Part 1 of 3 on the Future of Transportation and the Internet of Things

The world is moving away from cars based on the internal combustion engine (ICEs). The future is electric. With Tesla leading the way on what’s possible with electric vehicles, more traditional auto manufacturers are following suit.

Volvo has announced that all of its cars will have electric motors by 2019. Aston Martin is planning the same by 2025. General Motors plans to have at least 20 electric vehicles (EVs) by 2023. The list goes on.

Much of the pressure is coming from countries banning ICE sales in the not-too-distant future (The Netherlands by 2025; China, India and Germany by 2030; France and the UK by 2040). Industry and consumers, however, want electric as well.

When everybody wants something, it tends to happen. The question is, what will be the ramifications? One safe bet is that the market for your ICE -based car will be drying up quickly – so think about selling now. But beyond concerns for personal finance, we can also expect EVs to have a dramatic impact in a number of areas including climate conditions in cities, the automotive industry in general, and energy distribution worldwide.

Lower emissions

The obvious benefit of electric cars – the reason countries, industries, and individuals everywhere are pushing for them – is lower emissions. One of the cities most concerned about emissions is Beijing. Back in 2015, the notoriously thick smog of the city disappeared quickly when authorities banned driving  for two weeks in preparation for a World War II commemoration parade. The day after driving resumed, the smog returned.

Today, Beijing is planning to replace the city’s nearly 70,000 taxis with EVs. Doubtless, this is a step in the right direction. Yet, while Beijing tends to get the lion’s share of press coverage when it comes to smog, other cities face similar challenges. From Paris to Mexico City and all around the world, lower emissions from electric vehicles will help to improve health for citizens locally and fight climate change globally.

Industry change

The automotive industry is not just General Motors, Volkswagen, Toyota and the rest. It’s also made up of countless suppliers of parts and components. But when you move from a traditional ICE to the electric engine, you lose about 90% of the parts. Electric engines are just simpler.

This means that for companies in the automotive supplier ecosystem, much of the market is going away soon. The simplicity of electric engines will also be felt further down the value chain. Service centers, for example, will feel the hit.  Many of these centers – particularly the large chains – use the inexpensive 3,000-mile oil change as a loss-leader to upsell customers on needed maintenance. But without oil in the electric engine – and without as much need for maintenance – many of these chains will have to rethink their business models to survive.

New energy horizons

One of the most significant impacts of EVs will be on the way energy is distributed – because in addition to being modes of transportation, EVs will also act as energy sources that can plug directly into the grid.

This will help address the challenge of “demand response.” The problem to solve here is one of grid stability in the era of renewable energy. Traditionally, large centrally located energy generation plants –  coal, gas, and nuclear – have churned out a steady supply of energy that results in a fairly stable grid.

However, the renewable energy paradigm – based mostly on solar and wind – is neither centralized nor steady. Rather it is distributed across rooftops, solar farms, and mountain tops. And it is variable according to weather conditions.

With renewables, in other words, utilities have less control over the supply side of the equation – meaning how and when energy is generated. This has the potential to lead to instability on the electricity grid. If you can’t manage the supply, then you have to use demand side management, also known as demand response. This can be done using through incentives, and the technology is advancing such that increasingly the process is becoming automated.

By providing a storage mechanism that can both take energy in and send it out, car batteries on EVs can act as frequency regulators for the grid. This is a big deal that has the potential to change energy distribution forever.

At night, say, when the wind is blowing, a car battery can store energy generated by wind turbines. Or, in the middle of the afternoon when everybody wants air conditioning on a hot day, the same batteries can distribute some of their energy. This leads to improved grid stability.

Industry convergence

Let’s just note, however, that the entities with the closest relationships to the owners of the batteries so critical to grid stability would not be the utilities but EV manufacturers. What’s stopping Elon Musk from enticing Tesla customers from sharing their batteries? Tesla could enable its customers provide energy from their batteries – and then sell it on the grid for a profit. Customers make money. Tesla makes money. Utility companies make money. Everybody is happy.

This transforms the automobile industry into an energy industry. At SAP we talk a lot about digital transformation as a response to digital disruption. This is disruption at its most dramatic.

Elon Musk has stated aims to make 500,000 Tesla’s in 2018. Let’s say he falls disastrously short and only hits half his target. Let’s also assume an average 80 kilowatt hour (kWh) battery size in the EVs – (Tesla cars today have battery sizes ranging from 60 -110 kWh). 250,000 cars x 80 kWh – and you’ll see that this fleet would have the capacity of 20 gigawatt hours of storage. For comparison, a gigawatt is roughly the output of a nuclear power plant. So, Tesla will be producing the equivalent of 20 nuclear power plants worth of storage, at least, per year.

Electric vehicle manufacturers will be able to aggregate the energy on their networks, and sell access to their “virtual power plants”. It is a whole new world.

Stay tuned for more on how the transportation industry is changing forever.

Photo credit Tesla