That's the question that sort of hit me

in the middle of a Davos afternoon about four years ago.

It never left my brain.

And I started playing with it more like a puzzle.

The original thought I had: this must be ethanol.

So I went out and researched ethanol,

and found out you need the Amazon in your backyard in every country.

About six months later I figured out it must be hydrogen,

until some scientist told me the unfortunate truth,

which is, you actually use more

clean electrons than the ones you get

inside a car, if you use hydrogen.

So that is not going to be the path to go.

And then sort of through a process of

wandering around, I got to the thought

that actually if you could convert an entire country to electric cars,

in a way that is convenient and affordable,

you could get to a solution.

Now I started this from a point of view that

it has to be something that scales en masse.

Not how do you build one car,

but how do you scale this so that it can become

something that is used by 99 percent of the population?

The thought that came to mind is that it needs to be as good

as any car that you would have today.

So one, it has to be more convenient than a car.

And two, it has be more affordable than today's cars.

Affordable is not a 40,000 dollar sedan, right?

Alright? That's not something that we can finance or buy today.

And convenient is not something that you drive for an hour and charge for eight.

So we're bound with the laws of physics

and the laws of economics.

And so the thought that I started with was

how do you do this, still within the boundary

of the science we know today --

no time for science fair, no time for playing around with things

or waiting for the magic battery to show up.

How do you do it within the economics that we have today?

How do you do it from the power of the consumer up?

And not from the power of an edict down.

On a random visit to Tesla on some afternoon,

I actually found out that the answer comes

from separating between the car ownership

and the battery ownership.

In a sense if you want to think about it this is the classic

"batteries not included."

Now if you separate between the two,

you could actually answer the need for a convenient car

by creating a network,

by creating a network before the cars show up.

The network has two components in them.

First component is you charge the car whenever you stop --

ends up that cars are these strange beasts that drive

for about two hours and park for about 22 hours.

If you drive a car in the morning and drive it back in the afternoon

the ratio of charge to drive is about a minute for a minute.

And so the first thought that came to mind is,

everywhere we park we have electric power.

Now it sounds crazy. But in some places around the world,

like Scandinavia, you already have that.

If you park your car and didn't plug in the heater,

when you come back you don't have a car. It just doesn't work.

Now that last mile,

last foot, in a sense,

is the first step of the infrastructure.

The second step of the infrastructure needs to take care

of the range extension.

See we're bound by today's technology on batteries,

which is about 120 miles if you want to stay within

reasonable space and weight limitations.

120 miles is a good enough range for a lot of people.

But you never want to get stuck.

So what we added is a second element to our network,

which is a battery swap system.

You drive. You take your depleted battery out.

A full battery comes on. And you drive on.

You don't do it as a human being. You do it as a machine.

It looks like a car wash. You come into your car wash.

And a plate comes up, holds your battery, takes it out, puts it back in, and

within two minutes you're back on the road

and you can go again.

If you had charge spots everywhere,

and you had battery swap stations everywhere,

how often would you do it? And it ends up

that you'd do swapping less times than you stop at a gas station.

As a matter of fact, we added to the contract.

We said that if you stop to swap your battery more than 50 times a year

we start paying you money

because it's an inconvenience.

Then we looked at the question of the affordability.

We looked at the question, what happens when the battery is

disconnected from the car.

What is the cost of that battery?

Everybody tells us batteries are so expensive.

What we found out, when you move from molecules to electrons,

something interesting happens.

We can go back to the original economics of the car and look at it again.

The battery is not the gas tank, in a sense.

Remember in your car you have a gas tank.

You have the crude oil.

And you have refining and delivery of that crude oil

as what we call petrol or gasoline.

The battery in this sense, is the crude oil.

We have a battery bay. It costs the same hundred dollars

as the gas tank.

But the crude oil is replaced with a battery.

Just it doesn't burn. It consumes itself

step after step after step.

It has 2,000 life cycles these days.

And so it's sort of a mini well.

We were asked in the past when we bought an electric car

to pay for the entire well, for the life of the car.

Nobody wants to buy a mini well when they buy a car.

In a sense what we've done is

we've created a new consumable.

You, today, buy gasoline miles.

And we created electric miles.

And the price of electric miles ends up being a very interesting number.

Today 2010, in volume,

when we come to market, it is eight cents a mile.

Those of you who have a hard time calculating what that means --

in the average consumer

environment we're in in the U.S.

20 miles per gallon that's a buck 50, a buck 60 a gallon.

That's cheaper than today's gasoline, even in the U.S.

In Europe where taxes are in place,

that's the equivalent to a minus 60 dollar barrel.

But e-miles follow Moore's Law.

They go from eight cents a mile in 2010,

to four cents a mile in 2015,

to two cents a mile by 2020.

Why? Because batteries life cycle improve --

a bit of improvement on energy density, which reduces the price.

And these prices are actually with clean electrons.

We do not use any electrons that come from coal.

So in a sense this is

an absolute zero-carbon, zero-fossil fuel

electric mile at two cents a mile by 2020.

Now even if we get to 40 miles per gallon

by 2020, which is our desire.

Imagine only 40 miles per gallon cars would be on the road.

That is an 80 cent gallon.

An 80 cent gallon means, if the entire Pacific

would convert to crude oil,

and we'd let any oil company bring it out and refine it,

they still can't compete with two cents a mile.

That's a new economic factor,

which is fascinating to most people.

Now this would have been a wonderful paper.

That's how I solved it in my head. It was a white paper I handed out to governments.

And some governments told me that it's fascinating

that the younger generation actually thinks about these things.

(Laughter)

Until I got to the

true young global leader, Shimon Peres, President of Israel,

and he ran a beautiful manipulation on me.

First he let me go to the prime minister of the country,

who told me, if you can find the money you need for this network,

200 million dollars,

and if you can find a car company

that will build that car in mass volume,

in two million cars -- that's what we needed in Israel --

I'll give you country to invest the 200 million into.

Peres thought that was a great idea.

So we went out, and we looked at all the car companies.

We sent letters to all the car companies.

Three of them never showed up. One of them asked us

if we would stay with hybrids and they would give us a discount.

But one of them Carlos Ghosn, CEO of Renault and Nissan,

when asked about hybrids said something very fascinating.

He said hybrids are like mermaids.

When you want a fish you get a woman and

when you need a woman you get a fish.

(Laughter)

And Ghosn came up and said,

"I have the car, Mr. Peres; I will build you the cars."

And actually true to form, Renault has put a billion and a half dollars

in building nine different types of cars that fit this kind of model

that will come into the market in mass volume --

mass volume being the first year, 100 thousand cars.

It's the first mass-volume electric car,

zero-emission electric car in the market.

I was running, as Chris said,

to be the CEO of a large software company called SAP

And then Peres said, "Well won't you run this project?"

And I said, "I'm ready for CEO" And he said,

"Oh no no no no no. You've got to explain to me,

what is more important than saving your country and saving the world,

that you would go and do?"

And I had to quit and come and do this thing called A Better Place.

We then decided to scale it up.

We went to other countries. As I said we went to Denmark.

And Denmark set this beautiful policy;

it's called the IQ test.

It's inversely proportional to taxes.

They put 180 percent tax on gasoline cars

and zero tax on zero-emission cars.

So if you want to buy a gasoline car in Denmark, it costs you about 60,000 Euros.

If you buy our car it's about 20,000 Euros.

If you fail the IQ test they ask you to leave the country.

(Laughter)

We then were sort of coined as the guys

who run only in small islands.

I know most people don't think of Israel as a small island,

but Israel is an island -- it's a transportation island.

If your car is driving outside Israel it's been stolen.

(Laughter)

If you're thinking about it in terms of islands,

we decided to go to the biggest island that we could find,

and that was Australia. The third country we announced was Australia.

It's got three centers --

in Brisbane, in Melbourne, in Sydney --

and one freeway, one electric freeway that connects them.

The next island

was not too hard to find, and that was Hawaii.

We decided to come into the U.S.

and pick the two best places --

the one where you didn't need any range extension.

Hawaii you can drive around the island on one battery.

And if you really have a long day you can switch,

and keep on driving around the island.

The second one was the San Francisco Bay Area

where Gavin Newsom created a beautiful policy across all the mayors.

He decided that he's going to take over

the state, unofficially, and then officially,

and then created this beautiful Region One policy.

In the San Francisco Bay Area not only do you have

the highest concentration of Priuses,

but you also have the perfect range extender.

It's called the other car.

As we stared scaling it up

we looked at what is the problem to come up to the U.S.?

Why is this a big issue?

And the most fascinating thing we've learned is that,

when you have small problems on the individual level,

like the price of gasoline to drive every morning.

You don't notice it, but when the aggregate comes up

you're dead. Alright?

So the price of oil, much like

lots of other curves that we've seen,

goes along a depletion curve.

The foundation of this curve is that we keep losing the wells that are close to the ground.