Gasoline vs Electric ROI: Tesla Model S

The Tesla Model S saves owners roughly 15k over an 8 year ownership period when compared to similar luxury sedans – this analysis excludes government subsidies.

I’ll be taking delivery of a Tesla Model S in a few weeks, making it a great time for me to revisit the cost-benefit of purchasing an electric vehicle. Ignoring externalities [1] (pollution), and range limitations for a moment [2], an electric vehicle is a cost-effective purchase only if the total present value of gasoline savings equals the price premium paid for the technology. A number of factors impact the calculation:

  • Price of gasoline and price of electricity
  • Annual mileage driven
  • Comparable gasoline care MPG and electric vehicle MPGe
  • Risk-free discount rate
  • Projected annual increase in gasoline prices
  • Electric car price premium / discount
  • Length of car ownership
  • Time savings from elimination of gas station stops

Here’s a spreadsheet model analyzing the Tesla versus traditional competitors.

It’s possible to come up with a quick best-case estimate without a whole lot of math. Assume that premium gasoline costs $4 a gallon, that we drive 12,000 miles per year, that a comparable non-electric vehicle gets 20 MPG, and that the risk-free discount rate (currently in the 1-2% range) and gas price inflation roughly cancel out. Driving the non-electric vehicle for a year would require 600 gallons of gas for $2400. If we owned the Tesla for eight years, that makes $19,200 in maximum possible gas savings – if the Model S were to cost nothing to charge! The spreadsheet analysis shows that owning a Tesla for eight years might actually produce $15,000 in savings.

Does this make the Tesla a good deal? It depends on the frame of reference – what conventional vehicles are its competitors? Mid-sized and large sedans from Mercedes, BMW, and similar would seem to be appropriate benchmarks. The average base MSRP across a range of luxury sedans is around $71,000 [3], while the Model S starts at $69,900. When fuel savings are included, this makes the Tesla over $16,000 cheaper than its competitors!

Key Conclusions:

  • If owned for eight years, a Tesla saves owners $15,000 when compared to a comparable ICE-powered luxury car – without counting government tax credits
  • The Model S already has superior ROI when compared to competitors like BMW, Mercedes, Lexus, and Audi
  • The Model S (and all electric vehicles) do not yet possess the rapid refill capability of traditional vehicles, which limits their market appeal for single-car households [2]

[1] Why leave out externalities like pollution from the analysis? True externalities are outside the traditional economic transaction, and so a car buyer doesn’t take them into account when making a purchasing decision. In reality, many Tesla buyers purchase the vehicles in part because they value the environmental benefits of the vehicle. But in order to scale past the early adopters, electric vehicles will have to be cost-effective for the rest of consumers – so it makes sense to leave out environmental benefits here.

[2] Range limitation is the principle downside to electric vehicle ownership at the moment. While Tesla is quickly building a network of high speed charging stations, these stations provide only 150 miles of range per half hour, while a traditional vehicle can add 300+ miles of range in less than five minutes at a gas station. For households with one electric vehicle and one conventional vehicle, this limitation may not be of concern, making this a good target market for electric vehicle makers.

[3] The Tesla seems to compete with a broad range of luxury sedans from mid-level vehicles like the A6 and 5 series to upper-end vehicles like the Mercedes S class. Based on its size and performance characteristics, however, it seems that the larger vehicles are a more appropriate comparison. The average base MSRP of the BMW 5 series, 7 series, Mercedes E class, S class, Audi A8, Porsche Panamera, Lexus LS460, and Jaguar XJ is $71,000. Since this number is quite close to the Tesla’s starting MSRP, and since this calculation varies based on the comparison list, a price premium of $0 was used in all calculations.

Disclosure: The author has a paid reservation for a Tesla Model S

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1 Comment »

  1. Robert said

    Consider also the time investment.

    Suppose it takes ten minutes to find, drive to, and make use of a gas station, and you do that twice a week for about 6 gallons per trip.

    Subtract 20 seconds a day to plug in your Telsa, and you have a net savings of about 18 minutes (0.3 hours) per week * 52 weeks * 8 years = 124.8 hours.

    Not a huge cost for a minimum wage worker, but of course they are not your market for the Model S. If you make $150/hour (and value your free time similarly), you realize $18,720 over that eight-year span.

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