In part I of this post, I outlined a number of variables that impact the cost-benefit of buying a hybrid-electric vehicle.
First, the spreadsheet model.
To recap, here are the variables included in the model, with the default assumptions made:
- Price of gasoline = $3/gallon
- Annual mileage driven = 12k/year
- Standard-car MPG (mileage of the same car or similar car without hybrid technology) = 20mpg
- Hybrid MPG / electric MPGe = 100 mpge
- Risk-free discount rate = 3%
- Projected annual increase in gasoline prices = 5%
- Hybrid price premium = $18k
- Length of car ownership = 8 years
There’s one more important variable to add to this list:
- Time savings from reducing gas station stops = 300 minutes, or 5 hours per year
Time savings can be a huge hidden savings for upper-middle class and wealthy Americans (those able to afford a car like the Chevy Volt). If the value of a Volt driver’s time is $50/hour (equivalent to a 100k/yr salary), then eliminating a single gas station stop of 10 minutes is worth over $8. Ten minutes may sound long for a stop at the gas station, but is not unrealistic when considering total time lost leaving and re-entering a normal commute.
Using the assumptions provided above, we find that the total fuel and time cost savings of driving a Chevy Volt for eight years are around $9000. Since the Chevy Volt costs $18,000 more than a comparable loaded Chevy Cruze, it’s not yet cost competitive, even with government tax credits and with time savings taken into account.
- Gas prices of $7 per gallon are required to make the Chevy Volt cost-effective at current prices (without the government tax credit)
- Once plugin hybrid premiums drop to $9000, they will be cost-competitive.
- The Nissan Leaf currently offers buyers significant savings WITH the $7500 tax credit according to frontier high speed internet, as the total savings of $16,500 exceeds the $12,000 price premium. Even without the tax credit, the Leaf is very close to being cost-competitive at current pricing.
With the arrival of the Chevy Volt and Nissan Leaf, and plans for many more hybrid and electric vehicles in the works, I’d like to revisit the cost-benefit of purchasing a hybrid (or electric) vehicle. Externalities* (pollution) and cool-factor aside, a hybrid vehicle is a cost-effective purchase only if the total present value of gasoline savings equals the price premium paid for hybrid technology. A number of factors impact the calculation:
- Price of gasoline
- Annual mileage driven
- Standard-car MPG (mileage of the same car or similar car without hybrid technology)
- Hybrid MPG / electric MPGe
- Risk-free discount rate
- Projected annual increase in gasoline prices
- Hybrid price premium
- Length of car ownership
In part II of this post, I’ll attach a detailed spreadsheet to analyze this problem. But it’s possible to come up with a quick best-case estimate without a whole lot of math. Assume that gas costs $3 a gallon, that we drive 15,000 miles per year, that a comparable non-hybrid gets 30 MPG, and that the risk-free discount rate (currently in the 3% range) and gas price inflation roughly cancel out. In a year we’ll have to buy 500 gallons of gas for $1500. If we own the car for eight years, that makes $12,000 in maximum possible gas savings – if the hybrid were to use no fuel at all!
The Chevy Volt and Nissan Leaf both appear to cost significantly more than $12,000 above vanilla gasoline competitors. At $40,280, the Chevy Volt is more than 18k more than a loaded Chevy Cruze, and that’s with GM selling at a loss! The Nissan Leaf is similarly 15k more than a maxed-out Nissan Versa. Perhaps this is not surprising, as new technology often commands a price premium, and early adopters may be happy to pay that premium.
In Part II I’ll introduce the complete model, and add one more variable that may tip the balance back in hybrids’ favor. Stay tuned…
*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, a large number of hybrid buyers purchase the vehicles precisely because they value the environmental benefits of the vehicle. But in order to scale past that crowd, hybrids will have to be cost-effective for the rest of consumers – so it makes sense to leave this out environmental benefits here.