If the Inflation Reduction Act (IRA) hadn’t made it abundantly clear, recently proposed limits by the Environmental Protection Agency (EPA) are yet another signal the government really wants you to drive an electric vehicle (EV). Outside of retrofitting Tesla’s with shark teeth to eat chunks out of gas cars it couldn’t be more obvious that by 2030 the roads in the United States are going to look very different. What you’ll see is all sorts of EVs driving alongside new model gas-powered vehicles that will be smaller in stature like what you see in Europe, and the increasingly rare, enormous, vintage gas-powered SUV. We can imagine children on road trips will gawk and point at the latter of these, though the truth is they probably won’t look up from their screens long enough to notice. 2030 here we come!!
To put some meat on the bones, the EPA proposed regulations that requires U.S. auto manufacturers to produce vehicles that in aggregate reduce greenhouse gas emissions by 56% when comparing 2032 to 2026 models. These new limits are expected to dramatically increase the adoption of EVs, with some saying that by 2032 roughly two-thirds of new vehicle sales in the U.S. will be EVs. The math is fairly compelling—the fastest way to achieve these reductions is to produce more, or exclusively, EVs.
We’re certainly in favor of accelerating energy transition, though sometimes we get concerned about the industry’s ability to keep up with the politics. We’ll ignore the possibility that even with subsidization the price of EVs may take longer to get into most people’s price range, but rather focus on the electric grid that is meant to support this accelerated adoption. The average household in the United States consumes roughly 10,616 kWh per year of electricity. Meanwhile, the average electricity consumption (charging) of an EV draws roughly 4,310 kWh per year of electricity. Putting the two together implies demand for electricity will increase roughly 40% if each household has one EV. This analysis doesn’t factor in the impact of higher electricity demand from commercial, industrial, and non-transportation sectors, of which there will certainly be a lot.
The “Electrification of Everything” trend comes from a good place, especially if this electricity is sourced from renewable sources like wind and solar. Perhaps an accelerated adoption of EVs will perfectly coincide with the explosion of renewable energy growth thanks to the IRA, though in our opinion this is asking a lot. Let’s also not forget how difficult it is in the United States right now to build large-scale infrastructure like utility-scale wind farms and solar fields and long-distance electric transmission that is critical to bringing large amounts of renewable energy supply found in rural areas to the demand in urban centers. The companies that are able to successfully construct this critical infrastructure should see an immense appreciation in valuation if executed in an efficient and accretive manner (perhaps a big “if”).
In the end, the need for energy infrastructure has never been greater, whether it be renewable energy or traditional energy. We believe companies that own these assets will find themselves with an increasingly scarce asset, a good thing to have from a business perspective.