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Why Are Electric and Hybrid Cars So Freaking Expensive?

Is it backroom shenanigans from the big gas companies, or what?

Ever gone shopping for an electric car? Tesla Model S aside, you seem to get very little car for an awful lot of money. Why? It’s not like electric golf carts are expensive! Electric cars are less convenient — smaller range, longer to charge — than a gas-powered car, and yet they’re more expensive. We all know they’re the future, and have been for a while, so why do prices remain so high for an electric car versus a comparable car with an internal combustion engine? In short, just why are electric cars so expensive? Alongside Matt DeLorenzo, a senior managing editor at Kelley Blue Book who knows a heck of a lot about cars, we’re charging up some answers.

Okay, why are electric cars so expensive?

It’s really all about the battery. An electric-vehicle battery is big, and boy does it cost a lot of money. If people want more range — more miles on a single charge — the price goes up. A Nissan Leaf in the thirty-some-thousand-dollar range goes 150 miles on a charge. But the Leaf Plus, which can go 226 miles on a charge, costs several thousand more.

The cost curve to electric cars bends down with volume, as more batteries are built and more cars are sold, but there’s still a disparity between the cost of an electric-vehicle battery pack and internal combustion engine technology.

How much is the battery?

DeLorenzo says a good rule of thumb is to look at a car that’s offered in both an electric and conventional motor, and note the price difference. Take the Hyundai Kona: The entry-level version is around $20,000. The EV version of the Kona is around $17,000 more! Even with a federal electric-vehicle tax credit of $7,500, there’s still a $10,000 price difference.

This isn’t a perfect comparison, as the EV version is more loaded with features than the base model. But even the well-equipped gas-powered model is about $10,000 cheaper than the electric version. “Until that battery cost comes down significantly, there will be a cost advantage to buying a conventional gas fueled vehicle,” DeLorenzo says.

And that’s all down to the battery?

Pretty much. Cost-wise, you can compare the electric motor and drive system of an electric vehicle to the transmission of a gas-powered car — and the battery to a gas-powered engine, DeLorenzo says. And that difference right now stands at about $10,000, in this example.

About that tax credit — it helps, right?

Sure. They play a role in the adoption of EVs so that buyers aren’t as intimidated — although they still have to come up with the full price, as DeLorenzo says the tax credits come in only after purchasing the vehicle. But the problem with these federal tax credits is their structure: They’re designed to phase out when a manufacturer sells more than 200,000 electric vehicles. They’re already phased out of Tesla and GM, and will soon be phased out of Nissan, DeLorenzo says. 

That seems counterintuitive if you want to encourage sales, no?

Yeah, it looks to be the result of a flawed assumption by the lawmakers. The thinking was that once lots of people bought EVs and they were manufactured at scale, the price would come down to where they’d compete on price with gas-powered cars, in which case there’d be no need for an incentive. However, that’s clearly not happening yet! 

There’s another element to this, though, which is the fact that this additional cost for an electric engine — or rather, the battery — can more easily be borne by luxury car buyers. Some affordable-car manufacturers offer EV versions of gas-powered cars, like the Fiat 500 or the Volkswagen e-Golf. But for cars in these classes, the cost disparity becomes much more evident to the buyer than in the luxury category, where a manufacturer can hide some of that extra cost within the brand’s cachet.

What about trucks? Are they going to be a game changer when Joe Sixpack gets on board?

DeLorenzo doesn’t think so. The Ford F-series is the most popular line of vehicles in the country: More than 60,000 are sold each year. However, electric trucks will be more like Tesla Model S’s, he says: They’ll appeal to a certain segment of buyer, but they aren’t meant to be mass-market vehicles. Electric trucks have the same limitations as electric cars (higher price, shorter range, longer refueling/recharging time), and then some: Their payload and towing capacity will be diminished, and will result in a trade-off with the already-precarious battery life.

“Certainly there are a lot of people who are willing to build and sell them, so you’re going to see a lot of them on the market,” DeLorenzo says. “I just don’t see a lot of them being sold in the same numbers that the current pickup trucks are being sold.”

So wait, are electric cars even profitable?

Not for now. DeLorenzo says there’s very few, if any, auto manufacturers making money off of them at this stage. When Sergio Marchionne was head of Fiat Chrysler Automobiles, he called the Fiat 500 his “compliance car” — in other words, the reason to sell those was to meet California’s electric vehicle mandate, which allowed him to sell other cars in the state. 

“Some of them look at it as a cost of doing business so that they can support their more profitable product lines,” DeLorenzo says. “So if I have to sell two Fiat 500s to sell one Ram pickup, I’m going to do it! Because I’ll more than make up that money on a Ram pickup, where I have much higher profit margins.”

Yikes. Is there any other incentive for an automaker to make electric cars at this point?

Oh sure. On the one hand, they see regulatory and environmental laws eventually becoming so strict that they have no other choice, and they need to start working on them now. That’s because they see that electric is the future, just as you do. So they’re covering their bets. It’s a defensive move until a technological breakthrough happens that allows electrics to compete on price and convenience with gas-powered cars.

That’s because any big new technology opens the doors to new competitors to come into the market, like Tesla has done. If there was some kind of technological paradigm shift that allowed companies to outsource an electric motor, the traditional car companies would be inundated by new competitors who are only around to make electric cars (and who don’t have to bother with also making gas-powered cars). So the traditional automakers want to be there when it happens, and working on electric cars now is a defensive move against both the tighter regulations of the future and the marketplace competitors of the future.

What about the fact that there’s less money to be made on an electric vehicle post-sale, on all the maintenance and stuff?

It’s true — there’s no oil to change, brakes last a hell of a lot longer (because of regenerative braking technology), and there are just fewer items to service on an electric car. Someone stands to lose money on this! 

But that someone will be the dealers, not the manufacturers. Sure, manufacturers make a bit of money on parts, but the loss of service revenue isn’t nearly enough to disincentivize the car makers from making electric cars, DeLorenzo says. It’s a conundrum left to the dealers to figure out — who already compete against the quick-change oil industry for service anyway.

What about hybrids?

They’re looking good right now. The battery is a third the size of an all-electric, which is good for the price (if not for a very long range), and they also make long road trips more realistic, as they take gas. They’re eligible for some tax credits, too. They serve a useful purpose of allowing the manufacturers to meet regulatory mandates as well. Right now Toyota sells more hybrid RAV4’s than they do the gas-powered version. Generally, DeLorenzo says the premium for hybrids is only a couple thousand dollars more than for an equivalent gas-powered vehicle. 

So is there some kind of conspiracy by the oil companies to keep electric vehicles down, or is there something else holding them back?

What’s holding them back, DeLorenzo says, is the average consumer. They have no more than $25,000 to $30,000 to spend on a new car, and they want reasonable fuel economy and a comfortable car. They’ll consider an electric vehicle if it’s cost-competitive, but right now there isn’t a vehicle out there that meets those criteria for most people. That’s, of course, the reason for the tax credits and the mandates on the manufacturers. But EVs won’t truly break through until there’s parity on price, performance and ease of use (particularly refueling times). Though DeLorenzo says that even if they could get recharging times down to 10 minutes, we’ll see a significant uptick in electric car sales.

Where is this breakthrough technology?

Actually, Toyota just announced it last week — and it looks to be a big one. The company unveiled a new, solid-state battery that can fully charge in 10 minutes, and go 300 miles on that one charge. The company aims to unveil a prototype car with it next year, and will be putting cars on the road with these batteries within a few years. It’s said not to get hot like a lithium-ion battery, which both negates the need for cooling technology and lessens the risk of fire. The Japanese government has put its weight behind this technology, in order to both decarbonize the country and to compete against China on battery production.

It may or may not be the game changer or the magic bullet, but it does sound like a big step forward. Yet until the auto industry finds that magic bullet that makes electric vehicles competitive with gas-powered cars in price, performance and convenience, the simple fact is, they’ll remain expensive.

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