Electric Car Economics: Payback vs. Premium

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.

The cost at that time? Who knows? Clearly you will get a lot better performance of a next-gen battery some time around 2020 or 2025 or 2030. You could make the case that an electric car is the only type 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 to fail and it's double the price. In 10 years you'll pay $3,200 for a new 16 kWh Chevy Volt battery, and we assume your old one is worth zero. That's $320 per year, or under $1 a day.

All in all, netting things out as outlined above, I think that over a 10-year period, an electric car will save you perhaps around $1,000 per year if you drive 12,000 miles per year. Measured strictly on the basis of "payback economics" how much would you be willing to pay for that 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 not included, at least $10,000 more for an electric car. For this reason, electric cars will at least in the near term, be sold on superior performance instead of superior all-in lifetime economics.

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

Are you buying "protection" in the event gasoline prices were to increase from the current $4 to the Obama administration's (implicit and nowadays secretive, 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 electric cars that we talk about payback and economics when we buy a more expensive 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 the payback of a Mercedes S550 over the Toyota Corolla? What's the payback of a Bentley Mulsanne over the Toyota Corolla?

Nobody asks these questions, so one can legitimately ask why an electric car should be held to a different standard. All of these cars fit at least 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 cars will have to be sold on being a premium experience, not because you will save money in a total-factor lifetime "payback" equation. BMW 328, Mercedes S550 and Bentley Mulsanne are all premium experiences over the Toyota Corolla, and therefore nobody argues that they will have to have an operating cost "payback" to justify their higher purchase prices.

The same thing with electric cars! They are smoother, 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 the foot 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 in the 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't believe, and I don't care, whether electric cars reduce CO2 emissions or not. I don't believe it has any impact on "global warming" even if any such warming could be proven to exist, which itself is at best dubious. But there are many reasons other than allegedly environmental ones, to buy an electric car. By the way, isn't noise pollution 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 automotive history. These cars are luxury sedans with an EPA-certified 265-mile average range and the most advanced electronics of any car on the road.

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.

If you liked this article you might like



Elon Musk's Pay Package Could Be Worth $50 Billion

Elon Musk's Pay Package Could Be Worth $50 Billion

What U.S. Tech Giants Stand to Lose -- and Gain -- From a Trade War With China

What U.S. Tech Giants Stand to Lose -- and Gain -- From a Trade War With China

Inside Thursday's Dow Jones Industrial Average Blowup

Inside Thursday's Dow Jones Industrial Average Blowup

Fed Expectations as Useful as a Screen Door on a Submarine: Market Recon

Fed Expectations as Useful as a Screen Door on a Submarine: Market Recon