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Do Hybrids or Electric Vehicles Make Financial Sense?

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Car buyers are able to choose from an expanding variety of energy-efficient vehicles at their local dealer.  Joining the ranks of hybrid vehicles will be plug-in hybrids (PHVs) and fully-electric cars (EVs) in many shapes and sizes.   While some people are excited about the emergence of these new automotive technologies, others invariably make the argument that these cars are “not worth it” and cite the differential cost of the vehicle compared with the projected gas savings they provide.  I contend that unless you are thinking of buying one of these cars strictly as a cost-savings measure and for no other reason, then this argument is simply specious.

The reason I say this is that the amount of money any of us spends on a car is primarily a matter of personal taste and preference and has very little to do with the intrinsic value of the vehicle. If all car-buying decisions were to be made strictly on utilitarian/economic grounds, most of us would be driving bare-bones little imports that cost $9,000, or better still, 10-year old little imports that we paid $9,000 for at the turn of the century.

Instead, some of us will spend $40,000 to get the feeling of safety in owning a Volvo, some will spend $90,000 to own Istock bmw 7 series croppedthe fabled engineering of a BMW 7 series, some will spend $60,000 to get 556 horsepower in a Cadillac CTS-V -- or to look really cool in a Corvette t-top or maybe just to look successful in any number of luxury cars.  A (very) few of us will cough up $450,000 for a Lamborghini Mucielago so we can go from 0 to 60 mph in 3.2 seconds (and get 9 miles per gallon doing it.)  Certainly many would say that spending that kind of money on a car is an unnecessary extravagance, but for those that buy such vehicles, they feel their money is well-spent.

Fans of hybrid cars brag about their great gas mileage; detractors point out that hybrids cost much more than their standard internal combustion counterparts.

New technologies for fuel efficiency generally inflate the price tag for vehicles.   For example, to gauge the price of hybrid technology, there are cars on the market that are available both in standard versions and as hybrids.  Examples are the Ford Fusion, the Toyota Camry, the Hyundai Sonata and the Honda Civic.   Getting the hybrid typically adds $3000-4000 to the sticker price, but improves mileage by as much as 50% for city driving.  That’s a significant amount of foreign oil you don’t have to buy.

Continuing with hybrid technology, there are cars that are only available in hybrid models such as the Toyota Prius, Honda Insight and the Lexus HS.   The Prius has led the pack in gas mileage for years; most drivers get at least 50 mpg and some far better.  But this comes in a more idiosyncratic package that for some people is really cool but for others is a little weird.  As for the price, it is not as clear what car to compare the Prius to.  Perhaps the fairest criticism is that it is a bit pricey for its size. 

Hybrid cars are costly primarily because of the exotic batteries required for the hybrid drive.   Plug-in hybrids and electric cars have even more exotic and much larger battery systems and consequently higher costs.  Thus the Chevrolet Volt (which is really an electric car that includes a gasoline-powered generator to recharge its battery) and the soon-to-be released Toyota Plug-In Prius are $40,000 cars.   Small electric vehicles such as the Nissan Leaf (in the mid-$30’s) and the 2013 Chevy Spark (price unknown but presumably comparable to the Leaf) command premium prices for eliminating the internal combustion engine and its carbon-filled exhaust.   The forthcoming Tesla Model S luxury sedan will cost from $57,000 to $77,000 depending upon the driving range of the car (in other words, the configuration of the battery pack.)    

Are these fuel-efficient cars worth the extra money?  Perhaps the answer to that question is to ask whether any special attribute of an automobile is worth what it costs. We replace our cars for many reasons that often include the desire for features our current car lacks.  We pay for power, for luxury, for roominess, and for sex appeal.  Getting excellent gas mileage (or perhaps eliminating the use of gasoline entirely) is a completely reasonable feature to pay for in a car.  Objectively, from a strictly financial perspective, it probably does not make sense to replace a car simply to get better mileage.  However, there are other reasons to do so such as the desire to be environmentally responsible or perhaps to make a personal statement. Like most things about a car, high gas mileage is a feature that costs money.  Whether it is worth the price is mostly a matter of personal values.  But if you think about it, high mileage is probably the only automobile feature that gives you any return on your money at all once you’ve paid for it.  Istock 000015868684xsmall-nissan leaf

As “green” vehicles increasingly enter the marketplace, there is the continuing onslaught of naysayers saying that these cars are “too expensive”.  What this really means is that for these people, things like energy efficiency, environmental responsibility and an aversion to buying foreign oil don’t rate much of a price tag. To each his own.

Randy Simon has over 25 years of experience in renewable energy technology, materials research, superconducting applications, and variety of other technical and management areas. He has been an officer of a publicly-traded Silicon Valley company, worked in government laboratories, the aerospace industry, and at university research institutions. Dr. Simon has authored numerous technical papers, magazine articles, a book, holds seven patents and also composes and arranges jazz. He lives in Schenectady, New York and can be reached by email.

Comments on "Do Hybrids or Electric Vehicles Make Financial Sense?"

  1. Dan Gibson's avatar Dan Gibson October 17, 2011 at 10:42 am

    For too long we have been making the wrong statements with the car we drive - me among them. Not only can we buy a car that doesn’t send boys to war we can buy American. The Volt is a pretty interesting option. Thanks.

  2. Dan Gibson's avatar Dan Gibson October 25, 2011 at 10:50 pm

    I’m all for an electric car and as soon as I can afford one that will meet my needs I’ll buy it. My motivation is both environmental and economic. I expect we will want to keep the car at least 15 years (the few new cars we bought were kept 12+ and I expect to drive it less than in the past, so 15 seems reasonable). My main concern then becomes the cost of a replacement battery. I can’t get any reasonable answer from Nissan. If the battery costs $20,000 as I’ve heard, then the car is a throw-away in 10 years (its range will be so diminished that won’t be of much use). Environmentally, I’m not sure this is a good investment in embedded energy? And I’m not sure how the $/mile will work out with the battery factored in! If Nissan or other car company would provide some battery replacement cost provisions, this would take a huge uncertainty factor out of the equation for me. Any insight into battery expectations in 10 years?

  3. OEIC default avatar rwsimon October 26, 2011 at 10:26 am

    It seems to me that being an earlier adopter carries some early obsolescence risks.  The current cost (and performance, for that matter) of EV batteries is untenable for the long-term success of the industry.  Everyone acknowledges this.  So the likelihood and fervent hope is that electric cars a decade from now will have much cheaper batteries and much greater range.  So unfortunately, a 2011 Nissan Leaf is not going to be a very sensible car to own in 2021.  I don’t see a way around this issue.  With technology, it always seems to be the case that down the road there will be cheaper and better products.  If everybody waited for them, no current products would ever succeed.  Without early adopters, new technology would be impossible.

  4. Dan Gibson's avatar Dan Gibson October 28, 2011 at 8:23 pm

    That is what I was afraid you were going to say. Now, I’ve bought a screw gun that by the time I needed a new battery they didn’t sell them, but I’ve never bought a car like that. This is going to take some getting used to. Thanks.

  5. OEIC default avatar rwsimon October 28, 2011 at 9:03 pm

    I would expect that these electric cars won’t be like screw guns.  If the automakers are really in it for the long haul, they will support the vehicles over the long term.  The issue is whether you will want the support if you will be able to do much better with a newer product.  It could be like fixing a 7-year-old plasma TV that originally cost $6,000.  You can probably do it but it would be crazy since a brand-new one runs less than a thousand.  In the best outcome for electric vehicle technology, that will be the situation.

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