How hybrid electric vehicles can pay off

Dr. Edward Lovelace -November 26, 2012

This past year has seen the U.S. surpass 388,000 alternative vehicles sold representing 3 percent of new car sales and average market growth of 35 percent per year since 2001. Back then, the only hybrid electric vehicle (HEV) with annual sales over 10,000 was the Toyota Prius, which was first introduced in 19971.

While other alternatives have emerged, including plug-in hybrids (PHEV) and the extended range electric vehicle (EREV) subset, full electrics (EVs), hydraulic hybrids in the commercial vehicle sector, and other alternative fuel combustion engine vehicles; hybrids remain the predominant alternative option with the Prius selling more than100,000 vehicles per year over the last seven years, reaching a cumulative total of more than1,000,000 vehicles in 2011.2

As in previous years, several news reports have questioned and examined the value and future of HEVs. Now, as the U.S. enters the second decade of HEV sales, the question is still examined:

“Why do people buy a hybrid vehicle?”

According to the New York Times research compiled by, only two HEV models (and one diesel) have a fuel and maintenance savings payback for the incremental cost of the alternative powertrain technologies within a five- to ten-year period at current and recent historical high gas prices.3 Furthermore, payback is dependent on incentives including the federal tax credit up to $7,500.

These analyses are simplified by assumptions about the conventional vehicle purchase choice that consumers are comparing, which is often not the same vehicle in a non-hybridized option (e.g., your purchase choice may not be between a Chevy Cruze and Volt). But there is some evidence that with the current offerings, the market will begin to level off as early adopters, technology enthusiasts, green purchasers, and those with more complex return on investment assumptions become saturated as indicated by recent market studies suggesting only 35 percent of HEV owners are purchasing another HEV for their next vehicle.4

Moving forward
To continue growth of the alternative vehicle market some of the strategies that may be considered include:

  • Attempting to increase the appeal of the “alternative fuel” segment (e.g. who really needed thousands of songs in their pocket a decade ago, but there’s no denying how much people want that now)
  • Driving down the cost of the incremental technology
  • Focusing on sectors and technology solutions that maximize the financial payback.

The rest of this article will focus on the financial payback aspect, and the technology and application forces that are driving financial payback in some HEV sectors.

Financial payback and baseline MPG
Financial payback for the incremental cost of an HEV is primarily driven by a reduction in fuel costs. In the case of HEVs, the fuel costs are just the gasoline costs, while electricity costs should be factored in if using a PHEV, EREV or EV. So obviously payback will be function of miles traveled per year and miles per gallon fuel economy of the conventional comparison vehicle.

Consider an mpg-versus-fuel-used-per-year graph at 20,000 miles/year representing a high-mileage application. It is evident that to save an equivalent 500 gallons on a 10-mpg vehicle the HEV fuel economy must be 13.3 mpg, whereas to save the same 500 gallons versus a 20-mpg conventional vehicle the fuel economy must be doubled to 40 mpg.

Figure 1. Mpg improvements needed for the same fuel consumption reduction from different baseline mpgs.

Relevance to fleets
This type of comparison is particularly relevant to fleet operations. In fleet operations several drivers are at work: specific services need to be performed by the fleet, fuel costs are a bottom line profit margin driver for the business, and interruptions or changes to fleet operations can negatively impact costs. For these reasons, fleet managers typically focus on the purchase of the minimum number of different vehicle models to satisfy the business needs.

Increasing the volume purchases of each vehicle type and reducing the variety typically improves the cost efficiency of maintenance, operation and purchasing for fleets. Naturally when considering developing a “greener” fleet, managers prefer to look for a cleaner, more fuel-efficient version of the vehicles they are already using that serves business needs, that the field personnel are familiar with, and that can provide a reasonable financial payback.

Taking into account the previous discussion, one strategy of fleet managers is to begin by focusing on their lower-mpg vehicles with the highest annual mileage usage. These will have larger fuel cost reductions for the same percentage mpg improvement (or conversely for the same fuel cost reduction they will need a lower percentage mpg improvement).

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