Where electric vehicles make the most dollars and sense

How, and how quickly, battery electric vehicles (BEVs) will make sense from a household financial perspective, as well as an environmental one, is a question that interests a lot of people these days—consumers, investors, utilities, transportation planners, manufacturers. BEVs clearly bolster energy security, mitigate climate change, and reduce air pollution. But there are direct financial benefits to owners as well: BEVs offer inherent fuel savings benefits because they are several times more efficient than comparable gasoline vehicles, and BEV owners can save thousands of dollars on powertrain, driveline, and brake system maintenance costs. BEVs also avoid time-related refueling costs, as the majority of charging occurs at home. The question of how those benefits add up is practically important because the greater upfront costs are often depicted as a major barrier limiting widespread deployment; most BEVs cost $5,000 to $15,000 more than comparable non-electric vehicles.

Our recent paper on electric vehicle promotion activities in U.S. cities quantified various direct and indirect benefits of owning and operating BEVs. Since publishing that paper we’ve continued analyzing the total operating costs of BEVs. One thing we’re finding is that over a six-year period a typical BEV requires about $5,000 less in fueling costs than a non-electric counterpart (i.e., charging from the grid versus filling up on gasoline). This valuation is based on a few key assumptions: typical BEV fuel economy (miles per gallon-of-gasoline equivalent) is more than three times greater than comparable gasoline models, and average 2014 fuel prices are 11 cents per kWh of electricity and $3.48 per gallon of gasoline. We are also finding that over the same timeframe, a typical BEV requires about $1,700 less in maintenance costs, largely due to the simplicity of electric powertrains.

These inherent characteristics of BEVs significantly reduce the cost differential between electric and non-electric vehicles. Government incentives further reduce this gap. Purchase incentives, such as tax credits or rebates, exemptions from annual taxes or registration fees, and financial support for service equipment installations all directly reduce the cost of ownership. Extensive public charging infrastructure, carpool lane access, and local parking benefits indirectly reduce total costs. The most prominent BEV incentive is the federal tax credit of up to $7,500 per vehicle.

Offering attractive purchase incentives is one of the most effective policy actions that governments can take to help accelerate BEV deployment. In addition to the federal tax credit, many states also have substantial consumer purchase incentives. Colorado and California, for example, offer some of the largest purchase incentives — $5,000 and $2,500 respectively. Delaware, Connecticut, and Tennessee each recently began offering purchase subsidies ranging from $2,200 to $3,000 per vehicle. Similarly, Massachusetts recently allocated an additional $2 million to the electric vehicle program, which provides purchase rebates up to $2,500 per vehicle. Oregon too is considering offering a cash incentive worth up to $3,000 at time of purchase. However, purchase incentives are very expensive for governments to offer; just as some states are implementing or strengthening purchase incentives, others are removing them. Illinois and Georgia both recently revoked purchase incentives. Similarly, the Texas purchase incentive program recently expired.

If you add up the effective benefits of existing state and city purchase incentives, public charger availability, carpool lane access, registration fee exemptions, and home charger installation support (which we’ve done here), one thing that becomes clear is that the total cost of owning and operating a typical BEV over a six-year period varies significantly by location. The figure below summarizes the total cost of ownership—vehicle purchase cost, electricity and fueling cost, other annual costs, and policy incentives—for BEVs in the 25 largest U.S. metropolitan areas.

State and city policy benefits and total cost of ownership for BEVs in 25 U.S. metropolitan areas, compared to hybrid and non-hybrid gasoline vehicles.

As the figure shows, Atlanta, Denver, Los Angeles, and San Francisco have effective ownership costs below the conventional non-hybrid vehicle after policy benefits are included. (For consistency with our earlier analysis, the data are for policies in place at the end of 2014; some states have since cut incentives while others have added them.) The other 21 cities have total six-year ownership costs that are higher than the comparable non-hybrid, but lower than that of the hybrid. Clearly, policy incentives play a major role in reducing the cost differential between electric and non-electric vehicles.

To date, technology development and fuel costs have helped reduce the total cost of owning and operating a BEV, which is now less than that of a comparable gasoline model in some cities. Studies suggest that BEV costs may fall further; battery and manufacturing costs, which make up a significant share of total vehicle cost, are decreasing at about 6% each year, according to the National Research Council and other recent research.

But public policy support has also been crucial to achieving that cost parity, or superiority, as the chart shows. And extension of federal, state, local, and public utility BEV promotion policies will be crucial for continued growth through 2020. That’s one reason why the recent formal launch of the International ZEV Alliance – a consortium of governments which aims to accelerate global adoption of electric and other zero emission vehicles by setting ZEV targets, sharing data and best-practice government actions, and increasing education and awareness – is such an encouraging sign.