Sunday, February 13, 2011

Electric cars: pie in the sky or investors' heaven?

Electric cars have been the stuff of fiction and speculation for as long as I can remember but, in practice, have posed little threat to the standard gas guzzlers. There are over 600 million combustion engine cars in the world but only a tiny number of electric cars, a fact which is unlikely to change dramatically despite an apparent surge in interest from governments and carmakers.

There are issues of consumer resistance, battery technology, recharging infrastructure, price (including uncertainty over government subsidy) and economies of scale. But there are plenty of interesting initiatives out there : Denmark and Israel are building a network of charging points and "switching stations" where you swap your flat battery for a charged one in less time than it takes to fill a tank. The 2011 Car of the Year was the electric Nissan Leaf which the UK government is trying to get manufactured in the UK. Spain is aiming for 1 million electric or hybrid cars by 2015 though there are doubts about electric car sales in Spain taking off to this extent. One of the main issues in scaling up electric car fleets in Europe is the lack of a common standard for plug sockets.

But despite all the doubts, there is a future for electric cars simply because the alternative of burning through the planet's oil is not going to be viable for much longer. Exhibit 1 - oil price back over 100$ despite a weak economic recovery in most countries. Exhibit 2 - China. Already the world's biggest car market and growing at 50% (and it has a long way to go - only 2% of Chinese own cars). Exhibit 3 - other emerging markets. As India and the rest follow China's path their middle classes will want cars just like everyone else.

Yes, there are bio fuels, hydrogen cells, liquified gas and other alternatives but I suspect that electric will be the biggest part of the solution. In 2010 the Chinese government threw its weight behind the electric car and aims to be the world's biggest producer by 2012. This will be decisive. Which of course means a massive increase in the need for electric power generating capacity which in turn suggests some investment themes:

- forget the prospect of windturbines and solar powering all the new cars; the world will have to turn to the fuels it has in abundance to achieve the necessary scale. That means coal and gas whatever the carbon consequences might be.

- the electric grids themselves will need expanding and upgrading and will be even more important to the economies they serve. This will mean governments have to allow these monopolies to charge inflation-beating prices for decades. Great if you think like me that stagflation is the main threat and need to find good dividend payers (see what do with your savings in 2011)

- presumably controversial nuclear power will have a role. Uranium miners should benefit though their share prices have already surged in recent times.

- battery makers and battery technology companies but you need to do your research. Warren Buffet, the greatest investor of all time, is a fan - see http://www.rationalwalk.com/?p=11079

This is just a thought to tuck away for the long term (and a fairly obvious one at that) not specific investment advice - a lot of related shares in this area have shot up recently any way. One FTSE share that I would be quite keen on for a variety of reasons as a long term play is National Grid.

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