;

􀁸 Fuel prices;

􀁸 Vehicle pricing;

􀁸 Manufacturer plans including timing of vehicle updates and available capacity;

􀁸 Government policy including incentives to manufacturers and consumers;

􀁸 Fuel economy/emissions requirements that manufacturers must meet at the state and federal level;

􀁸 Strategies of the various manufacturers; and

􀁸 Changes in vehicle segmentation.

Fuel prices and government incentives directly affect the affordability/cost justification of electric vehicles to consumers. Manufacturing incentives and fuel economy and emissions requirements affect the amount and timing of corporate investment, pricing, volume, and production ramp of these vehicles.

Electric Vehicle Sales Volume Forecast for 2015

Figure 2 details 118 separate models that are currently available or could potentially be available in the U.S. market by 2015. While many of these models may sell in relatively modest volumes or not reach the market at all (due to challenges in research and obtaining development funding), the market is clearly growing strongly.

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Electrical Vehicle Sales Volume Forecast for 2015

Comparing Forecasts to the U.S. Department of Energy

The Energy Information Administration (EIA), the statistical agency of the U.S. Department of Energy (DOE), presents an annual long term projection and analysis of U.S. energy supply, demand, and prices. The EIA.’s Annual Energy Outlook 2010 (AEO2010) has projections to 2035, based on results from the National Energy Modeling System (NEMS). The AEO2010 includes a reference case and additional cases examining alternative energy markets. Federal agencies, Congress, and analysts in industry and academia rely upon EIA.’s forecasts and analyses. The NEMS is becoming the de facto standard tool for national-level comprehensive modeling of energy.

The forecast of electrified vehicles based on Baum and Associates is national in scope, but limited to the light vehicle sector. Please see Figure 11 below for a list of the alternative vehicles that are covered in this forecast. Comparing the forecast of electrified vehicle sales with AEO2010 at the total sales level for 2015, we find that, despite the differences in methodology and approach, the forecasts are consistent with each other and remain well within the mainstream.

The forecast of unit sales of 939,600 is 103,600 (12%) higher than the AEO2010 Reference Case (836,000). Figure 12 shows total 2015 sales forecasts for electric vehicles along with the AEO2010.’s alternative scenarios. The AEO2010 Reference Case sets a vertical axis in the figure, and for each scenario, a shaded horizontal bar represents the range of upside and downside impacts of the risk variables. At the ends of the shaded bars we show the values of the scenario factors that have produced the sales impacts.

The figure reveals that the forecast is higher than the AEO2010 Reference Case, but well within the upside extremes that either higher world oil prices or more rapid improvement in energy intensity would produce, and the forecast is just above what sales would be under the upside economic growth scenario. These assessments are confirmed by the numerical details in the table below

The above outlook was designed to represent the impacts of world oil price, technology, and economic growth on EVs for the sake of individual scenario analysis. We acknowledge that real world market forces can produce divergent results with respect to demand and overall sales volumes.