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January 23, 2008 > TechKnow Talk

TechKnow Talk

Hybrid Vehicles: Economics and Future Technologies

Last month, we looked at the technologies driving hybrid vehicles, but left unanswered the question of whether a hybrid is a sound economic investment. For some, the opportunity to reduce their impact on the environment is sufficient motivation to purchase a hybrid. But do the savings in fuel over the life of the vehicle make up for the higher initial cost? Let's take a quick look at who is buying hybrids then return to the question of value. Finally, we'll dust off the crystal ball and see what technologies may shape the hybrid market in the years ahead.

About 3.5% of U.S. automobile sales in 2007 were gasoline-electric hybrids. Perhaps because of the higher level of environmental consciousness here, California hybrid sales were at twice that level. In fact, roughly 25% of all hybrids in the country are registered in California.

There are 12 hybrid models currently available in the U.S.; Toyota (including the Lexus brand) dominates the market with about three-quarters of sales. Prius alone accounts for half of all sales. Honda has discontinued its Insight and Accord hybrids, but continues to market the Civic hybrid and is working on a new hybrid design. The U.S. automakers are nursing very small market shares and trying to catch up. Toyota will be difficult to catch; Prius sales doubled in 2007 compared to 2006.

Market research has demonstrated that many Prius owners chose that model at least in part because the car is easily recognizable as a hybrid, unlike most of its competitors, which use the same body styling as their conventional counterparts. These drivers wish to make a visible statement of their concern for the environment. Look for Honda and others to tap this market with uniquely-styled hybrids.

There are other potential motivations to buy a hybrid. The Civic and Prius qualify for the clean air stickers that allow a single occupant to drive in the California HOV (diamond) lanes during commute hours. But the allocated 85,000 stickers have all been assigned; unless legislation increases that number, no more will be issued. Federal tax credits have also been offered to some hybrid buyers in the past, but these are beginning to phase out and only a handful of 2008 models qualify. Check with the IRS for details.

Hybrid vehicles cost roughly $3000-5000 more than their conventional counterparts. Does a hybrid pay for itself in the long run? Let's look at a specific example, the Honda Civic, and compare the conventional, gasoline-only, manual transmission 2008 Civic EX sedan to the 2008 hybrid Civic. These vehicles look identical, provide identical performance, and offer essentially identical features, with the exception of a moon roof on the EX. Based on November 2007 prices, the MSRP for the EX is $18,700; the hybrid is $22,700, a difference of $4000. The estimated highway mileage is 34 mpg for the EX, 45 mpg for the hybrid.

Using these numbers as the basis for a rough calculation, and assuming an average gas price of $3.50 per gallon over the life of the vehicle, the hybrid will save about $250 for each 10,000 miles driven. To recover the $4000 price difference, the hybrid would need to be driven 160,000 miles. At an average price of $4.00 per gallon, 140,000 miles would be required to break even. (Most hybrids carry a battery warranty of 80,000-100,000 miles. If the batteries or other critical components fail after that, the cost of repair could well exceed the value of the vehicle.)

Of course there are many other factors that may be considered, including potentially reduced maintenance costs on a smaller engine, the unknown price of gas in the future, optional features affecting the sale price, sales tax, individual driving patterns, and the greater efficiency of the hybrid at low speed. This "back of the envelope" calculation also ignores inflation and the value of interest earned on the $4,000 invested rather than spent on purchase of the hybrid.

The numbers may be quite different in comparing other makes and models of vehicles as well. The potential buyer may wish to perform similar calculations based on the specific vehicles under consideration. There are several on-line tools to assist in this cost comparison.

The TechKnow Guy ran some numbers for comparisons between various comparable models, taking into account some of the additional factors mentioned above. In most cases, assuming the typical driver accumulates about 100,000 miles on a new vehicle before selling or trading it, gas prices would have to reach or exceed $5 per gallon to justify the purchase of a hybrid based on cost savings alone.

Another way to approach this is to evaluate the sales price gap at the current price of gas. If the price of gas remains in the $3.50 per gallon range, hybrid manufacturers would need to slash the price gap between hybrids and comparable conventional vehicles to about $1500 or less for the hybrid to become truly economical. It remains to be seen if this can be accomplished and if so, how soon.

The economic factors associated with buying used hybrids are more complex to calculate as the condition, mileage, and optional features of each vehicle must be taken into consideration. In general, one would expect a smaller price differential balanced by reduced operating savings resulting from a shorter service life.

By the way, the same driving techniques that minimize fuel consumption in conventional vehicles are also effective in hybrids, only more so. Accelerating slowly, driving smoothly, and avoiding excessive speed can significantly improve hybrid gas mileage.

What's next? The near-term future of gasoline-electric hybrids promises incremental increases in performance and efficiency and a reduction in production costs, gradually narrowing the price gap with conventional vehicles. Current research in several other hybrid technologies may yield results further into the future. Some promising candidates are diesel-electric hybrids, ethanol (E85)-electric hybrids, hydraulic hybrids (compressed gas or liquid is used in place of batteries), and flywheel hybrids (energy is stored in a spinning flywheel rather than, or in addition to, batteries).

But the most surprising development may be the return of the plug-in gasoline-electric hybrid. Several manufacturers are working on a new generation of highly efficient, lightweight, plug-in hybrids that will run primarily on the electric motor and provide sufficient power and range to appeal to a fairly broad market demographic. These may begin appearing in showrooms within a couple years.

Beyond hybrids, in the arena of single-fuel technology, hydrogen has been widely touted as the clean fuel of the future. On the vanguard of hydrogen fuel technology is Honda's experimental Fuel Cell Vehicle (FCX), expected to enter limited production later this year. Hydrogen is converted from natural gas by a "home energy station" and used to power this all-electric, plug-in vehicle with a range of 350 miles. When not in use, the batteries can return excess electricity to the home, reducing the owner's electricity bill.

The FCX may be test marketed in southern California by this fall. It is unlikely to capture a large market share anytime soon, partly because of the cost of installing the natural gas "fill-up station" in the owner's garage. But look for this and other all-electric vehicles to attract consumers seeking a true zero-emission vehicle and complete freedom from the gas pump.

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