Tesla Isn’t the Biggest Winner From Biden’s EV Plan

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Shares of Tesla Inc. have jumped predictably on news of electric-vehicle incentives in President Joe Biden’s $2.3 trillion greenish new deal proposal, the “American Jobs Plan.” That looks at odds with what Biden is actually trying to achieve.

Biden’s proposals, just unveiled ahead of a significant policy speech he is set to deliver in Pittsburgh on Wednesday afternoon, contain $174 billion centered on electric vehicles (EVs). While that is considerably smaller than the $450 billion Clean Cars for America proposal advocated by Senate Majority Leader Chuck Schumer, it shares several of the same elements, and the level of ambition is unlike anything seen before from the federal government when it comes to EVs. Biden aims to expand discounts and rebates for drivers to buy the vehicles. He plans incentives to increase the number of public vehicle chargers to half a million by 2030, up from 72,000 at the end of 2019. In terms of direct procurement, he calls for electrifying the roughly 650,000-strong federal vehicle fleet as well as tens of thousands of transit vehicles, including school buses.

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Set against earlier measures, like 2009’s $3 billion “cash-for-clunkers” rebate program or existing EV tax credits, Biden’s proposal is bigger by orders of magnitude. It is understandable, therefore, that a company like Tesla, which has relied extensively on subsidies, should be viewed as the primary beneficiary. Plus, the buy narrative for Tesla stock, which was up nearly 4%, is never that exacting. Indeed, the company’s already-gargantuan market value is a big reason to view Biden’s plan as less about boosting the fortunes of America’s top EV maker and more about enabling the competition bearing down on it.

With transportation now the single-largest source of U.S. greenhouse-gas emissions, electrifying the vehicle fleet is essential if Biden is serious about tackling climate change. As it stands, despite being home to Tesla, the U.S. lags in terms of penetration of EVs. BloombergNEF projects delivery of about 4 million EVs in 2030, or roughly a quarter of U.S. vehicle sales. That would be up from less than 2% now but far behind projected penetration for Europe and China in 2030, put at roughly a third and a half, respectively. More important, from an emissions point of view, it implies only about 8% of the U.S. passenger vehicle fleet running on electrons by then.

Biden’s proposal can be seen as a way of pulling forward demand and getting the EV market up to a self-sustaining speed faster. Chargers, for example, suffer from a notorious chicken-and-egg problem: No one buys cars if there aren’t enough chargers, but no one builds chargers if there aren’t enough cars to serve. BloombergNEF estimates half a million public chargers would support a vehicle fleet of 8.5 million, which is only about half the current fleet projection for 2030. However, in seeding that much critical mass, Biden’s proposal would clear the way for other developers to get over their hesitancy; indeed, the language of the proposal positions federal dollars as a way to bring in other funding.

The outlay also looks minimal in the context of the overall plan; BloombergNEF estimates a 500,000-strong charger network would require roughly $6 billion of investment. The lion’s share of that $174 billion looks likely to go directly to consumers to encourage the purchase of EVs. Taken together, though — and alongside the direct procurement of federal vehicles —  the effect is the same: pulling forward demand to spur the U.S. auto industry to speed up electrification.

As I wrote here in January, the existing bubble of investment in clean-tech is something Biden should harness in realizing his climate agenda. Seeding the charging network and persuading Americans to buy from a growing set of electric vehicle models piggyback on the existing momentum. In doing so, this also serves to stoke the enthusiasm further — hence the $23 billion lift to Tesla’s market cap Wednesday morning.

Yet if Biden is taking advantage of that enthusiasm, his objective of mass EV penetration doesn’t ultimately support that gain. Tesla was, after all, already priced at more than 200 times forward earnings and had raised $12 billion of new equity funding in the past year alone. In a way, Chief Executive Officer Elon Musk is able to secure all the funding he wants more easily than the president; Tesla investors are far easier to butter up than Senator Joe Manchin. This is the company’s greatest advantage in terms of overturning the auto industry’s incumbents, with their humdrum multiples and persistent investor demands for reporting actual profits. Stocks of both General Motors Co. and Ford Motor Co. were down Wednesday morning, incidentally.

On that basis, Biden’s $174 billion can be seen as helping to close the gap. Would some of it flow to Tesla? Of course. Dollar for dollar, though, it would offer far greater benefits to existing automakers seeking to convince their far-less forgiving investors that going all in on EVs makes sense. The energy transition, for all its complexities, is simply a vast exercise in changing over our fixed-asset base — which means it largely boils down to securing capital as  cheaply as possible. Doing that for the widest set of players must be the guiding ethos if Biden is to realize his climate ambitions.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

©2021 Bloomberg L.P.

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