Authors – John Auers and Ryan Couture
Last week, we looked at the potential for more diesel vehicles in the U.S. and how that is being driven by federal laws mandating increased mileage efficiency standards (CAFE). Although we will be examining the impacts of dieselization in more detail in coming weeks, our blog for today shifts gears a bit to look at another potential threat to gasoline demand coming from governmental policy initiatives – electric car mandates. In particular, we will outline the specifics associated with California’s Zero Emission Vehicle (ZEV) mandate. As the early 80’s song by UK pop and reggae artist Eddy Grant goes, California, which is still the largest gasoline consuming state in the U.S., wants consumers to “Rock Down to Electric Avenue.”
In 2012 California finalized legislation around the ZEV mandate – Section 1962, Title 13 California Code of Regulations (CCR). The most quoted figures in press reports about the legislation were that by 2025 one out of every seven cars (15.4%) sold in California would have to be electric vehicles. The actual press release issued by the state of California on which these stories were based states that the number is “about 15.4%”, based on their target of 1.4 million new electrics and plug in hybrids on the road between 2018 and 2025. But that only tells a part of the whole story.
First of all, it is important to note is that the regulations do not stipulate all true electric vehicles even by 2025, but a mix of various types of low and zero emissions vehicles, slowly ramping up to the ultimate target. Until 2018, the “ZEV” categories include the true all electric vehicles, along with clean gasoline, hybrids, plug in hybrids, natural gas, hydrogen, and fuel cell vehicles. After 2018, the clean gasoline, natural gas, and conventional hybrids that derive their battery power from petroleum fuels will drop off, but the other categories will remain.
Figure 1 shows a table of the types of “ZEVs” covered in the regulation, breaking them down with examples. Think of the “level” as a way to interpret the value (in terms of their ability to satisfy the mandate) of the various types. The ZEV (Zero Emissions Vehicle) type is the most valuable, made up of true electrics and fuel cell vehicles. Those vehicles can fill that “level”, and any lower levels. The TZEV (Transitional ZEV) is more valuable than an AT-PZEV (Advanced Technology), which is more valuable than a PZEV (Partial Zero Emissions Vehicle). Of course, it is easier and cheaper to make a PZEV than a ZEV, so it is unlikely more valuable vehicles will fill the lower tiered quotas.
Additionally, according to the 2012 legislation, not all these vehicles will be on California roads. There is a group of states joining on with California in this legislation, and there is a method of sharing credits of vehicles sold across the nation. This means the numbers they are quoting will likely be nationwide, not just statewide. These fifteen Section 177 states that are participating in this with California include CT, ME, MD, MA, NJ, NM, NY, OR, PA, RI, VT, WA, DE, GA, and NC, and others may join in later.
Another critical point is that the number of “ZEVs” is calculated by credits, which means you are counting credits and not necessarily vehicles. Depending on several factors such as the ZEV range, recharge rate, and other considerations, they can get more than one (up to 7 through 2014, and then 9 in 2015-2017) credits per vehicle sold. There is also a set of rules governing number of credits for the other types of “ZEV” categories which changes throughout the 2009-2017 period the regulation covers. For simplicity in this blog post we have only covered 2012 onward, and omitted hydrogen fuel cell vehicles from the calculated credit tables. See Figure 2 and 3 for more details.
So to put this in an example, lets assume Manufacturer A sells 100,000 vehicles per year in the state of California. As of 2014 they have to meet the 12% target as laid out in the regulation, meaning they would need 12,000 credits. Of those 100,000 vehicles, only 0.79% have to be a ZEV as shown in Figure 2. So theoretically, if we assumed they were producing a car with a 350 mile range and fast recharge capabilities (a Type V ZEV), they would only need 100,000*0.79%/7=113 vehicles to meet the ZEV credit quota in 2014. Granted, the remaining vehicles needed to satisfy the 12% credit target will not be gas guzzling SUVs; they can be made up of a mix of hybrids, plug in hybrids, natural gas and clean gasoline vehicles, but they will not be entirely electric as is often implied. Figure 4 goes through the required credits for the years 2012-2025 based on that 100,000 vehicles per year sales number.
If you look closely you see what seems like an anomaly of sorts in 2018. The total number of required ZEV credits falls dramatically. This is not a typo, it is because there is a step change in not only what vehicles can be counted towards your credits, but how the credits are calculated. The program becomes much more demanding. Figure 5 shows the new method for calculating the credits moving forward.
To put this to another example, let us look at the requirements for Manufacturer A again, assuming a constant sale of 100,000 vehicles per year in the state of California. The amount of true electrics (ZEV) dramatically increases as the years pass. Figure 6 shows a graph of this increase, using examples of the required number of vehicles based on a 150, 250, and 350 mile range, and a fast recharge capability.
As you undoubtedly now see, this is far from straightforward and as a result estimating the impact on gasoline demand in future years is a complicated matter. In the coming weeks we will attempt to present some of these estimates regarding gasoline demand in not only California, but also the rest of the nation. As a final thought, let us point out that it is much easier to write legislation than it is to develop the technology necessary to satisfy that legislation and there is certainly a “lot of work to be done” in developing the next generation of ZEVs that can satisfy these regulations.
California’s ZEV mandate is one of a variety of governmental policy initiatives which have the potential to significantly impact demand for petroleum products and thus also the prospects of the U.S. refining industry. In the course of our normal consulting and industry forecasting practice Turner, Mason & Company spends significant time analyzing all of these policies and their potential impacts. On a biannual basis we issue our Crude and Refined Products Outlook(TheOutlook) publication, which incorporates these analyses in our forecasts for refined products supply and demand and the resulting prices and margins which refiners can expect during the 15-year timeframe of The Outlook. We also regularly assist clients on focused studies and analysis to help them assess policy implications for their specific situations. For more details about The Outlook, or our consulting practice, please visit our website or give us a call.