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The Great Debate -- All-Electric Cars vs. Plug-In Hybrids

Stocks in this article: TM NSANY

NEW YORK (TheStreet) -- One of the greatest debates about the future of the automotive industry is the relative merits of pure electric cars, so-called BEVs (battery-electric vehicles), versus plug-in hybrids, so-called PHEVs (plug-in hybrid electric vehicles). This article is an attempt at making a prediction of how it will shake out over the next half-decade.

Let's start with the BEV.

The main advantage of the BEV is the elegance of its architectural simplicity. It contains an absolute minimum of moving parts. It can also be made very small and the energy storage can be conveniently baked into the floor pan of the car, enabling the overall car design to be optimized for people, luggage, handling and safety.

The BEV design's simplicity has two other implications:

1. It should allow for the lowest possible service costs over time. Aside from tire rotation, at some point after the car's first decade of service, you might consider trading in the battery for a fresh one. That could admittedly be a very expensive proposition, and the debate is raging as to what to expect for those battery prices at that time.

2. It could make for the fastest possible car. By ditching the entire internal combustion engine (ICE) driveline, you can create a high-performance car and you can optimize for a low center of gravity and maximum acceleration and handling.

The BEV also has three important negatives:

1. The economics isn't quite there yet. Thanks to one factor alone -- the battery -- the cost of a reasonably equivalent BEV is higher than an ICE car. Okay, you say -- but you save on gasoline. Sure you do. But how much?

Let's say you buy a regular fuel-efficient car such as the Toyota (TM) Prius. This is what you would buy if you are concerned about fuel economy but for whatever reason aren't buying anything that plugs into a wall.

The average American drives close to 12,000 miles per year. The Prius, at 50 miles per gallon, therefore, consumes 240 gallon per year. Multiply by $4 per gallon and you get $960 per year in fuel cost.

Assuming your cost of electricity is zero, the most you can save per year is $960. How much are you willing to pay up-front to save $960 per year? What's the opportunity cost of a $10,000 upfront investment? 5%? Well, there's $500 per year, or half your savings. Do you actually pay for electricity? If so, that other $500 per year could start to approach zero net savings.

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