Greenformance: ICE vs. EV, The Real Costs

Having reviewed the Tesla Model S this month, I was once again reminded of the various issues surrounding electric vehicles. In particular, I was reminded of the variety of ways EVs are understood by relatively knowledgeable consumers–albeit consumers who tend to have little firsthand experience with the cars in question.

 

It would seem, as is the case with football teams and political candidates, that some substantial part of the consumer’s view of EVs starts with a basic “For” or “Against” intuition. On that basis, you can look for data corroborating your stance. If you are in the Against camp, you can criticize the range of EVs, or their pricing, or the cost of battery replacement. If you are on the For side of the aisle, you point to greenhouse gas footprints, or operating costs, or driving characteristics.

 

As in the political arena, I suspect that a fair number of our gentle readers are actually not in one camp or the other mentioned above, but instead are the equivalent of independents. These people would consider an EV, but it has to be a better offering than what they could get with a hybrid or a pure internal combustion engine (ICE) car. If you are one of these people, this column is for you.

 

One way for independents (EV independents, not political independents) to think about EVs is to look for wholesale superiority. That is, independents could consider whether EVs are better at everything than hybrid or ICE cars. If and when they are, you buy an EV. That isn’t such a far-fetched scenario, as you can see if you look at consumer electronics. Fifteen years ago, if you wanted a relatively high-end TV you bought a 36-inch, CRT-based television. It cost perhaps $2000 and delivered a standard definition (480i) image. Today, for half that sum, you can get a 46-inch LCD HDTV (1080p).  And, the LCD TV will be much thinner, use less energy, and has a variety of internet connections that were missing from the TV of 1997. Basically, you can’t buy a CRT-based TV today; flat panel technology is completely dominant. You’ve heard this story so many times it has become passé.

 

But the consumer electronics progress curve doesn’t operate everywhere. In the automotive industry, for a given cost, the performance of tires, or seats, or frame rails, or cooling systems doesn’t double every 18 months. The net result of slower progress in cars, even EVs, is that for many years to come, hybrids, and pure ICE cars, and EVs will each have distinctive advantages, but none is likely to be a dominant technology that drives the others to zero market share.

 

So, what is the likely scenario for, say, the next ten years in the automotive arena? With regard to EVs, I think you can count on a few things:

 

 

Those are the basic rules that define which one- or two-percent or so of the population will be in the EV market in the near term. One other factor, however, is missing, and that factor is the operating cost of EVs. If you like the driving dynamics of an EV, and the statement an EV makes, and you can live with the range and the purchase price, you still might not jump in because of operating costs. If the operating costs are too high, an attractive and affordably priced car might still not be a good value for you.

 

To look at this issue in a bit more depth, let’s consider the Tesla Model S with the mid-sized 60-kWh battery compared to the BMW 535i.  Both cars have an MSRP of $60,000, at least if you put the Premium and Technology packages on the BMW and take the $7500 Federal tax credit into account for the Tesla. You could argue whether these cars are comparably equipped, but let’s assume they basically are because we’re looking for major differences between EV and ICE operating costs, and not the specifics of this BMW-Tesla comparison.

 

Both cars have 4-year, 50,000-mile warranties, so let’s call that a wash in operating costs. After four years, let’s also assume repair costs or extended warranty costs are the same. There are reasons to assume that either the BMW or the Tesla will be less costly to repair, which is why I make this assumption.

Then we come to energy costs. If we drive the BMW 10,000 miles per year and get 23 miles per gallon, we’ll spend about $1800 per year on gas, if gas is $4 per gallon. The Tesla is about four times as energy efficient from well to wheel, but let’s assume that some of that efficiency is lost in the pricing of electricity. So, say the Tesla costs about $600 per year for energy.

 

I’m going to assume an eight-year ownership period. That’s a little long, but it coincides with roughly the replacement cycle for the Tesla battery (the battery has an eight-year warranty as well). With EVs, the battery’s energy storage capacity declines over time, due to aging, usage, and charging. At some point, even though the battery still functions properly, the car’s range has diminished to a point (say two-thirds of its original range) where a replacement is desirable.

 

So, using this eight-year period (which could be two, four-year ownership periods for two owners), the Tesla costs $9600 less for energy than the BMW. Note that if gasoline prices rise, that number goes up, so that at $5-per-gallon average over the period it would be $12,000 more to run the BMW. But, with the BMW we don’t have to replace the engine at 80,000 miles, we can just sell the car. With the Tesla, we basically should replace the battery pack at that point. What does this cost?

 

Well, right now estimates are that a 60-kWh battery pack, like the one we specified for our Tesla Model S, costs $30,000 to $36,000. But eight years from now we won’t be paying 2012 prices, we’ll be paying 2020 prices. McKinsey & Company has done an analysis of likely future battery costs, and they estimate that our 60-kWh battery pack will cost $12,000 in 2020. Assuming that is correct, there would be some labor to do the swap as well. But, using these calculations, the operating costs of an EV and the operating costs of an ICE car are rather similar.

 

I conclude two things from this. First, the real difference in cost between a BMW and a Tesla lies mostly where it does with other inter-brand comparisons: depreciation rates. A BMW and a Jaguar, for example, cost about the same amount to buy and run, but the Jaguar depreciates more and therefore is more expensive. The same will likely hold true for EVs. Depreciation is harder to predict for new technologies and new brands, so my other conclusion is that the cost of EVs involves more risk (more variability in the likely actual cost). You can reduce the risk by leasing, but that may simply ensure that the costs are higher.

 

Fortunately, for now most EV buyers are probably motivated by points 2 and 3 in my list above, more than by cost considerations. Another $500 or $1000 per year, or even more, won’t be a deciding factor given those benefits.