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The Affordability of Plug-in Hybrids

The numbers support it: plug-in hybrids are inevitable.

By Peter M. Chase

Abstract: This analysis addresses the economic considerations in a plug-in hybrid electrical vehicle (PHEV) versus hybrid electric vehicle (HEV) purchase decision. Since a PHEV is essentially a HEV with additional batteries, the decision is one of whether the investment in these additional batteries would be profitable. Curves are presented that show the return on investment (ROI) for a range of battery and fuel prices, both gasoline and diesel.

Introduction

The attraction of the PHEV is that its batteries can be charged from the electrical grid, preferably at night at low off-peak rates, and then the PHEV uses this stored electricity, instead of fuel, for a portion of its mileage during the following day. The direct benefit to the PHEV owner comes from the fuel savings.

The use of less fuel would also provide benefits to the general public. These benefits, which are the bases for government subsidies for PHEVs, relate to the environment, CO2 emissions, energy security, national economy and balance of payments.

Another beneficiary of PHEVs would be the power companies, who are delighted with the prospect of a major market for off-peak power that requires no meaningful structural investment by them until PHEVs represent a large percentage of the light-duty vehicles (LDVs), cars, pick-up trucks, vans and SUVs, on the road. For the US as a whole, Pacific Northwest National Laboratory (PNNL) pegged this percentage at 73%.

The major losers in the move to PHEVs would be the oil supply chain – petroleum exporting countries, producers, service companies, shippers, refiners and retailers – who rightly see electrification of the transportation sector as a threat to their business.

In this analysis, two sets of ROI curves are derived, one for gasoline PHEVs and one for diesel PHEVs. There is also a brief discussion of battery electric vehicle (BEV) economics.

Methodology

For the calculation of the ROI curves, the net savings on energy costs, fuel savings less the electricity cost, represents the return and the cost of the additional batteries in a PHEV, compared to its HEV counterpart, represents the investment. Curves for ROI are plotted against battery costs and fuel costs, with the following assumptions:

Interest calculated annually; 10-year battery life with zero residue value;

Batteries deliver 2,500 deep discharge cycles over 10 years, or 3,650 days;

After battery depletion, the PHEV delivers the same mpg as its HEV counterpart;

Electricity costs 11¢ per kWh - the average US residential rate as of Nov 2009 (European and Japanese rates, are higher, but would be comparable with the expected off-peak charging incentives); and,

1 kWh displaces 0.089 of a gallon of gasoline or 0.068 of a gallon of diesel, based on CalCars’ Priuses and the 30% greater efficiency of diesel vs. gasoline ICEs.

Results

PHEV costs graph

PHEV costs graph

The resultant ROI curves are shown in Figures 1a and 1b for gasoline and diesel PHEVs, respectively. Since the ROI curves are linear, their sensitivity to fuel prices and to electricity rates is a constant. For example, in the case of a gasoline or diesel PHEV, a $1 per gallon increase in fuel would move the battery breakeven price point up by $222 or $170, respectively; at a 10% ROI, the move up would be $137 or $104, respectively.

A 1¢ per kWh increase in electricity costs would have the same effect on ROI as a decrease of 11.2¢ or 14.7¢ in the price of a gallon of gasoline or diesel, respectively.

The ROI curves can be used to directly approximate payback time. For example, at an ROI of 10%, the payback time is about 6 years since the ROI = 10% line is about 60% of the height of the 10-year breakeven line; for an ROI of 30%, the payback time is about 3 years.

The price of motor vehicle fuel varies widely around the globe, as shown in the table of gasoline and diesel price data from November 2009. As per this data, the price of a gallon of gasoline varies between $2.65 in the US, $5.38 in Japan and $6.94 in Europe. Being highly dependent on fuel price, the ROI will also vary widely for different regions of the world. For example, at a battery price of $1,000 per kWh and recent gasoline prices, the ROI for a gasoline PHEV would be decidedly negative in the US, marginally negative in Japan and about 5% in Europe.

For any given fuel price, the ROI curves for a diesel PHEV are lower than that for a gasoline PHEV since each kWh of electricity displaces less diesel fuel than gasoline. In addition, compared to gasoline, diesel is 17% cheaper in Japan for all vehicle types and 11% or 25% cheaper in Europe for private and commercial vehicles, respectively.

Table. Fuel Prices, in $ per US Gallon




Country

Gasoline

Diesel


w/o VAT (for EEC
commercial use)

w/ VAT

France

$7.15

$4.96

$5.93

Germany

$7.42

$5.25

$6.25

Italy

$7.27

$5.28

$6.34

Spain

$6.06

$4.71

$5.47

UK

$6.81

$5.98

$6.88

Japan

$5.38

$4.49

$4.49

USA

$2.65

$2.79

$2.79

European
Averages

$6.94

$5.24

$6.17

As the medium and long-term trends are up for fuel costs and down for battery prices, the ROI for PHEVs is poised to improve markedly. However, as the recent banking crisis has reminded us, return on investment must be weighed against risk.

Investment Risk

An investment with a low return demands a low risk while a high return investment will tolerate a high risk. At the moment, the price differential between a PHEV and a HEV, even with subsidies, is a low return investment that demands a low risk. The primary risk with a PHEV lies in the battery technologies.

Compared to the li-ion batteries used in laptops and cell phones, the PHEV batteries will typically use a more stable li-ion chemistry, based on less expensive materials, have a larger cell format and operate in more extreme environmental conditions. Does this greater stability translate into a battery that will be safe enough, last long enough under real world conditions, deliver enough discharge cycles and be cheap enough to enable a viable market for PHEVs?

Based on lab testing, the existing applications of these PHEV chemistries and the expected learning curve, the answer would be, “Yes.” However, the perceived risk will only fade when more and more PHEVs prove themselves on the road. Subsidies and a strong battery warranty should spur enough initial PHEV sales to provide this proof.

Whither BEVs?

A BEV is a PHEV without an internal combustion engine (ICE) and its ancillary components – exhaust system, fuel system et al. (The Tesla Roadster is a BEV but it is not designed for economy and is excluded from this ROI-oriented discussion.)

A BEV could be a vehicle used for applications with a somewhat fixed daily range. These applications include local deliveries, commuting and garbage collection. For example, 91% of the 146,000 USPS delivery vehicles drive less than 30 miles per day and 69% drive less than 20 miles per day.

Not having an ICE, a BEV would be cheaper, lighter and roomier than a PHEV with the same all-electric range (AER) and it would have a very reliable, long lasting drive train. Routine maintenance would consist of changing the wiper blades, rotating the tires and a brake job every 100,000 miles or so. Also, after 10 years or so, a BEV would have a good residual value since it could be completely rejuvenated with a new battery pack, better and cheaper than the original pack. (Similarly, a used PHEV could be converted to a born-again BEV.)

Range has been flagged as an issue for BEVs but it would be alleviated if charging, even at 15amps and 110 volts, or 6 miles for each hour of charging for a mid-size car, were available at one’s travel end point – shopping mall, parking garage, or work. As a second car, the limited range of a BEV is not a big issue since an existing PHEV or ICE vehicle could be used for longer trips.

In summary, BEVs would be more economical than PHEVs in some niche applications and the number of these niche applications will increase as batteries get better and cheaper and a public charging infrastructure develops.

PHEVsare Inevitable

With the trends in fuel and battery prices, it is a matter of when, not if, the PHEV market takes off. As the economy recovers, rising fuel prices alone will eventually justify healthy PHEV sales, beginning in Japan and Europe due to their fuel prices being much higher than in the US. The conjunctive effect of falling battery prices will hasten this eventuality. Certainly, the automakers have finally realized this, as witnessed by the daily flurry of EV-related announcements.

As for the when the PHEV market takes off, it should be sooner than the 2020 to 2030 timeframe. For example, with gasoline prices at $1 per gallon more than today and a battery cost of $500 per kWh, the ROI would be 1.3%, 18.7% and 27.1% in the US, Japan and Europe, respectively. With ROIs of this order and a proven battery technology, the PHEV market will take off. These conditions may well happen in 5 years and are quite likely to happen within 10 years.

The ROI calculations assumed no variation in the annual return due to changes in fuel or electricity prices. However, it should be noted that, if these energy prices trended upwards by approximately the same percentage over the ten year battery life, then there would be a net improvement in the ROI since the effect of a fuel price increase would be several times that of a similar percentage increase in electricity prices.

The ROI curves also might help to explain how the DOE came up with $200 per kWh, 15-year life and 5,000 cycles as key long term goals for PHEV batteries. They obviously used a much lower price for gasoline than $2.65 to derive these goals.

Times Article Viewed: 12683
Published: 10-Feb-2010

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