Is a Hybrid Worth It?
The rampant complaining about gas prices is enough to put an army of Eeyores to shame. At last, however, it seems that Americans are starting to put their money where their mouth is. Some are forsaking everything you ever thought was cool for a scooter that gets 80 mpg.1 , 2 Others have established organizations offering incentives to car poolers3 or encouraging employer rewards for conscientious commuters.4 Mass transit systems are expanding. Hybrid vehicles are becoming more and more popular, with most manufacturers planning to significantly increase the number of available hybrid models in the near future,5 a figure that has already tripled since 2003.6 Various levels of government are beginning to offer incentives for hybrid ownership, a trend that will likely accelerate as alternative fuel and hybrid research continues to develop.7
Of all these new developments, the majority of the hype in 2005 centers on the gas-electric hybrid automobile. Ecologically, there is no question it is the best consistently available passenger vehicle out there, but what about what really matters to Americans? What about money? Is purchasing a gas-electric hybrid financially beneficial? Will you actually save enough money on gas to outweigh the incurred car payment? Might a hybrid be worth it even if you don't?
Well, that depends. How much do you drive? What gas mileage do you get presently? What is the trade-in value of your present vehicle and how much do you still owe on it? Let's explore those variables, along with many others, to determine if buying a hybrid is "worth it."
People are obsessed with spending less money on gas. Websites have even been created to help the penny-pinching consumer find the cheapest option close to home.8 When prices are skyrocketing all over town and scouring for deals brings no relief, however, many look to better gas mileage for help. How much money can improved gas mileage put in your pocket every month? That depends on a few variables:
After gathering this information, the amount saved each month on gas ($save, U.S. dollars per month) can be calculated using the formula shown in Figure 1.
To illustrate the above, let's calculate the potential monthly gas savings of a 2006 Toyota Prius over a 1999 Honda Accord. The variables might be defined as follows:
Plugging this into the equation in Figure 1 results in a monthly savings ($save) of $70.7,12 reducing the projected monthly gas cost from $139 to $68.2.
Gas price ($gas) fluctuations or changes in the gas mileage (GMimp) of the potential new ride will affect these savings - although not linearly. As the improved gas mileage increases, there are diminishing returns. For example, given a gas price of $2.50 and the base case assumptions, increasing your fuel efficiency from 27 mpg to 100 mpg will save you about $100 per month. If you tack on another 50 mpg, however, the additional savings are only about $10 per month. Figure 2 displays these trends for various gas prices using our specific case assumptions: 1,500 miles driven per month and looking to replace a 1999 Honda Accord.
Now that we know how much money can be saved by improving gas mileage, it's time to look at where at least some of that saved money will be going: a car payment.
The first step in determining a monthly car payment is calculating the loan amount using the following:
Plug these variables into the equation in Figure 3 to determine the approximate loan amount ($loan, U.S. dollars). The 1.15 factor included in the equation is to account for typically incurred costs not included in the sale price.14
To illustrate this calculation, let's continue with our previous example of buying a 2006 Toyota Prius to replace an existing 1999 Honda Accord. The variables could break down as follows:
Plugging these values into the equation in Figure 3 results in a loan amount ($loan) of $20,360.
The determined loan amount can best be compared with the monthly gas savings calculated earlier by converting it to monthly payments. These payments depend on the loan amount (calculated above), loan length (length, months), and interest rate (rate, percentage). Using these variables, the monthly payment can be calculated and then compared to the current car payment17($nowpay, U.S. dollars per month) to find the overall monthly impact ($payment, U.S. dollars per month) as shown in Figure 4.
Continuing the former example, the monthly payment can be calculated for the purchase of a 2006 Toyota Prius using the following variables and assumptions:
Plugging these values into the equation in Figure 4 results in a monthly payment increase ($payment) of $387.19
Some examples of gross monthly payments resulting from different combinations of interest rates and loan amounts are shown in Figures 5, 6 & 7, reflecting 30, 60 & 120 month loan periods, respectively.
As you can see, the length of the loan plays a large part in determining the monthly payment.20 The interest rate does have an impact, but it is much less significant.
Hybrid vs. Economy
At this point, the short road to answer to the question posed in the title of this article seems quite obvious. Isn't the only remaining step to subtract the calculated monthly gas savings from the monthly payment increase and then go for it if the result is positive?21 If such was the case, you would be limited to "hybrid or nothing" and wouldn't have considered the traditional method of gas savings, the economy car. Could this less expensive and less efficient option be more economically sound?
Prius vs. Corolla
Let's investigate by continuing our example of looking to replace a paid-off 1999 Honda Accord with something more economical. We've already looked at the possibility of buying a 2006 Toyota Prius and found that it could save $70.7 per month in gas but would add $387 a month for the car payment. Now, let's throw in the value-driven 2006 Corolla with a combined mileage of 36 mpg22 and a sticker price of $14,005.23 Applying the same equations with the same assumptions yields gas savings of $34.7 per month and a loan amount of $12,000, with a corresponding monthly payment of $228. Comparing the monthly expenses of each choice, the Prius would result in a net expense of $316 and the Corolla a net expense of $193. Thus, although neither option is economically advisable based purely on gas savings, the 2006 Prius would be $123 more expensive per month than a 2006 Corolla.
The same comparison could be done with various other hybrids and economy vehicles and the results are usually the same: the more expensive hybrids cost more on a monthly basis, even when considering their high gas mileage. Figure 9 lines up the leading economy cars with most of the presently available hybrids according to monthly savings over the same 1999 Honda Accord. It reveals that at least ten 2006 economy cars would be more economical than the most competitive hybrid, the Honda Insight, although none of the options keep you out of the red.
The numbers involved in comparing these two vehicles will likely soon change. Automotive companies will eventually cover the extensive research costs that led to the first hybrids. Increased competition will drive down prices considerably and hybrid gas mileage is likely to continue to increase. How much change is enough change? How much would the hybrid price have to drop, fuel efficiency increase, or gas prices skyrocket before a hybrid becomes economically viable?
Future Hybrid vs. Existing Vehicle
For streamlined analysis, the above equations can be combined into various inequalities. For example, given the current vehicle information, the loan information and the gas prices, the maximum sticker price can be determined for a corresponding gas mileage (Figure 10). Alternatively, the equation could be manipulated to show the opposite relationship, the minimum gas mileage for a corresponding sticker price (Figure 11).
Future Hybrid vs. Future Economy
Before a new hybrid becomes economically the best option, it will have to first beat out a new economy car. By making a few minor assumptions, some basic graphs can be generated to easily determine just how much things would have to change for this to be the case. And when they do, you can be first in line at the dealership.
After making these assumptions, the maximum price of a new vehicle can be plotted against its fuel efficiency for various gas prices using the previously explained equations. Find the gas mileage along the X axis and follow it up to gauge how "cheap" the hybrid (or other more-expensive vehicle with better gas mileage) will need to be to give it an economical advantage when compared to purchasing a $12,000/40mpg economy car. For example, if the 2009 Honda Civic hybrid ran at 80 mpg and gas was $3.50, we can see from the graph that it would need to be less than $15,000 to be economically preferable over the assumed 2009 economy car.
There are several other factors that are worth serious investigation before deciding for or against a hybrid purchase.
Advertised vs Actual Gas Mileages
Many cars are criticized for not living up to their advertised efficiency. Hybrids, especially, have come under recent criticism for this very issue. Excited new hybrid owners expecting to breach the half-century mark of gas mileage may end up disappointed when their Prius manages an average of only 44mpg or their Honda Civic Hybrid a meager 36mpg. Don't blame the hybrid manufacturers, however; non-hybrids fall short of advertised efficiency in similar fashion.26 The cause for this lies in the EPA testing method, which has been in use since 1985. The test is consistent, but the critics say it is consistently inaccurate as it does not account for modern highway speeds and congested city traffic.27 Thus, the ratings will usually work well for comparative purposes, but you will have to look elsewhere for real-world fuel efficiencies. Two such places are Greenhybrid.com, where a Real Hybrid Mileage Database is set up,28 and Fueleconomy.gov, where users are allowed to share Your MPG.29
There are various government incentives for hybrid owners at the federal, state and sometimes local level. In 2005, the U.S. federal government offered tax breaks30 that will switch over to "tax credits" starting in 2006, the value of which depends on the hybrid model.31 Tax refunds can be used to offset some of the hybrid expense and might even become the determining factor in a close decision. A $284 billion highway bill was also passed into law that includes a provision allowing states to open HOV lanes to all hybrid cars rated at least 45 miles per gallon - even with just one passenger.32 State incentives range from free hybrid parking to various tax rebates and credits.33 At the local level, cities such as Baltimore have begun to offer incentives such as hefty parking discounts.34
The first concern that pops up for many power-hungry Americans when they hear the word "hybrid" is a perceived drop in performance. While performance vehicles will always need more energy than economy vehicles, hybrid technology is actually making increased power less "energy expensive." There are still issues preventing a hybrid from being a total performance vehicle, but hybrids are not the weak alternative by any means.35 Hybrid technology is even being investigated by several Formula One teams as the "next step" in engine evolution performance and small hybrids such as the Lexus RX use the hybrid system like an "electric supercharger."36
While there are some inherent fears in buying an "unproven" technology, a hybrid isn't a technologically risky purchase. As of late 2005, both Honda and Toyota hybrids come with long warranties. The Insight has an 8yr/80,000mi warranty on the powertrain (including batteries) and a 3yr/36,000mi warranty on the rest of the car. The Prius has a 8yr/100,000mi powertrain warranty and a 3yr/36,000mi warranty on the rest.37
Hybrid regular recommended maintenance is much like that of a typical ICE vehicle: oil changes, filter changes, engine coolant level checks, brake inspections, tire rotation and inflation, etc.38 Some are concerned about the availability of properly trained and knowledgeable hybrid mechanics, but it is reasonable to assume that these will materialize as the demand increases. The warranties also counter this concern by effectively providing a cushion before the need to find a mechanic outside the dealer.39
Hybrids have batteries that will need to be replaced in eight to ten years,40 but they also have the benefit of longer lasting brakes due to regenerative braking.41 Hybrids have more electric systems to break down,42 but non-hybrids have more mechanical systems to break down.43 The maintenance concerns seem to balance out.
Value retention is another area not considered in the above calculations. The Prius debuted in 2001 for $19,99544 and the same year model is now worth $15,058,45 a 75.3% retention of value over the five year period. The Corolla retailed at about $12,568 in 200146 and now sells for about $7,496,47 a 59.6% value retention over the same period.
Looking at the values in Figure 14, it seems that comparing the Corolla to the Prius is fairly representative of the hybrid advantage in this area. The Prius is holding its value better than any other vehicle and the Honda Insight (the only other hybrid that has been around long enough to include) is among the best of the economy cars.
Many think hybrids are a temporary fad before alternative fuels replace them. Alternative fuels such as liquified petroleum gas (LPG), liquified natural gas (LNG), hydrogen, alcohol, fuel cells, solar power and bio-diesel are in various stages of development and availability. It will most likely be a while before any of them are able to achieve the prominence level of gas-electric hybrids, so even if you are one who always wants the "greenest" car available, the hybrid is your pick for the next five to ten years.48
There are many other issues related to personal taste that might sway you one way or the other. Some feel attracted to the "hype" around hybrids and others are comforted by the proven economy vehicles. Hybrids are being introduced as the high end trims for many models, such as the Honda Accord, so the accompanying luxury features may be convincing. Others might be turned off by the lack of hybrid selection now available. There's no getting around the effect of personal taste on the decision; if the monthly gas budget was the only concern, everyone would be riding bikes or walking.
While no "green" person would ever advocate buying a hybrid for purely economic reasons,49 it is painfully obvious that existing hybrids lack the ability to make up for their steep prices with gas savings. While a hybrid would present significant savings over something like a new Ford Super Duty, you would always save more with any of a number of economy cars.
Hybrid technology is just entering the mainstream, however. As gas prices rise and hybrid technology improves and cheapens, don't be surprised to find hybrid owners in the green.
Info About This Work
Is a Hybrid Worth It?
Date of Publish
11 November 2005
Gas-electric hybrids are the most fuel-efficient passenger cars on the road and ecologically there isn't a more viable option. Until something big changes, though, the industry-high efficiency can't economically offset the steep sticker price.
It's All About the Green