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Electric Car Economics: Payback vs. Premium

Stocks in this article: TSLA TM GM

NEW YORK ( TheStreet) -- One of the most common questions about plug-in electric cars is the reason for buying one. In this article I will break down the key argument and its alternative:

1. Cost: Is there a positive payback?

2. Premium: If there is no payback, is there another reason to "pay up" the extra money to buy a plug-in electric car?

Let's start with cost and payback:

With an electric car, you can drive mostly somewhere between three and four miles per kilowatt hour, depending on the model. The average price of electricity in the U.S. is between 11 cents and 12 cents per kWh. Let's for a moment disregard the fact that more and more people now can charge at night when rates are considerably lower than 11 cents per kWh.

Let's say you drive 12,000 miles per year. That means that at four miles per kWh, you will consume 3,000 kWh. Multiply by 11 cents and you get $330.

In a gasoline or diesel car that yields 40 MPG, you would consume 300 gallons per year, multiplied by say $4 per gallon, or $1,200 per year.

Basically, the electric car will save you $870 per year in fuel costs ($1,200 minus $330).

What about non-fuel costs? This obviously gets extremely complex. Such costs include:

1. Depreciation

2. Service

3. Battery replacement.

As for depreciation, we just don't know yet. I could make a case that an electric car exhibits less wear and tear, so it will perform better in terms of depreciation, but who knows in reality. Time will tell.

Wear and Tear

As for service, the electric car is clearly cheaper. Just inflate the tires and eventually change the brakes and tires, and you're done. By the way, regenerative braking means less brake wear. That said, many cars nowadays have free service included for the first three years or 36,000 miles, so this may not seem that important at first.

As for battery replacement, there is clearly an eventual cost here. Current electric cars have warranties of eight or 10 years (100,000 or 150,000 miles). At least some Chevrolet Volts have already gone well beyond 200,000 miles, and none of them has yet required a battery swap.

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