Many countries are supporting electric cars for environmental and independence reasons. But perhaps there are some targets for electrification with better economics than those, cost-effective without any government incentives. For example, trains and hydraulic excavators.
In some countries, most trains are powered by overhead electric lines. In America, most trains are powered by diesel engines. Why?
The competent estimates I’ve seen for ROI of electrifying US rail lines have it being worthwhile. This isn’t a new thing. Here’s a paper from 40 years ago estimating ~19% ROI. Arguments that the economics are bad in America because of geographic differences are wrong.
Why, then, hasn’t that happened? Yes, US high-speed rail programs have not gone well, but unlike new high-speed rail lines, building electric lines over existing rail doesn’t require purchasing a lot of land.
One major reason is that the Association of American Railroads has lobbied against electrification programs. Apart from private lobbying, they’ve put out some reports saying “it doesn’t make sense for America because American rail networks are special” (wrong), “we should wait for hydrogen fuel cell trains instead” (ultra-super-wrong), and various other bad arguments. Why would they do that? Some hypotheses:
Construction of overhead electric lines would be much more expensive in America than other countries, making those ROI estimates inaccurate.
The pay of rail executives depends on short-term profits, so they’re against long-term investments.
Manufacturing of electric trains would have more competition from overseas companies, and there’s cross-ownership between rail operators and manufacturers.
Change would require work, and might give upstart companies a chance to displace larger companies, so it’s opposed in general.
My understanding is that (2) and (4) are the dominant factors. Those aren’t specific to rail; they’re properties of US business management, so I think rail electrification is a good example of wider problems in US companies. Management is evaluated on shorter timescales than good investments provide returns on, so US companies eventually end up using outdated equipment and processes, and lose out to foreign firms. See also:
GE under Jack Welch.
Private equity now having better long-term returns in the US.
US steel companies being outcompeted by foreign steel firms, and then eg ArcelorMittal taking over steel plants in the US.
US shipyards failing to modernize, until they produce no commercial ships and Burke-class destroyers cost 2x as much to make as the Sejong-class equivalents from Korea.
When you look at the internal evaluations of proposed projects at large companies, it’s fairly common for 15% ROI to be the minimum value for serious consideration. That is, of course, higher than the cost of borrowing. The usual explanation has been that a substantial buffer is needed to account for inaccurate estimations, but that doesn’t make sense to me, for 2 reasons:
The required ROI doesn’t increase linearly with low-risk interest rates or the cost of capital.
Some ROI estimates are known to be more accurate than others. The spread between required ROI and interest rates doesn’t increase proportionately with estimate inaccuracy.
I have a different theory: the reason you see requirements for 15%+ ROI so often is because executives are often at their position for around 6 years, and they want most of the investment to have been returned by the time they’re looking for a promotion or new job. What’s really important isn’t the true ROI estimated as best it can be, but rather the ROI in practice over the first few years. Fans of independent games have repeatedly seen some beloved game company get bought by a larger company, which then rushes out a release and squeezes out as much short-term revenue as they can with microtransactions, wrecking the company’s reputation and causing employee burnout but producing a revenue stream that executives can claim is permanent and a great ROI. Meanwhile, investments with longer-term benefits get ignored despite the true ROI being better.
When you look at a construction site, you’ll usually see a hydraulic backhoe. Those use a diesel engine to drive a hydraulic pump, which moves fluid to a pressurized tank (“accumulator”). Valves connect the high-pressure tank to various hydraulic cylinders.
Why do they always use diesel engines? That’s because governments allow tax-free diesel fuel for use off roads, because the fuel taxes are nominally for road maintenance.
Most of the energy of fuel is, of course, wasted by the engine. And then, no matter how much force is needed, fluid is provided at the same pressure by the tank, so most of the hydraulic energy is wasted by throttling in the valves. Modern equipment uses variable-pressure tanks, so it can adjust somewhat, but different forces are needed by different actuators and at different times, so most of the energy is still wasted.
It’s possible to instead have an electric motor and hydraulic pump for each hydraulic cylinder. (Those assemblies are sometimes called “electrohydraulic” or “electrohydrostatic” actuators.) Then, there’s no throttling that wastes pressure. This approach is much more energy-efficient, perhaps 6x as efficient. It also makes movement smoother, increasing productivity by perhaps 15%.
Using electric motors makes starting with electricity a better option, either from a battery, a generator truck, or a grid electrical connection. Grid electricity is substantially cheaper than diesel fuel, and excavators generally move around less than cars, so it’s easier to keep them connected to an electrical cable.
Excavators using separate electric motors and pumps for each cylinder are obviously more expensive to buy. What’s the ROI on that investment? My crude estimate was payback in ~2 years of full-time operation—assuming you can usually plug in the machines while they’re working. This thesis concluded payback would typically be ~26 months; that doesn’t seem to account for slightly improved productivity from smoother movement. So, that’s basically consistent with my guess.
The manufacturers of heavy machinery are aware of the advantages of electric actuators, and several of them have made prototypes of fully-electric excavators. But currently, those seem to be more of a long-term and contingency plan than a near-term replacement for their current products.
Another option for electrification is to not use hydraulics. Electric rope shovels are sometimes used; they’re more expensive to buy than hydraulic excavators, but large ones have lower total costs. (Back in my day, all the excavators were driven by cables, and the winches were turned by steam engines.) My view is that electrohydrostatic actuators should usually be cheaper than using wire rope that way.
Using electrohydrostatic equipment is a different financial issue from railway electrification: faster returns on investment and equipment that doesn’t last as long. I think the problem is largely risk aversion and uncertainty:
Can you resell the equipment for a good price if you need to?
Will the appropriate maintenance be available? (There should be less maintenance, but look at the prices Tesla charges.)
What if you need to work somewhere without electrical lines? (answer: Presumably, you’d rent a generator truck.)
It makes some sense for these companies to be risk-averse. The potential benefit to them is relatively small compared to total costs, some new procedures would be needed, and the potential risk is something unknown going wrong that makes their initial purchase worthless. A round of equipment purchases being completely lost could bankrupt some smaller construction companies.
What, then, might governments do about this situation?
One option is to tax diesel fuel to account for pollution. How large a tax would be appropriate for that? This paper concluded that ~$3/gallon (in 2023 dollars) would be appropriate for diesel fuel in the US. I can believe that: I can often smell air pollution from construction sites before I see them, and air quality monitors often show hazardous air quality in a small radius around them. That’s not great for construction workers, either. Well, if diesel fuel for excavators and farm equipment had a $3/gallon tax, you’d certainly see some changes, but that might be politically...problematic.
Also, in the US, the structure of agencies involved is an issue. The EPA is tasked with environmental regulation, but while it can ban things, it can’t tax things. There are other agencies with the power to tax things, but they aren’t tasked with considering environmental harms.
Another option is for government to mitigate some of those risks. For example, if companies are worried about electric equipment being unsuitable for them and not being able to resell it, the US government could agree to buy equipment according to some reasonable depreciation schedule, at prices that probably wouldn’t be the best but would reduce risk for companies involved. Things like the politically successful (if economically questionable) “cash for clunkers” program indicate to me that such a system could be politically feasible.
As for extending this into some broader point about companies or management, what comes to mind for me is actually food ingredients. Companies used partially hydrogenated oil for years, and then it was banned, and replacing it was a non-issue. Some US companies are still using brominated vegetable oil, and now it looks like that will be banned soon, and it won’t be a problem. But companies still didn’t want to change their old recipes until they were forced to. And leaded aviation gasoline will probably be around until it’s banned, at which point switching to one of the existing alternatives suddenly won’t be a problem. This kind of dynamic is how you can get upcoming or temporary government bans on things that are actually necessary up until it turns out there’s really no replacement: the regulators don’t understand the technology well, and the companies lie to them even when switching is a non-issue because the executives can’t tell how hard something is, so a credible threat of a ban is the only way to get them to honestly try to solve a problem.