It’s been a while since the last post in this series on electric vehicles (here are parts one, two and three), but this post is number four. Today, I’m looking at the costs of these cars – both their running costs, and their capital costs. Again, I’ll abbreviate plug-in hybrid electric vehicles to PHEVs, and battery electric vehicles to BEVs – these are the “full” electric vehicles which don’t have an engine for backup.
This post is about the cost of electric vehicles – the main reason they’ve been so slow to take off. These cars are much more expensive than conventional cars, unless there are hefty subsidies involved.
Capital (“Up Front”) Costs
The high capital cost of EVs is driven in large part by the batteries. The latest generation of vehicles use lithium-ion batteries, which are much better at storing energy than the traditional lead-acid batteries you’ll find in your Corolla. They’re also much more expensive, although the price is falling and will continue to do so. The graph below shows some scenarios for price decline:
Battery costs are usually measured in terms of a cost per kilowatt-hour (kWh) of energy storage; a PHEV might have a battery with 8 kWh, and a BEV might have 30 or 40 kWh. When I was writing my thesis a couple of years ago, costs of up to USD $1,000/kWh were being floated around, although there was and continues to be a wide range of different opinions. Adding to the uncertainty, early EVs will have been sold below cost, or at least at less-than-economic returns to the manufacturer, as they started to develop the technology. It seems to be generally agreed that battery costs are now less than USD $500 per kWh, although manufacturers would obviously want to make a profit on those costs at some point, and there are taxes and other considerations as well.
So, what kind of price difference would that mean for a new PHEV or BEV in New Zealand? Let’s say that the car manufacturers are happy with a battery selling price of USD $500 per kWh, around $570 in NZ dollars. Adding GST onto that brings the figure to around $650. Therefore, an 8 kWh PHEV battery could cost $5,200, and a 33 kWh BEV battery might be around $21,450 – still not cheap by any measure. Things get a little less straightforward when you consider that the PHEV will cost a little more due to having both an electric motor and an engine, and the BEV will cost a bit less since its electric motor is quite a bit cheaper than the typical engine.
As discussed in part two, electric motors use a lot less energy than a traditional car engine. This means lower running costs. But how much lower? From my earlier posts, a vehicle running on electricity could use around 20 kWh to travel 100 km. To see how much that costs, simply look at your power bill. Across New Zealand, households pay an average of 28 cents per kWh, according to the MBIE. The “marginal” cost you’ll pay for an extra unit of electricity, though, will be a bit lower. I’ll use a figure of 22 cents per kWh.
This gives a cost of $5 per 100 km – certainly much cheaper than a typical petrol car, which uses 10 litres of petrol to travel 100 km, costing around $22.00 at current petrol prices.
However, a big chunk of the petrol price is tax, comprising a contribution to the National Land Transport Fund, and a bit to ACC as well. According to the MBIE, that’s around 77 cents per litre once GST is added on, or $7.70 per 100 km. Since EVs also contribute to road wear and tear (and demand for new investment), and to accidents, they should also be paying something for this. We obviously can’t tax them through petrol, and it’d be pretty hard to do it through electricity prices as well, so the logical way to do it is through Road User Charges. Indeed, EVs would normally be subject to these, but they’ve received an exemption for the time being (to encourage their uptake). Perhaps that’s a sensible move, but it’s probably not something we’d still want to do in 20 years time when a growing number of cars are electric, and drivers of old cars will need to pick up the slack and pay more tax.
As I’ve written previously, the long-term solution may be to make Road User Charges universal, although there are issues with this as well. For now, I’ll just note that EVs might either be exempt from Road User Charges (i.e. not directly contributing to the upkeep of the transport network and accident costs), or they might end up paying the full charge. This would more than double the running costs of BEVs, although they’ll still be cheaper than petrol cars.
Sitting awkwardly in the middle of all this are PHEVs. At the moment, they get a somewhat inconsistent treatment. Petrol-electric hybrids, for the time being, pay tax through their petrol consumption. In my thesis, I assumed they average 3 litres of petrol per 100 km, although this will vary substantially. Drivers who only do short trips could end up using the electric motor for nearly all their driving. Regardless of the actual figure, they may end up paying very little tax.
Diesel-electric hybrids, on the other hand, have to pay Road User Charges, so they end up paying the full whammy of costs (once the RUC-petrol tax discrepancy gets resolved in the next few years). That’s a real disincentive from buying diesel-electric PHEVs, so we’d expect them to be much less popular here.
The graph below compares the lifetime running costs of several kinds of car, under several taxation scenarios. As you can see, RUCs or the lack of them make a big difference. The Excel file is here if you want to play around with it.
Getting the costs to stack up
Setting aside environmental concerns, “range anxiety”, and all the rest, consumers will be prepared to pay the higher capital cost of electric cars, if they’re going to save enough money on their running costs. In the graph here, for a car travelling 12,000 km a year for 25 years (perhaps a bit on the high side), and using an 8% discount rate, you’ll pay nearly $30,000 in running costs for a petrol car, compared with $7,000 for a BEV which is exempt from Road User Charges forever.
That’s a $23,000 difference, for quite an extreme case. For some of the other BEV/ PHEV combinations, the difference is $10,000 to $15,000. The difference would get smaller with a higher discount rate, or with less travel.
Overall, if you compare these running cost savings to the extra capital cost, it looks like the financial argument for BEVs and PHEVs isn’t quite there yet.
Battery costs will continue to decline, driven by economies of scale (i.e. production scaling up) and technological advances. It’s hard to predict how fast costs will come down, or by how much. Someone might invent a transformational new battery chemistry (rather than lithium-ion), or we might simply see incremental advances.
There are ways of reducing this issue: for example, customers could lease electric vehicles, or buy the vehicles but only lease the batteries. This kind of scheme could allow the buyer to avoid the high up-front cost, which could be recouped over time through the running cost savings. Electricity providers would find this a straightforward extension to their business, and I believe a number of companies in New Zealand would look at running these schemes.
At current price levels, BEVs have running costs that are only marginally lower than petrol-electric PHEVs, because these hybrids are only taxed on their petrol consumption. Furthermore, even though diesel-electric PHEVs will be more efficient than petrol-electric PHEVs, they are likely to have higher running costs.
BEVs currently have an exemption from Road User Charges, to encourage their uptake over the next few years, but there’s no reason why this should be the case in the long term – they use the road network, and should pay their share.
Since the costs associated with the road network are primarily dependent on the weight and number of vehicles using the road – and not on the litres of fuel used – the Road User Charges scheme arguably provides a more equitable way of charging for road use.