Will A Hybrid Car Really Pay Off?

by Todd Kaho
06/10/2008

It's true that hybrids cost more than regular vehicles. This prompts many to wonder if the extra cost for these high efficiency cars is worth it, and in fact if the difference can be offset over time by the cash saved from buying less fuel. While plenty of generalizations have been made on this in recent years, the concept of payback for a hybrid's incremental cost involves many variables and can only be answered on a case-by-case basis. Green Car's research shows that a realistic answer is not so simple and boiling this down into a simple chart is misleading ... so we're not going to do that. Instead, we're going to do this the right way and help you come up with a valid payback factor for the hybrid you may be considering.

You need to know that crunching the numbers involves some elements that are moving targets. For example, higher gasoline prices work to shorten the number of miles needed for payback. Changing government incentives mean that calculations made today may be different than the realities of calculations made a few months down the road. And let's not forget that the retail price of hybrids also appears to be in play as some dealers tack thousands of dollars onto a hybrid's suggested retail price because of high demand.

Still, the basic equation for determining a hybrid's breakeven point is straightforward. It begins by identifying the combined city/highway mpg number for a hybrid and that of its closest conventional counterpart. These mpg figures can be found online at www.fueleconomy.gov. Once armed with these numbers you can figure each vehicle's operating cost per mile based on current fuel prices.

To do so, simply divide the price of fuel (such as $4.00 per gallon) by a vehicle's combined mpg. As an illustration, a Honda Civic Hybrid would pencil out as follows, assuming the above gas cost: $4.00 ÷ 42 mpg = $0.095 (9 ½ cents) per mile operating cost. If a Civic EX was used as a conventional comparison, this would pencil out at $4.00 ÷ 29 mpg = $0.14 (14 cents) per mile. So, the hybrid variant would cost $0.045 (4 ½ cents) less for each mile driven. Placed in these terms, it's enlightening that even at 42 mpg, you're burning nearly a buck's worth of gasoline every 10 miles you drive. Ouch.

Next, determine the manufacturer's suggested retail price (MSRP) for the models you're comparing. The Honda Civic Hybrid MSRP is $22,600 and the standard Civic EX is $18,710, with a differential of $3,890. To find the projected mileage to a breakeven point - where the increased fuel efficiency offsets the cost of a hybrid premium - the difference in price between the hybrid model and an identical conventionally powered model is divided by the savings per mile. In the case of the Honda Civic, this figures out this way: $3,890 (cost difference) ÷ $0.045 (4 ½ cents per mile savings) = 86,444 miles. So, at least in theory, the extra cost of a Honda Civic hybrid in this scenario would be offset in just over 86,000 miles of driving if gas prices are $4.00 a gallon.

Of course, federal incentives exist for many hybrid models and this can make a big difference in payback calculations. The Civic Hybrid is currently eligible for a federal tax credit of $1,050, which changes the cost differential between comparative models and results in a payback mileage factor of 63,111 miles if purchased now. However, tax credits are phased out according to specific criteria and disappear when an automaker sells 60,000 hybrids. For example, the Honda tax credit is reduced to $525 on July 1, 2008 and goes away completely on January 1, 2009. The substantial $3,150 tax credit made available for Toyota's Prius when the federal incentive program began has now gone away completely for this model, and in fact all Toyota/Lexus hybrids, because of this automaker's successful hybrid sales. Current information on available credits for specific hybrid models can be found at http://www.fueleconomy.gov/Feg/tax_hybrid.shtml.

These fundamental calculations can be used to determine the theoretical payback for any hybrid model. If the basics are what you're looking for then you're done here. But there are more 'wild card' factors to consider, so if you're inclined to explore how other influences can weigh in, then read on.

BEYOND THE BASICS
If all this sounds simple, rest assured it's not. Finding direct hybrid/gasoline model comparisons can be tricky since many of the features that come standard on hybrid models may not be offered on their gasoline powered counterparts. Auto manufacturers often sweeten the deal on hybrids with additional content to soften a hybrid's higher price. These extra features cost the manufacturer much less than the added retail value they bring to the consumer, so this content serves to take some of the sting out of the additional money being paid for expensive hybrid technology.

The challenge in identifying a direct hybrid comparison is illustrated by the Toyota Camry. When you add in the engine options and trim levels, Toyota lists 11 different Camry styles and none have the exact mix of options and components as the Camry Hybrid. Also, while a singular example, it should also be noted that Toyota's Prius hybrid has no direct basis for comparison since that body style is offered only as a hybrid.

Still other factors cloud the issue. Driving habits present a significant wild card in this payback equation. Fuel economy can easily differ by 5 mpg or more on high fuel economy vehicles with differences in driving style. Drive with fuel economy in mind and you may well cut the miles to achieving breakeven in half.

Other incentives that influence breakeven are not so obvious, like the ability for solo drivers to use high occupancy vehicle (carpool) lanes in some states. While this incentive can save hundreds of hours of behind-the-wheel time in heavily congested cities over the course of a year - a real quality of life advantage - it also offers tangible financial benefits since cutting commuting time saves fuel, which also saves cash. A case could certainly be made for factoring the dollar value of fuel saved into the payback equation. But again, that's a wild card that must be calculated on a case-by-case basis. Plus, those counting on this must keep in mind that the HOV benefit could go away for new hybrid purchases once quotas are reached, as has happened now in California.

One major consideration when shopping for a new hybrid is the length of time you plan to keep the vehicle. If you're a short-term buyer, then the math to breakeven may seem impossible to achieve. The big variable here is the resale or residual value when you sell the car. A hybrid will likely retain much of the original premium you paid due to high demand, particularly if you sell it or trade it in after only a few years. So, that $3,000 or $4,000 premium you paid for a hybrid could still add $2,000 or more to the car's value used, meaning you may only need to save $1,000 or so in gas - or consume 250 gallons at $4 per gallon - to hit breakeven.

Finally, there's the subject of battery replacement cost that could (or should) be factored into the equation. While hybrids are new enough so actual battery replacement costs are generally unknown, it's projected that a new battery pack will likely fall in the $2,000 or so range when aging hybrids get to the point where replacement is needed.

When will a hybrid pay for itself? We like to think the day you drive it off the lot. Being an early adopter of environmentally positive technology, reducing oil dependency, and creating less pollution have their own rewards. The substantial savings realized at the pump every time a new hybrid is filled up also provides real and immediate financial gain. With all this and rising gas prices that are already driving up the resale value of efficient smaller cars - a trend that will surely benefit hybrid values as well - the answer to those questioning whether a hybrid will pay off seems to be getting clearer every day.