Electric Car Costs

As the p.r. campaign for the Nissan Leaf starts to heat up, we're going to be hearing about cost comparisons between electric vehicles (EVs) and existing types.

Here in Seattle, electricity costs 9.14 cents per kilowatt hour (kWh). The Leaf will use 24 kWh to go 100 miles, which works out to a fuel cost of $2.20 for 100 miles, or 2.2 cents per mile. Gas is on the expensive side here, at $3 a gallon for regular. For a gas-fueled Japanese compact of Leaf's size, I'd estimate 30 miles per gallon, which is $10 for 100 miles or 10 cents a mile. The new diesels get 50 miles a gallon, and hybrids range from 40 mpg to 50 mpg, making their cost per mile 5 cents to 6 cents.

So, the Leaf kicks ass, right?

Not so fast. The Leaf's "gas tank" is a lithium-ion battery, and they wear out. Nissan says it will lease the batteries separately. It's reasonable to include those leasing charges in the fuel costs. Nissan hasn't said what the lease rate will be. In Seattle, the break-even point relative to a gas car would be $78 a month in typical use (12,000 miles a year), and $28 a month relative to a diesel.

Hybrids Use Batteries Too

Even though hybrid batteries aren't leased, their replacement cost is properly included in fuel costs. How much are those costs? Hard to say. A new one from the dealer costs $3,500 including installation, but no one knows how long they last. Toyota warranties the Prius battery for 8 years/100,000 miles, and the word seems to be that in normal use they last quite a bit longer.

There are a few ways to skin that cat. One would be to assume that a typical buyer of a new Prius would never have to replace a battery, and therefore the Leaf's battery leasing break-even point relative to a hybrid would be the same $28/month relative to a diesel. Some other hybrids get closer to 40 mpg, so the Leaf battery lease break-even points relative to them would be $50 or $55 a month. Another method would be to add a penny or two a mile to hybrid fuel costs (and therefore $10 or $20 a month to Leaf break-even battery leasing rates relative to hybrids) to reflect the reduced value of a used hybrid emanating from the buyer's realization that he will be on the hook to swap out the battery.

In the real world, the battery cost issue doesn't look like much of a problem for the hybrids. All of this might be cause for Nissan to forget about battery leasing and grant the same warranty that Toyota does. In that case, there'd be no leasing charge to add onto fuel costs and the fuel cost comparisons would look great. Could it be that the leasing idea is just a security blanket for customers worried about battery life? If so, then Nissan's leasing fee should be nominal, no more than $5 or $10 a month.

The alternative might lie in the nature of a true EV's battery versus a hybrid's battery. As the sole power source, an EV's battery is larger, heavier, and more expensive than a hybrid's. What about its longevity? The gas engine in a hybrid could mask battery run-down in a way that would be impossible in a true EV.  Nissan will have a pretty good idea along those lines, so to the extent that battery leasing charges are more than nominal, the message will be that EV batteries won't last very long.

Other Gas/Diesel Costs

Anyone who thinks that the price of gas at the pump reflects its full cost is either blind, crazy, or Dick Cheney. Some time ago, I calculated the cost of the wars in Iraq and Afghanistan at 60 cents a gallon, or 2 cents a mile for gas cars and 1 cent for diesels. You'd probably have to double that cost in real life, to reflect opportunity costs, i.e., the benefits lost by not deploying the same resources in the productive economy.

So, we ought to raise the cost of gas to 14 cents a mile and diesel to 7 cents a mile. Which does not include the cost of the tears from the families of the dead in those wars, the agony of the wounded, the stress of division at home, or the irritation of having to learn about why Sunnis and Shiites hate each other and the Pashtuns hate us.

Then there is pollution, both smog that aggravates heart disease and asthma, and carbon dioxide that causes global warming. Gas and diesel are culprits, but so are the coal-fired power plants that will make electric cars go. My strong gut feeling is that internal combustion engines, in the aggregate, are worse for the environment than coal fired plants, but I don't know the numbers.

Of course, if we had good leadership, a reasonably clean government, and clear vision, we'd erect windmills to provide the fuel for EVs. But that is almost certainly an impossible dream, given the sorry state that we're in. Alas, for the foreseeable future, just about everyone outside of hydro-powered Seattle is going to have to assume that EVs will add to pollution generated by coal-fired power plants, and waste from nuclear plants.

The Bottom Line

Nissan has said that the cost of battery leases will not bring fuel costs for its Leaf above that of gas-powered cars. Nevertheless, I expect that the first Leaf will not be a value proposition. It'll cost more than a conventional car, and I expect that fully-loaded fuel costs will be higher than a diesel and close to those of a gas-powered model, if not higher.

But that's not unusual for the first version of a new technology. Over time, I expect the comparison to move inexorably in favor EVs, as gasoline gets more expensive and volume production of EVs and components brings costs down. EV mechanics are radically simpler than gas and diesel vehicles, and hybrid batteries are already getting cheaper. Alternative forms of electricity storage -- larger-scale capacitors -- are on the drawing boards, and they'll be cheaper and offer much better range.

You can expect the oil companies to mount a stealth p.r. blitz against EVs soon. All kinds of numbers will be thrown around. Whopping lies will be told, and the stenographers of the media will be all too happy to pass 'em along under the guise of "reporting" on the "controversy behind the numbers." But from what I now know, I'll be in the EV camp.

Addendum: "Miles Per Gallon"

EVs face an issue when making fuel economy comparisons with conventional vehicles. Because a true EV doesn't use any gas, any "miles per gallon" figure is theoretical, based solely on comparing the costs of electricity and gasoline. And then there is the battery cost issue; should that be included in an "mpg" figure, or not?

At 2.2 cents a mile for electricity, and gas at $3 a gallon, and without battery leasing or replacement included, the Nissan Leaf gets "136 mpg." If gas goes to $4 a gallon and electricity stays the same, then the Leaf gets "181 mpg." In the summer of 2007, I paid $5 a gallon for regular at a station near L.A. That year, the Leaf would have gotten "227 mpg." All without using a drop of gasoline.

The point: Beware of "MPG" claims for pure EVs. Think "fuel cost per mile" instead.

An Electric Game Changer

One reader of this posting will recognize himself. We worked together in the investment business in the '90s, and he'll remember one of my mottos, which was to look for products and trends that would change your life.

There were some life-changers in the 1990s and this decade. Falling interest rates and budget surpluses during the Clinton years, laparascopic surgery, cellphones, Microsoft Windows, video gaming, visual computing (think "You Tube"), broadband, the convergence of computers and communication (think "the Internet"). All of these things have had major impacts on people's lives, and those who saw them early made a pile of money.

I see another life-changer coming soon: the electric car.

I've been interested in them for quite a while. A couple years ago, I drove to the middle of Oregon to look at someone's converted Ford Ranger pickup truck with a useable range of 25 miles on a charge. It was a long drive and a friendly conversation, but the vehicle wasn't reliable enough to justify the purchase. I wonder if the seller ever thinks about the guy who drove 300 miles from Seattle, didn't buy his truck, and advised him to pay off any debts because we were heading into a real estate crash and depression.

The reliability issue is about to be solved, and usable range will be extended to 100 miles. The vehicle is the Nissan Leaf, a subcompact that looks a lot like a Toyota Yaris or a Honda Fit. The main difference is that is doesn't have a gas engine. It's not a hybrid, but a pure electric car.

I saw one on display in Seattle last weekend. Nissan says they'll start selling them here at the end of next year. I hope to be among the first retail customers. Right about the same time, Chevrolet will introduce the Volt, a hybrid that will get 40 miles on a charge, with batteries then replenished by a small gas generator on board. A bunch of other real car companies have said they'll be introducing electric vehicles in 2011 and 2012.

Not All Electrons Are Created Equal

I've never been much of a believer in the current generation of hybrids like the Toyota Prius or Ford Fusion. They get 40 to 50 miles per gallon, a level of economy that I regard as trivial. Plug-in vehicles are in a different category, especially the all-electric models.

Nissan's forthcoming Leaf will be accompanied in the Puget Sound area by charging stations that, in 25 minutes, can recharge the car to 80% of capacity. At home, it'll fully recharge overnight on a 220-volt circuit. In the winter, with the heat on, the range will be 70 miles. In summer, with the A/C blasting, it'll be 80 miles. For all-city driving, the range will be 10% higher. The car will cost about $30,000 including the battery.

The average American motorist drives 28 miles a day. Give that person an electric car with a 100-mile range, and you've eliminated his gas consumption, period. That's the game changer. Before very long, you'll have a whole group of drivers who don't use any gasoline at all.

And remember, this is only the beginning. Once these things get up and running, we're going to see rapid improvement in battery technology. Performance will improve and costs will decline. Electric propulsion systems are inherently simpler and cheaper than gas. The guts of the new all-electric cars are going to ride a cost and performance curve that will look an awful lot like personal computers. I bought my first new computer in 1990 for $3,000. Today, I can get a much better one for $600.

(Incidentally, I've never been any kind of fan of the Tesla Roadster, a criminally overhyped converted Lotus Elise produced in small batches by a Silicon Valley boutique. I have been waiting for car companies to get into this game. Nissan and GM, and the next set of entrants, are car companies. Unlike Tesla, a car company -- even GM -- won't deliver a vehicle without working brakes and a range of one-fifth the claimed level, two years late and 20% more costly than expected, at a loss of $40,000 per unit.)

The Implications of the Shift

Oil companies are not going to like this very much at all. Demand for their product is stagnant due to the current economic depression, and commodity prices are always set on the margin. I expect to see much lower gas prices within the coming decade, as demand begins falling. By 2030 or so, gas consumption in the U.S. is going to decline by 75%. Just wait.

The coal companies, on the other hand, will probably do well, because those cars will need electrons. An intelligent government would be racing to erect windmills to supply the new power -- windspeeds are higher at night, when those vehicles will be recharging, and the U.S. is chock full of windy spots. But the reality is different: We live in a deeply corrupt country, and Big Coal will use its influence to block meaningful investment in alternative power generation. There will be a few prominent wind demonstration projects, but I don't think we'll see widespread implementation.

(An aside: Seattle is a special case on the electricity front. We get 90% of our juice from hydro, 5% from wind, and 5% from hydrocarbons burned during peak demand periods. Electric vehicles will be charged mainly at night, and won't cause the burning of any additional coal or natural gas. Where I live, an electric car really will be a "green" alternative. Major smugness points for this one!)

There is also the issue of highway construction and maintenance. It is now financed mainly through gas taxes that average about 40 cents a gallon. Stagnant gasoline demand has already pinched the funds, but they ain't seen nothin' yet. I expect a mileage-based system to replace gas taxes for owners of electric vehicles.

There are also potential foreign policy implications. If lightning were to strike and the U.S. also got serious about alternative forms of heating and cooling (through the use of ground-source heat pumps I discussed in this post a while back), the U.S. could turn its back on oil imports and the trade deficits and geopolitical messes that go with it. Not that I think this will happen, mind you. There are too many other interests conspiring to keep us in the Middle East.

The Risks to This Forecast

There are all kinds of reasons to doubt my enthusiasm. After all, the Nissan Leaf gets only 100 miles on a charge. Even people who average 28 miles will want more of a reserve. And what about long trips?

But those aren't objections I worry about. For starters, there is more than one market for cars. Electrics will begin as second vehicles. As performance improves and costs fall, you'll see more people with a primary electric vehicle. Gas-electric hybrids with meaningful electric-only ranges will appear. (Note to General Motors: 40 miles on the Volt simply isn't enough. Your new car is neither fish nor fowl, and I think it's going to flop until you extend the battery-only range.)

The bigger risks are the following: First, that the Obama administration's weak responses to the depression prove ineffective, and the current malaise deepens so dramatically that even a life-changing innovation fails to make an impact. It has happened before. Television was ready to roll in the 1930s, but the depression and then the world war kept it on the shelf for 20 years.

Second, the oil companies find a way to block the change. At the very least, people should get ready for a wave of anti-electric publicity, focusing mainly on range limitations and the expense of the new vehicles, and whatever initial performance quirks emerge as the technology is rolled out to the masses. They'll be labeled as a type of "greenwashing," simply a relocation of the smokestack from the vehicle to the local power plant.

If they are as popular as I think they'll be, electric cars will upset some big, rich apple carts, one of which is piled high with money that routinely makes its way to Congress. This is one area, however, where American corruption could benefit the rest of us. True, the oil companies will be giving it their best shot. But so will Big Coal, and so will the electric utilities. If I were a typical member of Congress who cares about nothing but the money, I'd have my hand out to all of them.

Cynical as I might be, I'm also an optimist. I realize that many of you who are reading this will scoff at that idea, having heard me go on and on (and on) with my doom and gloom about the economy and politics. But amid all of the well-justified discouragement, our best minds have a way of producing life-changing ideas and products. I think the electric car is going to be one of them.