Statistics that Miss the Mark(et)

By Mike V.

What does hydroelectric power generation cost? This is a question everyone instinctively realizes has a wide range of answers depending on the available water source. Before any discussion of cement prices or permitting costs, it is intuitive that respective costs per output at a flat, dry plain are nearly infinite those at a gushing waterfall. With history as a rough guide, and assuming that all the good spots have not be taken, hydroelectric financial costs are likely reasonable with high water current at large altitude drops and uncompetitive elsewhere. The extension I would like to draw from this is that statistics, such as national averages of rainfall or altitude changes, are often meaningless. Florida consistently ranks in the top five states by rainfall yet produces less than 0.1% of its generated electric power by hydro (www.eia.gov/electricity/state/florida/index.cfm). Even targeted statistics can be misleading.

The reason I am addressing this issue is that legitimate markets are often masked by such statistics. Perennially, journalists and analysts are asked, “Is a hybrid car worth it?” Limited in words, or wanting a conclusive answer, they pick yes or no. But accurate math suggests this is akin to the hydroelectric dam problem. Given the NPV factors of upfront incremental cost and financing rate from the car dealer, the annual fuel savings varies broadly by consumer. Rather than use the canonical 12,000 annual miles per car in America, consider that 6% of new cars log over 30,000 miles per year, 19% over 20,000, and conversely 16% under 6,000 miles (Transportation Energy Data Book, cta.ornl.gov/data). In the spirit of this article, readers should demand that I go further into local gasoline prices and individual driving patterns, but length prohibits me. The opposite 30/70% mix of gasoline/diesel car registrations in Belgium and the Netherlands (www.acea.be) is a reminder of how narrow local factors can be in demand for automotive technologies.

Using Consumer Reports’ overall mileage for a four-cylinder Toyota Camry versus its hybrid counterpart with $3.55 per gallon gasoline, a driver logging 20,000 miles per year saves $761 annually with the hybrid version. A driver logging 6,000 miles per year saves only $228 annually. With a hybrid incremental cost of about $3500, a price carefully masked by Toyota offering different options, the economics are favorable at 20,000 annual miles over the car’s expected lifetime with comparable maintenance and low financing costs. The hybrid option is economically pointless at 6,000 annual miles. This is why hybrid taxis are popular in Europe where Toyota, the primary hybrid brand, was never particularly successful. More importantly, consider the seemingly high 4.3% of light vehicles sold in the US in August, 2013 being hybrid or plug-in electric. This is historically high and appears driven by fashion, but it is only a fraction of the segment where an electric powertrain is economically sensible to its basic alternative. Other efficiency technologies may eclipse today’s hybrids, and hybrid options are not available for all vehicle categories; the argument here is that thriving markets may exist underneath factual but irrelevant statistics.

Similar to hydroelectric power is solar power. Chile, by total land average, receives less sunlight power than the contiguous forty-eight US states. However, particular northern and southern regions receive different sunlight power by a factor of about six. The latest government bulletin on expected solar installations (http://cer.gob.cl/boletin/septiembre2013/ReporteCER-%20Sep-dise%F1o%20pm.pdf) shows nearly 5 GW of upcoming projects beyond the environmental approval stage and 2 GW in earlier stages. On any reasonable estimate of project completion, these numbers discounted for evenings are significant for the country with 18.3 GW of capacity (http://www.centralenergia.cl/en/power-plants-chile/). This project pipeline grew in mid-2012, years after enthusiasm for solar power faded to cost concerns across the globe. Assuming generally rational behavior by power asset owners and government policies, solar is economically sensible in northern Chile despite national geographic averages suggesting otherwise. Similar narratives in solar around proximity to transmission, on-site demand, and even roofing materials could show that averages miss potential markets.

As managers and investors, we would certainly prefer energy projects that “always” make sense. Lower- weight automotive parts at minimal or negative incremental costs, LED replacements for commercial lighting, etc. will have the largest markets. Still, it is often worth dissecting market data further in cases of average “no” as considerable markets with positive NPV’s may still exist.

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About macomberjohnd

HBS Finance faculty interested in sustainability in the built environment including devices, structures, townships, and cities.

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