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How much does cost matter in first wave of EVs?

Chevy Volt's $41,000 price tag caused some sticker shock, but the first buyers appear willing to pay. Will it lead to the mainstreaming of electric vehicles?

The Chevy Volt races to market.
The Chevy Volt races to market.

For the price of the Volt, you could buy almost two hybrids from competitors. But in these early days of electric vehicles, a cold economic analysis doesn't really apply.

Ending years of speculation, General Motors on Tuesday said the Chevy Volt will cost $41,000 or can be leased for $350 a month over three years with a $2,500 payment.

The price tag appeared to have surprised many people who wondered how a car with that price can be aimed at mainstream consumers, which is GM's intention in making an electric-gas hybrid with a longer range than all-electric cars.

Cars powered by electricity are going to be cheaper to run per mile than gasoline cars, which provides some comfort to electric vehicle buyers. Also, there is a federal tax credit of up to $7,500 for battery-powered cars and an energy bill unveiled on Tuesday could bring more incentives for charging infrastructure and manufacturing.

But in the short term, there's much more emotion at play than number crunching. Much like hybrid buyers, who rarely calculate a precise return on investment, initial purchases for electric vehicles are driven by peoples' desire to cut oil use, help jump-start a new high-tech manufacturing industry, or experience a different driving experience.

"The pent-up demand from early adopters is very high," said auto analyst Oliver Hazimeh, who is director of the global E-Mobility practice at consulting company PRTM. "All indications are that these cars are over-subscribed. When you add in the state and federal incentives, add the buzz and the hype, I think they will be a success."

GM expects to sell out its first year's production of 10,000 Volts and Nissan said that it already has a long waiting list for its electric Leaf, which runs entirely on batteries.

The key question for the auto industry is what happens in a few years after the early adopters, the people willing to pay more for new technology and a greener ride, already have their EVs. Here, the economics of fueling and daily driving patterns loom much larger in the decision.

Pulling out the calculator
Although there are many factors at play, in general, electric cars cost more upfront but have lower operating costs.

With the average gasoline price in the U.S. now at $2.75 and average fuel efficiency for new passenger cars at 32 miles per gallon, it costs 8.4 cents per mile to drive on gasoline.

But the price of oil is perennially volatile. A New York Times calculator from 2006 shows that with gas at almost $3 a gallon, the cost per mile could be as much as 11 cents and as low as 6 cents. With $4-per-gallon gas and 20 mpg, it's 20 cents per mile.

Battery-electric vehicles, such as the Leaf, cost less to operate. The 24 kilowatt-hour battery of the Leaf can take it about 100 miles. Using that as a crude approximation of economy, that's 2.8 cents per mile if you use the average U.S. retail electricity rate of 11.7 cents per kilowatt-hour.

An estimate for the kilowatt-hours per 100 miles done for the all-electric Mini-E was substantially better, meaning even lower cost. GM figures that if you drive within the Volt's 40-mile battery range, it will cost $1.50 a day to drive, compared to about $3.50 per day for a 30 mpg sedan.

Also, automakers anticipate that electric vehicles will be cheaper to maintain since there are fewer moving parts and, for battery electrics, no need for oil changes.

A consumer could estimate the cost of driving, figure in government subsidies, and calculate the payoff from the higher initial cost of electric vehicles, much of which is tied up in the giant batteries that move them.

The problem is consumers simply aren't accustomed to buying goods based on the total cost of ownership. Auto dealers, too, sell the purchase price and financing options. That's why automakers expect fleet operators to be more likely buyers for new auto technologies.

On top of that, electric vehicles require consumers to understand the differences in the technologies offered by automakers.

"Conceptually, at the 100,000-foot level, electrification sounds good. But when it comes to putting real money down on the table and making a commitment and possibly changing behavior if it's a plug-in, that's a huge amount of change," said Nancy Gioia, director of global electrification at Ford. "That's why we view one of the key elements is customer education and awareness."

Even when drivers have a good idea of how many miles they drive, many other factors will affect the fuel economy and range of battery-powered cars, including the temperature, driving habits, and things as mundane as hilly terrain. Electricity rates vary regionally more than gasoline, too, which significantly affects charging costs.

Price convergence?
With the Volt, GM appears to be nudging potential drivers toward leasing. The purchase price of the Volt is $8,000 more than the Leaf, but the leases are almost the same. "We find that most consumers want to hear monthly payment," said Joel Ewanick, vice president of marketing at GM on Tuesday.

GM's technology gambit is that appeasing "range anxiety" among consumers with an extended range electric vehicle will pay off for it in the long term. Batteries will take the car 40 miles on its 16 kilowatt-hour battery and then a gasoline engine runs a generator to sustain the charge, delivering a 340 mile range. That compares with about 100 miles for the Leaf and other battery electric cars.

In the coming years, the key to bringing down electric vehicle costs isn't so much a technological breakthrough as manufacturing scale and commoditization. Right now, many components such as battery packs are "one-offs," but the auto industry needs to standardize, much as it did with internal combustion engines, said Hazimeh.

With greater scale, the total cost--which combines the purchase price and operating costs--of electric vehicles and gasoline sedans could be about the same by 2018, said Hazimeh. But it's still not clear that mainstream buyers will buy based on total cost.

Having well known automakers, including Toyota and Honda, enter the electric vehicle market helps customer acceptance and familiarity. But most auto analysts estimate that electric vehicles and plug-in hybrids will be a relatively small percentage of overall auto sales, representing between a few percent or 10 percent by 2020.

So in the near term, the most accessible form of electrification will be traditional hybrids, which represent some of the most fuel-efficient vehicles available. But when it comes to plug-ins, people will be paying for the pleasure of going green and driving electric for some time.

The experience of the early EV drivers and the overall economic situation will play a big role on how these cars are accepted by the "wave of people after early adopters," said Joel Pointon, the plug-in electric vehicle program manager from San Diego Gas & Electric.

He noted that the purchase price of electric vehicles and home charging infrastructure can be knocked down very substantially from federal and state rebates and credits. San Diego, which is participating in a DOE-funded project for public charging stations, will have thousands of electric vehicles in two years and tens of thousands after that.

"The incentives we need are in place and there are more possible incentives on the horizon," Pointon said. "If things go very well with the early adopters, there's a very good chance of seeing a very robust market."