Hybrid Economics Part II

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.

Key Conclusions:

  • 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.

Hybrid Economics Part I

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.

Plugin Hybrid List

Plugin America, an organization devoted to promoting electric and plugin hybrid vehicles, has put together an excellent list of plugin vehicles (linked above). Most major auto manufacturers now have a plugin model targeted for 2011 or earlier.

Continuing advances in battery technology mean that by 2011 plugin hybrids will be cost effective at today’s gas prices ($2.50 per gallon), and by 2013 hybrids may be cost effective at $2 a gallon.

Fuel efficient vehicles to the rescue!

The market is responding to energy prices with a raft of new fuel efficient commuter vehicles. I thought I’d mention a few here – many of these vehicles or modifications are competing for the X-Prize, and a few, like Hymotion’s BREM for the Toyota Prius, are available today. The automotive market is changing fast, and 100 mpg looks like it will become a realistic target for drivers in the next few years! Where available, each model’s projected cost, mileage (for commute purposes), and top speed are provided.

Available Today:

Hymotion BREM for 04-08 Toyota Prius – $9995 (plus the price of a Prius), 100mpg, 100+ mph top speed. Hymotion’s battery-range extender module converts a standard 46mpg Prius into a 100mpg plug-in hybrid for under $10,000, and is available today in a handful of major cities.

Tesla Motors – $100,000, 200mpg, 140mph top speed. You can have a high-performance electric car today that costs 2 cents per mile to drive, if you’ve got 100k to burn.

Available by 2010/2011:

Chevy Volt – Exact details unknown (more here), but GM is aiming for a 2010 release of the plug-in hybrid Volt, which will have an all-electric range of 40 miles, and effective mpg of 100+ when used as a commuter vehicle.

Phoenix Motorcars’ Electric Truck – $47,500, 100+ mpg (exact figure unknown), 100mpg top speed.  Phoenix has developed all-electric truck and SUV models that it is currently selling to fleets, and will release to the public in 2010.

Poulsen Hybrid – Poulsen is developing a conversion technology which can be installed on the rear wheels of any vehicle to turn it into a hybrid.

Nissan has announced work on an electric vehicle with a 2010/2011 delivery date, but few details are available.

Toyota is working on a plug-in version of the Prius with a 2010 deliver date as well.

Small Commuter Vehicles: Most available in 2009-2010

GreenVehicles Triac – $20k expected price, 200+ effective mpg, 80mph top speed, and 100 mile range. The Triac is a three-wheeled commuter vehicle designed to help urban commuters park their larger vehicles during the daily grind.

Aptera – $30k, 230mpg, 85mph top speed. Another three-wheeled vehicle, Aptera looks more like a plane than a car, but still has two seats plus space for a child car-seat in rear.

Venture One – $20-25k, 100+ mpg, 100mph top speed. This three-wheeled commuter vehicle looks more like a motorcycle, and incorporates technology that enables it to automatically “lean” as it moves through curves.

Commuter Cars – Tango T600 available today for $108k, T100 target of $20k, 100mpg+, 120mph+ top speed. George Clooney owns a T600, whose tandem seating allows for two passengers or a rear child seat.

Fuel Vapor Ale’ – $75k, 92mpg achieved to date, 100mph+. This is another three-wheeled commuter car, but it’s shaped a bit like a rocket and is designed for high-end performance.

This list is not exhaustive, though I believe I’ve covered most of the credible efforts currently afoot. Feel free to add others in the comments below if you feel they were erroneously omitted.

Peak Oil – I can’t wait!

What is Peak Oil, and why am I so excited about it? Peak Oil theory owes its start predominantly to the work of M. King Hubbert, who correctly predicted in 1956 that US oil production would peak in the early 70’s. Hubbert was a research geologist for Shell, and in his research noted a bell curve distribution in the rate of discoveries of new oil fields. He predicted that the later exploitation of these fields would follow a similar curve, wherein oil production would reach a peak rate at some point in time followed by a steady decline. While highly controversial, Hubbert’s theories proved correct in his own lifetime, and have spawned a generation of Peak Oil theorists who are predicting an imminent peak in world oil production.
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