The McKinsey Quarterly (free registration required) has an article on "electrified cars will transform the auto and utilities sectors and create a new battery industry" - Electrifying cars: How three industries will evolve.

It’s a safe bet that consumers will eventually swap their gas-powered cars and trucks for rechargeable models. Electrified transport, in some form, would seem to be in our future. But how long will investors have to wait for the bet to pay off? Years? Decades?

Bears would bet on decades. For the next ten or so years, the purchase price of an electrified vehicle will probably exceed the price of an average gas-fueled family car by several thousand dollars. The difference is due largely to the cost of designing vehicles that can drive for extended distances on battery power and to the cost of the battery itself. What’s more, the infrastructure for charging the batteries of a large number of electrified vehicles isn’t in place, nor is the industry tooled to produce them on a mass scale. In any case, consumers aren’t exactly clamoring for battery-powered sedans (see sidebar “From well to wheel”).

Bulls are betting on interference by government. They think that concern over energy security, fossil fuel emissions, and long-term industrial competitiveness will prompt governments to seek a partial solution by creating incentives—some combination of subsidies, taxes, and investments—to migrate the market to battery-powered vehicles.

In fact, governments across many regions are starting to act in this way. The bulls also note that electrified vehicles can address certain niches whose economics could be favorable more quickly, such as delivery and taxi fleets in large cities or elements of military fleets. In some countries, such as Israel, electrified vehicles already make economic sense because buyers get substantial tax breaks from the government. The bulls include innovators preparing new products and business models (such as the packaging of battery leasing and recharging costs) designed to make electrified vehicles more attractive to buyers.

Sooner or later, electrified vehicles will take off, changing several sectors profoundly. Let’s assume that these vehicles will share the roads of the future with other low-carbon options, such as cars running on biofuels and vehicles with more fuel-efficient internal-combustion engines. Even then, significant sales of electrified vehicles could dramatically reshape the fortunes of the automotive and utilities sectors and propel the rise of a multibillion-dollar battery industry.

The stakes are high for companies in these industries. In the near term, executives should determine how to win revenues and contain costs if the governments of China and the United States, for example, live up to their promises to stimulate consumer purchases of electrified vehicles. Planning should also begin on strategies and on ways to build capabilities if early adoption creates a sustainable market.

Running on electrons

The economics of electrified vehicles start with the batteries, whose cost has been declining by 6 to 8 percent annually. Many analysts predict that it will continue to fall over the next ten years as production volumes rise. Battery packs now cost about $700 to $1,500 per kilowatt hour, but that could drop to as little as $420 per kilowatt hour by 2015 under an aggressive cost reduction scenario. Even then, the upfront purchase price of electrified cars would be quite high. We estimate that by 2015, a plug-in hybrid-electric vehicle with a battery range of 40 miles (before the need for a recharge) would initially cost $11,800 more than a standard car with a gas-fueled internal-combustion engine. A battery-powered electrified vehicle with a range of 100 miles would initially cost $24,100 more (Exhibit 1).

Subsidies could help bridge the difference. China announced that it will cover $8,800 of the cost of each electrified vehicle purchased by more than a dozen of its large-city governments and taxi fleets. Business innovation could address costs too. In the solar-technology market, for instance, SunEdison owns, finances, installs, operates, and maintains solar panels for customers willing to adopt the technology. The company then charges these consumers a predictable rate lower than the one they paid for traditional electric power but higher than the actual cost of generation. That allows the company to recoup its capital outlay and make a profit.1 Innovators are considering similar models to cover the battery’s upfront cost and recoup the subsidy by charging for services.

To sway buyers, electrified vehicles—hybrids, plug-in electric hybrids, or all-electric cars (see sidebar “Electrified vehicles: A glossary”)—must be cheaper to operate than gas-fueled ones. The difference between the total lifetime costs of a car with an internal-combustion engine and an electrified car will depend for some time on the difference between the price of gasoline at the pump and the cost of the battery and of recharging it (for those who own the battery) or the cost of leasing a battery and of recharging services. Oil prices have fluctuated wildly over the past two years, and electricity prices vary throughout the world. In Europe, electrified cars (for example, plug-in hybrid-electric vehicles with a 60-kilometer range) could have lower total running costs, assuming an oil price of $60 a barrel and current electric rates.2 In the United States, electrified cars will be less expensive on a total-cost-of-ownership basis only if the price of gasoline exceeds $4 a gallon and electric batteries can go 40 miles before a recharge, or if the government gives manufacturers incentives that subsidize the cost of production (Exhibit 2).

The proliferation of electrified vehicles will also require an infrastructure, such as recharging stations. China’s State Grid is speeding up plans to build charging facilities in at least three of the country’s largest cities by 2011, and Hawaii has announced plans to build as many as 100,000 charging stations for electrified vehicles by 2012. Investments in capabilities to manufacture the vehicles are needed as well. China, which set a goal of producing half a million electrified cars annually by 2011, has announced that it will invest $1.4 billion in R&D for the purpose. The United States has committed $2 billion in stimulus spending to help companies manufacture batteries and $25 billion for government programs to encourage car makers to retool their production lines to produce larger numbers of more fuel-efficient vehicles, including electrified ones.

Of course, consumers may decline to buy electrified vehicles for any number of reasons: the distance drivers can go before recharging, for example, may undermine acceptance. But on a more fundamental level, electrified vehicles will go mainstream at a pace determined by government action to make gasoline more expensive; to reduce the cost of producing, buying, or operating electrified vehicles; or some combination of these two approaches.

Preparing for tomorrow

There is little point in trying to predict how many electrified vehicles of one kind or other will be on the road by any given year, because so many factors are unpredictable. Governments could aggressively promote the use of electrified vehicles, for example, and then lose tax revenues when drivers spend less money on gasoline at the pump. Will lawmakers in Europe and the United States be willing to sacrifice tax receipts that pay for the upkeep of roads in order to help control climate change. If not, how will the tax burden be migrated to the new fuel: electricity? Besides, electrified vehicles are a nascent technology, and it’s too early to say how the rate of adoption by consumers in different segments will evolve or how costs will be optimized.

But here’s a number to contemplate: electrified vehicles would enter the mainstream if about 10 percent of all cars on the roads were battery-electric or plug-in vehicles, running solely on electric power. That would mean sales of six million to eight million electrified vehicles a year by 2020, which would change whole sectors dramatically. Let’s look at the opportunities and challenges for the three key ones: autos, batteries, and utilities. ...

Electrified vehicles will become a reality—sooner, as the bulls believe, or later, as the bears do. That will change the competitive landscape of the automotive, battery, and utilities sectors and have an impact on several others. Companies that act boldly and time their moves appropriately will probably enjoy significant gains; those that don’t will not. But timing is critical: jumping in too early or late will be costly. Buckle up and hang on for the ride.

The latest McKinsey Quarterly has an interesting look at the economics and growth rates of solar PV production - The economics of solar power. Note the excellent graphic showing when PV will reach grid parity in different regions.

A new era for solar power is approaching. Long derided as uneconomic, it is gaining ground as technologies improve and the cost of traditional energy sources rises. Within three to seven years, unsubsidized solar power could cost no more to end customers in many markets, such as California and Italy, than electricity generated by fossil fuels or by renewable alternatives to solar. By 2020, global installed solar capacity could be 20 to 40 times its level today.

But make no mistake, the sector is still in its infancy. Even if all of the forecast growth occurs, solar energy will represent only about 3 to 6 percent of installed electricity generation capacity, or 1.5 to 3 percent of output in 2020. While solar power can certainly help to satisfy the desire for more electricity and lower carbon emissions, it is just one piece of the puzzle. ...

Even in the most favorable regions, solar power is still a few years away from true “grid parity”—the point when the price of solar electricity is on par with that of conventional sources of electricity on the power grid. The time frame is considerably longer in countries such as China and India, whose electricity needs will require large amounts of new generating capacity in the years ahead and whose cheap power from coal makes grid parity a more elusive goal. ...

Government subsidies have played a prominent role in the growth of solar power. Producers of renewable energy in the United States receive tax credits, for example, and Germany requires electricity distributors to pay above-market rates for electricity generated from renewable sources. Without such policies, the high cost of generating solar power would prevent it from competing with electricity from traditional fossil-fuel sources in most regions.

But the sector’s economics are changing. Over the last two decades, the cost of manufacturing and installing a photovoltaic solar-power system has decreased by about 20 percent with every doubling of installed capacity. The cost of generating electricity from conventional sources, by contrast, has been rising along with the price of natural gas, which heavily influences electricity prices in regions that have large numbers of gas-fired power plants. These regions include California, the Northeast, and Texas (in the United States), as well as Italy, Japan, and Spain.

As a result, solar power has been creeping toward cost competitiveness in some areas. California, for example, combines abundant sunshine with retail electricity prices that, partly as a result of the state’s policies, are among the highest in the United States—up to 36 cents per kilowatt-hour for residential users. Unsubsidized solar power costs 36 cents per kilowatt-hour. Support from the California Solar Initiative2 cuts the price customers pay to 27 cents. Rising natural-gas prices, state regulations aiming to limit greenhouse gas emissions, and the need to build more power plants to keep up with growing demand could push the cost of conventional electricity higher.

During the next three to seven years, solar energy’s unsubsidized cost to end customers should equal the cost of conventional electricity in parts of the United States (California and the Southwest) and in Italy, Japan, and Spain. These markets have in common relatively strong solar radiation (or insolation), high electricity prices, and supportive regulatory regimes that stimulate the solar-capacity growth needed to drive further cost reductions. These conditions set in motion a virtuous cycle: growing demand for solar power creates more opportunities for companies to reduce production costs by improving solar-cell designs and manufacturing processes, to introduce new solar technologies, and to enjoy lower prices from raw-material and component suppliers competing for market share.