EV Economics are getting interesting

EVs are getting interesting.  With the Nissan Leaf this year, Ford planning to release its Focus EV in 2011, and the Honda Fit EV scheduled for 2012, the 100 mile range EV class will provide consumers with several choices within a couple of years.

So it’s time to take a look at whether EVs are a good deal for consumers.   It took a bit work to analyze but the results were worth it.  The initial step is to review the key drivers affecting consumer economics.

First is upfront cost for the EV, the charging station, and the incentives being offered.  The EV costs more, even after vehicle and charging station incentives.  I estimate the additional cost at $7,334 for a Nissan Leaf versus a basic Toyota Camry.

Second is annual cost.  A Camry gets 24.5 EPA miles per gallon.  A Nissan Leaf, by my estimate, will get about 3 miles per kWh.  So what matters is how much a driver drives and the cost of electricity.  The average driver drives 15,000 miles per year, or 41 miles per day, which should be reasonably feasible in an EV.

Electric costs are a big factor.  Retail rates nationwide are something like 11 cents/kWh.  In high cost states like California, without time-of-use metering, costs are 15 cents/kWh and higher.  I’m a SMUD customer with an old meter.  I’m into Tier 2 consumption and if I charged up tonight it would cost me 17.55 cent per kWh.   But wholesale, nighttime rates are dramatically lower.   One wholesale electric price forecasting company that serves electric traders shared their outlook for the next 12 months with me:

Quarterly forecast prepared 12/3/2010, Off-peak prices

period        NP15 (Northern California)
2010-4      3.3 cents/kWh
2011-1      2.7 cents/kWh
2011-2      2.2 cents/kWh
2011-3      3.3 cents/kWh

These prices may seem amazingly low but they are, in fact, realistic.  Thanks to the shale boom natural gas is being delivered to  power plants for $4.40 per mmBtu.  And the power plants setting prices throughout the western US are modern combined cycle units with heatrates around 7,200 Btu/kWh. (4.40 * 7200 / 1000 = 3.2 cent/kWh).  In Northern California alone on Dec 3 there are over 4,000 unload MW of these plants.  That’s enough to charge 1.3 million EVs consuming 3 kW each.

Tying the analysis together I computed the IRR of owning an EV under three scenarios.

  • In scenario 1 my utility is serious about promoting EVs and they flow cheap nighttime power to me at a 5 cent/kWh rate.  They can do this with their new smart meters; at night they have plenty of distribution capacity; and they would make some money.
  • In Scenario 2 I pay roughly the national average for power, say 11 cents/kWh.
  • In Scenario 3 my utility does nothing and I have to pay Tier 2 rates — 17.55 cents/kWh.

I computed when I break-even, or when my fuel savings equal the extra cost of the EV, and my IRR, or the return on my initial investment after I’ve driven 105,000 miles (this is 7 years at 15,000 miles per year).  The results are presented below:

Scenario                 Break-even years      IRR at 105,000 miles
1  (5 cent/kWh)                 3.9                                17 %
2  (11 cent/kWh)              4.8                                 11%
3  (17.6 cent/kWh)          6.2                                 3%

At a 17% return the EV option is pretty compelling and my local utility can make it happen, if they really want clean energy technology.

At the national average rate 11% isn’t bad, and early adopters may find EVs attactive.

And under my current personal rate schedule, EVs aren’t interesting.

That said, with a bit of creative utility rates, and leveraging the big smart meter investments being made, EV can be a hit.  And if they are a hit car companies with early products, like Nissan, GM, and Ford can pick up market share.

At the national level this makes great sense.  Every EV driven will displace over 600 gallons of gasoline per year, virtually all of which is produced from imported oil.  This reduces our balance of payments and trade deficits and improves our security situation.  Maybe a higher federal incentive would be cost effective and should be pursued?

Disclosures: none
Credits:  Price forecast and electric data courtesy of Plexos Solutions LLC and its weccterm forcast.

24 replies
  1. jgarma
    jgarma says:

    May be missing something here, but would not the "cash flows" that are being discounted against the initial investment for the electric car, and thus determining the IRR calculation, be difference between what the electric car owner would have paid for gas minus what he will pay for electricity?

    When calculating the savings, and thus the return on solar photovoltaics, one determines the difference between projected electric bills over the life of the system were it not installed and the reduced electric bill (perhaps $0 if the systems is sized large enough) given what is generated by the solar-generated electricity.

    So, the cash flow in either the solar or EV case is the projected cost difference between some current state (continuing with the norm) or its replacement (solar produced electricity or electric propelled vehicles).

    if I'm on the right track here, your IRR calculation would need to assess projected fuel costs for the Camry and subtract that from the projected electricity costs for the Leaf, which would then be the net cash savings, or "cash flow" created from the initial, up front, investment in the Leaf.

    Another important consideration is leverage.

    If a cash-on-cash IRR calculation produces a return greater than the Leaf owner's cost of debt, (s)he could potentially dramatically increase his IRR by financing part of the Leaf's purchase price, just as most people do with their homes.

    If you pay $100,000 cash for your home and it appreciates 4% per year, that's your ROI. But if you finance $80,000 (80%), that $4,000 (4%) is the return on $20,000 (the 20% down payment), or a 20% ROE (equity). From this, one would need to deduct the after-tax financing costs(assuming mortgage rate income tax deductions) to get the net number, which will be greater than the all cash purchase as long as the financing rate is less than 10%.

    I go through the above exercise familiar to home owners to point out that either the EV or solar situation could have an enhanced rate of return if financed at a debt rate less than all-cash return scenario.

    • henwood
      henwood says:

      The cash flow analysis was done as the difference between the cost of gasoline to fuel the Camray and the cost of electricity to fuel the Leaf. I am aware that there may be some maintenance cost advantages for the EV but at this point I haven't been able to reasonably quantify the savings so I have ignored this for now.

      Leverage could improve the IRR but I consider this secondary to considering the basic economics. In my view the EV needs to pay out on a cash basis to have traction.

  2. jyurow
    jyurow says:

    I would have preferred if you would have done your analysis in units of measure that are comparable between a gasoline powered car and an EV. I would suggest US$/mile. That way we could compare the annual operating costs between the two.

  3. d123
    d123 says:

    This analysis is being done continually comparing an EV with a low priced base Camry or other comperable sedan. But in fact – the consuming public routinely buys small BMW's and luxury cars that cost more – much more than an EV. There is no calculation that can ever justify someone buying a BMW or a Mercedes but people do in fact buy them. An EV exudes so much interest just by existing – and if it is placed beside a 50K Lexus – it will draw all the attention.

    So please everyone – stop thinking that intelligent actuarial monetary analysis has ANYTHING DO DO WITH BUYING DECISIONS – it never has and it never will.

  4. rutlandw
    rutlandw says:

    I did not see what the electric car would cost me! How much per mile, how much will I save and is it worth it ?
    I looked a Prius a while back it it did not make sense to buy one for $10,000 more than the same size gas car. I would love to have one if the price was right.
    Forget the government helping me out -it's my money they are spending!
    Build an electric car that's priced with the others and they will sell all they can build.
    It's the money stupid-nothing else!

    • sandeen
      sandeen says:

      "Forget the government helping me out -it's my money they are spending! "

      Hey, if you take advantage of a tax credit or rebate, at least you get a rare chance to choose directly how it gets spent. 🙂

  5. mike
    mike says:

    LEAF will cost little over $20K in CA after all rebates and incentives ($7500+ $5000). Plus has NAVI, Blue tooth and other amenities your base Camry doesn't plus car pool lane access. And lower maintentance costs better warranty. Plus the EPA got 3.4 miles per KW…without even trying hard. So base assumptions are WAAAY off. Good try but suggest Try again!

  6. Martin Kay
    Martin Kay says:

    The analysis also ignores the savings from lower maintenance costs of EVs due to no tuneups or oil changes, and fewer brake jobs because of regenerative braking (My Prius still has 60% of its original brake pads left after 75,000 miles).

  7. Breath on the Wind
    Breath on the Wind says:

    Mark Henwood has excellent credentials but it does no credit to the analysis to simply guess at the average annual mileage and the cost of electricity for the basic initial assumptions. The DOE provides these numbers. For the US 12500 average miles traveled and the current average cost of US electricity is $.1202/ KW-hr. I have written this analysis several times recently using the DOE numbers and most recently using the Leaf EPA sticker mileage ratings (73 miles / 24 KW-hr) and have added in 5% for the inefficiency of the charger. This gives you a fuel cost of about $.04/mile. You can find one such analysis here: http://answers.yahoo.com/question/index;_ylt=At7E

    The cost of the battery is an interesting issue. I prefer an analysis where we reduce the price of the car by the cost of the present battery (approx. $9000) and prorate the cost over the warranty period of 100,000 miles or about $.09/ mile. The car then costs approximately $11000 in California with Incentives ($16000 in the rest of the US) and costs approximately $.13 / mile (little maintenance and no oil changes) for a $11,000 to $16,000 car.

  8. Breath on the Wind
    Breath on the Wind says:

    When we take the current average cost of gasoline $2.876 and divide by the average US Passenger vehicle mileage of 26.7mpg (2.876/26.7) we come up with an average passenger fuel cost per mile of approximately $.11/ mile for fuel. If over the next 8 years the price of gasoline and the price of electricity track each other then the cost ratio will be consistent. But some feel that the price of gasoline will rise and the cost of electricity will remain relatively the same. At a price of ($.13×26.7)= $3.47 the cost will be the same for fuel but the ICE will require maintenance and oil changes.

    • henwood
      henwood says:

      Regarding assumptions, I used Nissan's 3 mile/kWh figure (73 miles / 24 KW-hr) and bumped the charging requirements by 10 % to account for losses. I didn't have time to track down actual losses but I figured this should easily and conservatively cover losses. On the cost side I included a $2,000 charger cost (the owner will need one) and a $1,000 charger incentive from the feds. I did not include the California state incentive because it is only in California but also because, as far as I can tell, there is only $4.1 million allocated to it. This only covers 820 vehicles so it's not that big a deal (If high speed rail money could be diverted to this purpose it would be a different story).

    • henwood
      henwood says:

      My assumption about the national average retail rate of 11 cents/kWh may be off a bit. The EIA's Electric Power Monthly shows the residential average price in 2009 was 11.6 cents/kWh and through August of 2010 was 11.53 cents/kWh. (http://www.eia.doe.gov/cneaf/electricity/epm/table5_3.html) This only makes the case for EV a bit less compelling in the "pay national average" case.

      The mileage per year for use in the analysis is a pretty important assumption. The DOE/EPA Model Year 2011 Fuel Economy Guide bases its annual fuel costs on 15,000 mile per year. Various other sources put the number in the 12,000 – 13,000 range. The Federal Highway Administration (http://www.fhwa.dot.gov/ohim/onh00/bar8.htm) shows drivers in the key 20 – 54 age range averaging over 15,000 per year. On balance I think my assumption of 15,000 may be a bit favorable to EVs but is acceptable for now.

  9. Ann Stovel
    Ann Stovel says:

    The author is performing what we call in real estate development, a sensitivity analysis based on one factor, (cost of a kWh) under multiple scenarios. As the other posters noted there are multiple ways to perform an analysis, perhaps making it more complicated then the "average" person cares (especially those BMW buyers!) Thanks to Mark Henwood for starting the conversation.

    • henwood
      henwood says:

      I performed sensitivity analysis on the electric price for a couple of reasons. First cars are going to be charged at night and as I showed wholesale power at night is way cheaper than average rates, at least in the west. Secondly, this cost can be controlled by public utilities without costing them money and without the giant overhang of getting federal or states to grant more incentives at a time of big deficits. They just have to pass through costs. And finally, if our elected publicly owned electric utility officials really care about clean energy technology, oil imports, and CO2 emissions this shows that they can make a difference by making EVs a good consumer choice. This is a huge opportunity for our utilities to seize now.

  10. John Christian
    John Christian says:

    So, help me understand the cost of Oil subsidies vs. the cost of EV tax credits. It seems like if this undo help to the oil industry truly exists, it may well be time to phase it out. I would much rather see a free market reaction to EVs given higher gas prices than have the feds promoting both at our expense.

  11. Rick Ehrlich
    Rick Ehrlich says:

    i hope you will all realize it is not necessary to buy a $33,000 car to drive electric. If you look around in any large city, you can find a dealer of existing electric cars, including used Solectrias and Jet Electricas, including used conversions, and including several kinds of NEVs. If you can't find an electric car for $10,000, it is because you haven't looked. The lowly NEV costs 2 cents per mile because it is very lightweight. Electric cars have been and continue to be so much cheaper to drive than gas guzzlers, and also cheaper than "hybrids", that the complex finance exhibit that started this discussion is unfortunate. By the way, even though the tone of this discussion is to ignore the no-pollution benefit, this is very wrong, pollution imposes a cost on the world. E-cars make no pollution at all, different states have different "dirty" factors in their gen/ grid, but now some places offer a 100% no carbon electric account. These accounts are common in Texas (based on all wind power) where I am, where electricity is 10 cents/ kwh with zero carbon (if you are not too lazy to sign up for it)— so we are driving our cheap electric cars for 2 to 3 cents per mile, have no maintenance duty or expense (other than plugging in each nite) and are making net net net, zero pollution. This is cheaper than riding the bus, way cheaper than a hybrid, and 1/10 the cost of driving an average car.

  12. Russ Finley
    Russ Finley says:

    Very few but pizza and auto part delivery companies care about cost of operation of cars. Look around you. Your neighbors drive Hummers, vans, shiny trucks, SUVs, and very very few small economy cars. It's all about stature and how much of it you can buy. Electric cars have many many advantages other than cost of operation that appeal to consumers.

  13. EVmc
    EVmc says:

    to Breath on the Wind
    are you saying the range is only 73 miles per 24 kwh charge?
    not 100 mile range
    (73 miles / 24 KW-hr)Leaf EPA sticker mileage ( i haven't kept up)
    thats a whopping 328 Wh/mi not very good = 91.4 mpg
    is that all freeway speeds?
    almost all EV conversions get 200 to 250 Wh/mi city/freeway = 150 to 120 mpg

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