Does an Electric Car Make Economic Sense?

Many people automatically assume that an electrically powered vehicle is enormously less expensive than a gasoline or diesel powered vehicle.

It is true that hybrid vehicles such as the Toyota Prius boast higher than normal fuel economy ratings (51/48 for the 2015 Prius) and it is also true that completely electric vehicles show very high MPGe figures (often in the range of 90 – 120).

With the MPGe number being an attempt to equate the fuel economy/efficiency of an electrically powered vehicle to that of a regular gasoline powered vehicle, it would seem, simplistically, that an electric vehicle which offers 90 MPGe is three times better than a regular vehicle which offers 30 mpg.

But this is indeed a simplistic calculation.  Don’t go rushing off to buy your Leaf, Volt, or Tesla just yet.

How Much Money is Saved, Upfront, with an Electric Car?

Let’s first of all understand the straight out difference in fuel costs per mile between an electric and a gas powered car, and whether this is as meaningful as it seems or not.  You can follow through this calculation and substitute whatever numbers you might wish for your own scenario.

For the gas powered vehicle, let’s multiply miles driven a year by the cost of gas per gallon and divide by miles per gallon.

For the electric vehicle, let’s multiple (the same number of) miles driven a year by the cost of electricity per kWhr and divide by 3 (on the basis of 3 miles per kWhr – if a Tesla, divide by 2.85).

If we use 12,000 miles, $3/gallon, 30 mpg, and 12c/kWhr (remember to include all the charges on your electricity bill to get the real cost per kWhr), we get a cost of $1200 for the gas car and $480 for the electric – a saving of $720 a year ($60/month or $2 a day or 6c/mile if you prefer) for the electric car over the gas powered one.

So, yes, there’s a real saving to be enjoyed.  There are probably some other, harder to quantify, benefits, too.  You’ll have less brake pad wear, and while you still have a drive train and suspension and electrics and plenty of electronics, you have easier to maintain and more reliable electric motors rather than a more maintenance intensive gas motor powering your car.

These savings, while harder to be specific about, probably represent another 3c or more a mile, or in our example, perhaps it is another $360 saving.  So we’re looking at a total saving of $1080 a year for the electric vehicle.

But now lets start to think of some other things.

The Extra Cost of an Electric Vehicle

First, your electric vehicle is going to cost more than a gas powered vehicle.  How much more?  That is a bit hard to say, exactly.  The Leaf lists for $30,000 and up, a Volt for $35,000 and up, and, well, if you’re looking at a Tesla, you’re quickly writing out a check for something the far side of $100,000.

A $7500 federal tax credit can probably be applied to reduce these costs.

A Chevrolet Volt has often been compared to the gas powered Chevrolet Cruze, which lists for $16,000 and up.  So, in this case, and after the $7500 tax credit, you’re looking at a $11,500 extra cost to get a more or less similar vehicle.  Some would say the Cruze is the better car – roomier, and for sure, it has a much more practical range between needing to be refilled/recharged (the Volt has a 38 mile range on its battery).

The Leaf is perhaps similar to the Nissan Note or Versa, and so again you’re looking at about a $11,500 price differential (and the Leaf has an 84 mile range).

It is hard to know what to compare a Tesla to, but you can get a nice German sedan for $75,000, so perhaps there’s a $15,000+ differential in choosing a Tesla.

Note that some states may offer incentives/concessions on electric vehicle purchases in addition to the federal $7,500 tax rebate.

Depreciation and Future Value

Now you might say ‘yes, the up-front cost of the vehicle is higher, but so too will be its trade-in value when I go to sell it’ and you might be right about that.  How much you’ll see reflected in the trade-in value is hard to say at this stage, because there aren’t a lot of second hand electric cars being sold second hand, and the Tesla cars in particular (at least until the release of the new dual motor vehicles at the end of 2014) have been holding their value extremely well.

This factor also needs to consider how long you keep the vehicle for, and it further needs to consider, when you do sell it in the future, whether electric vehicle technology has evolved such that it is more commonplace and less expensive than it is today.  With projected reductions in battery pack costs, and improvements in economies of scale, it is reasonable to expect electric vehicles will reduce in price, relative to gas powered ones, over the next some years.

The chances are when you come to sell your car, its value will have dropped to half its purchase price, and perhaps a bit below half due to the premium on electric vehicles having reduced.  So let’s say you get a third of the extra cost you paid up-front back when you sell the car in the future.  So perhaps this is a $7500 net cost to you (ignoring other complications like time value of money and inflation).

There’s a related issue as well.  Unsurprisingly, work at developing improved batteries (greater storage capacity in less size/weight, lower cost, faster charge time and more recharge cycles) is progressing at a fever pitch, with many new and existing technologies being looked at and enhanced – here’s a good article.  When such a transformative technology finally makes it into production, will that entirely obsolete the technology in your present electric vehicle?

Maybe it will be a simple plug-in replacement of the battery pack, but more likely, it will be deployed only in new cars and your present car will become massively less desirable and depreciate much further for technological reasons.  How desirable will an electric car with an 80 mile range between recharges be when newer models offer 200 – 400 miles between recharges?

Replacement Batteries

The electric vehicle’s battery pack will need to be replaced at some time.  It is not clear how long these battery packs will last, because they don’t just fail, they deteriorate over time – every time they are recharged, they have slightly lower capacity than the time before.  The lower capacity batteries in a Leaf or Volt will need more recharges for a given number of miles than the higher capacity battery in a Tesla.  It is expected that a Leaf or Volt battery will last more than 100,000 miles and still have 60% – 70% of its original capacity; a Tesla battery might get closer to 200,000 miles with that amount of capacity loss.

A new Leaf battery costs $5500 plus tax and installation, and there’s probably some trade-in value from the old battery.  Worst case scenario, this seems to suggest about another 5.5c/mile for amortizing the cost of the battery, and conceivably this cost could drop to less than 4c if you were careful with the vehicle, its battery, and how you charged it.

The Volt has a lower battery cost – $3000 or less.  Call it 3c/mile.

The Tesla battery is sort of priced at $12,000, and if it provides 200,000 miles prior to being replaced, that’s 6c/mile.

These are quite hefty additional costs to be added to your driving cost per mile – more than outweighing the saving in maintenance costs and eating into the fuel savings.

Other Costs

You’ll need to install an at-home charger for your vehicle.  You’ll have to buy something from the car dealer, and then pay an electrician to wire it into your home/garage.  Hopefully you won’t need to upgrade your distribution panel or main wiring into your home.

This is probably going to run you about $2000.  Maybe more, maybe slightly less.

Some states are starting to consider charging electric vehicles some sort of road use fee.  They are realizing that the tax income they get from the gas sales for regular vehicles is being lost to them when electric vehicles start using the roads, and in some states, where appreciable numbers of electric vehicles are starting to appear, the states are starting to move towards charging use fees.  We’ve no idea what this would end up as being, or when it would happen to you in your state, but if it does happen, it is could fairly be justified to be in the order of 1.5 – 2c a mile (the average state tax per gallon of gas is 48.5c).

If you’re away from home and need to top up your car’s battery, then the cost of this will vary wildly from free (if you have a Tesla and can use one of their Supercharger stations – and you might note that Tesla does not usually locate them in convenient locations in the middle of major cities!) to many times the cost of electricity you’d pay at home.  Indeed, the rates charged by some commercial charging stations mean you end up paying as much or more for the electricity your car uses as you would if buying gas for a regular car.

Many of us will rarely need to buy electricity away from home, but if you live in an apartment with no garaging for your car, the issue of how you recharge your car will be much more challenging.

Summary

You’ll pay $15,000 – $25,000 more to buy an electric powered car compared to a comparable gas powered vehicle.  You’ll get $7500 of this refunded to you with your next tax return, and might get a third of the balance back when you sell the vehicle in the future.  You’ll also have to spend close on $2000 to get your garage wired for a high current battery charger for the vehicle.

So, in round figures, the capital cost of owning an electric car is probably $10,000 or perhaps more, than that of a gas powered car.

In driving costs, your saving per mile will probably be in the order of 4c, depending on the cost of gas, the fuel economy of an equivalent gas powered car you’re measuring against, and how you allow for a saving in repair costs and an allowance for occasional battery replacements.

This savings will increase as gas prices increase again, and would reduce if your state started taxing electric vehicles for their road use.

If you drive 12,000 miles a year, you’re probably looking at about a $500/year saving.

So, if you’re planning on keeping your electric car five years, you’ll have saved $2,500 and spent $10,000 to do so.

Rather than saving you money, the electric vehicle has ended up costing you money.

Now, of course, and quite literally, ‘your mileage may vary’, but we’ll wager the ultimate bottom line conclusion you reach is similar – there’s no money to be saved if you buy an electric car today.

There are a lot of reasons to consider (and to avoid) electric powered cars.  But, for most of us, saving money is not one of them.

And, lastly, it seems that battery technology in particular is on the cusp of some major breakthroughs that will transform the economics and capabilities of electric vehicles.  Instead of standard vehicles with a range of less than 100 miles and costing $15,000 more than gas powered vehicles, we might see new vehicles with a range of 500+ miles and costing the same as a comparable gas powered car.

With no compelling reason to buy an electric car today, maybe you’re better advised to wait for this breakthrough.