Electric Car Economics: Payback vs. Premium

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

1. Cost: Is there a positive payback?

2. Premium: If there is no payback, is there another reason to "payup" 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 ofelectricity in the U.S. is between 11 cents and 12 cents per kWh. Let's fora moment disregard the fact that more and more people now can chargeat 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 milesper 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 300gallons 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 thatan electric car exhibits less wear and tear, so it will perform betterin 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 thetires and eventually change the brakes and tires, and you're done. Bythe way, regenerative braking means less brake wear. That said, manycars nowadays have free service included for the first three years or36,000 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 or150,000 miles). At least some Chevrolet Volts have already gone wellbeyond 200,000 miles, and none of them has yet required a batteryswap.

The cost at that time? Who knows? Clearly you will get a lotbetter performance of a next-gen battery some time around 2020 or 2025or 2030. You could make the case that an electric car is the onlytype where performance improves every 15 or 20 years! But even so,there will be a cost attached to it.

Ten years from now, it is estimated that battery cost will approach$100 per kWh. If so, a Chevy Volt battery at 16 kWh would cost$1,600. But let's say that the equivalent of Moore's Law starts tofail and it's double the price. In 10 years you'll pay $3,200 for anew 16 kWh Chevy Volt battery, and we assume your old one is worthzero. That's $320 per year, or under $1 a day.

All in all, netting things out as outlined above, I think that over a10-year period, an electric car will save you perhaps around $1,000per year if you drive 12,000 miles per year. Measured strictly on thebasis of "payback economics" how much would you be willing to pay forthat kind of savings up-front? $10,000? More? Less? I think$10,000 is probably not a crazy number, although it could be less.

The fact is that today, you pay, for most models, tax adjustments notincluded, at least $10,000 more for an electric car. For this reason,electric cars will at least in the near term, be sold on superiorperformance instead of superior all-in lifetime economics.

Obviously, some people may consider an electric car a call option onthe potential for increasing gasoline/diesel prices. I have not madethat assumption here, although it's likely to impact the discount ratefor the annual current $1,000/year savings.

Are you buying"protection" in the event gasoline prices were to increase from thecurrent $4 to the Obama administration's (implicit and nowadayssecretive, hush-hush) goal of $8 to $10 a gallon?

The Luxury Factor

The biggest point here is that it's only when it comes to electriccars that we talk about payback and economics when we buy a moreexpensive car. What do I mean by that? Well, consider this.

You can always buy a basic car -- Toyota Corolla, say -- for $17,000,and then try to justify the economics of buying a more expensive car.What's the "payback" of a BMW 328 over a Toyota Corolla? What's thepayback of a Mercedes S550 over the Toyota Corolla? What's thepayback of a Bentley Mulsanne over the Toyota Corolla?

Nobody asksthese questions, so one can legitimately ask why an electric carshould be held to a different standard. All of these cars fit atleast four adults, they have a trunk, and they will take you from A to B.

This again points to my long-standing conclusion: Most electric carswill have to be sold on being a premium experience, not because youwill save money in a total-factor lifetime "payback" equation. BMW328, Mercedes S550 and Bentley Mulsanne are all premium experiencesover the Toyota Corolla, and therefore nobody argues that they willhave to have an operating cost "payback" to justify their higherpurchase prices.

The same thing with electric cars! They aresmoother, more quiet and have more torque. So they drive better!That will be the way to electric car success.

What constitutes a "premium" driving experience? Here are eight examples:
  1. Silent operation. Why are you buying a Rolls Royce anyway?
  2. Instant torque: Go-kart fun of extreme acceleration.
  3. Smooth power delivery: No herky-jerky shifts and engine revving up and down.
  4. No incessant braking: Regenerative brakes mean you just lift thefoot off the accelerator.
  5. No oil spills or gasoline fumes in the garage.
  6. No visits to the gasoline station. Just plug it into the outlet inthe garage; same as your smartphone.
  7. Less wear and tear: Ability to upgrade the car's performance over time.
  8. More luggage space: If the battery is in the floor (Tesla Model S).

Notice I am not mentioning any greenie-weenie stuff here. I don'tbelieve, and I don't care, whether electric cars reduce CO2 emissionsor not. I don't believe it has any impact on "global warming" even ifany such warming could be proven to exist, which itself is at bestdubious. But there are many reasons other than allegedlyenvironmental ones, to buy an electric car. By the way, isn't noisepollution something environmental anyway?

Tesla will deliver its first Model S cars from the Fremont, Calif.,factory on June 22. This will be a watershed event in automotivehistory. These cars are luxury sedans with an EPA-certified 265-mileaverage range and the most advanced electronics of any car on theroad.

Which owner is asking about the "payback" of owning a Tesla S?Nobody, as far as I can see. It's all about the premium experience --just as if they had bought a Mercedes S550 or BMW 750 instead.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

More from Technology

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Some Companies Are Already Feeling the Effect of GDPR

Some Companies Are Already Feeling the Effect of GDPR

Experts Break Down GDPR Risks for Investors

Experts Break Down GDPR Risks for Investors

Netflix Ready to Surpass Disney as America's Most Valuable Media Company

Netflix Ready to Surpass Disney as America's Most Valuable Media Company

60 Seconds: What the Heck is GDPR?

60 Seconds: What the Heck is GDPR?