Updated: Sep 27, 2018
For many people, buying a new car is a strongly emotional decision. For example, Tesla buyers aren’t buying Tesla Model S’s and Model X’s for the low running costs. They buy a Tesla because it is an incredible car that represents an ethos and vision that they associate with.
However, there are a significant proportion of EV and PHEV buyers who buy an electric car because it’s cheaper overall than an equivalent petrol or diesel model.
Regardless of type of car, nearly everyone has an eye to Total Cost of Ownership (TCO) and will consider it in varying levels of detail. Is Car A more efficient than Car B? Is Car A better than Car B because servicing costs are less? Given that EV’s have a higher sticker price, total cost of ownership is a larger consideration for EV purchasers. Why? It’s the only means of fairly comparing costs against petrol models.
When I bought my PHEV ten years ago, I suddenly became obsessed with battery life and fuel savings, seeking to justify the higher upfront cost. Given my low mileage these days, the battery is still in fine working order, and as I bought it outright, my return on investment against other vehicles has been outstanding.
What this made me realise is that total cost of ownership is almost impossible to generalise.
While I’ve owned my car for 10 years and hardly drive it, others will own their car for much shorter periods but drive much more.
These individual factors need to go into any TCO calculation. Thankfully, there are simple tools to help you make the right choice.
This article is a review of the various factors that impact on total cost of ownership, how you can reduce them, and how you can expect TCOs to fall in the future. It will also form the basis for future articles on how to improve the total cost of ownership.
Contributing Factors to TCO
Estimating the total cost of ownership (TCO) for an electric vehicle is a reasonably complex process with many dependencies on individual user behaviour and which must consider the specifics of an electric vehicle. The TCO is essentially the total of:
the purchase price
less any upfront subsidies
less the resale price (thereby calculating depreciation)
less any ongoing government benefits
plus all associated running costs
The running costs include:
maintenance and repair
Below is more detail on each of these factors. Note: in this article we make reference to internal combustion engine (or simply ICE) vehicles. For those not familiar with the lingo, this is code for a petrol or diesel engine cars.
The purchase price is always the largest component of the return on investment calculation. While this seems like a simple factor the main issue is whether you bought the vehicle outright or second hand. The automotive companies also have a process called “demonstrator” where they are able to sell vehicles at a discount if they have travelled over a certain number of miles. Generally, the purchase price of a vehicle should also include the cost of installation of any home charging equipment.
There are some handsome subsidies in the UK for EVs and PHEVs.For all EV buyers in the UK, you are able to claim the Plug-in Car or Van Grant. This represents 25% of the cost of the vehicle up to £4,500 for BEVs and £2,500 for PHEVs. Vans are 20% of the cost of the vehicle up to £8,000. Vehicles must meet stringent design criteria in terms of CO2 emissions. Note that some fancy PHEV luxury cars are not eligible. For businesses purchasing company cars, the First Year Allowance is claimable for up to 100% of the cost of qualifying low emission and electric cars. That means your business has the ability to claim a 100% year one deduction for the cost of the vehicle. This is available until 2021.
Due to not having significant long term data on depreciation of electric vehicles, there is a lot of debate about the depreciation rates that should be applied to an electric vehicle. Depreciation rates are important, not only because they dramatically impact TCO, but they also influence finance costs. Typically a depreciation rate of 50% after three years of ownership has been used for typical ICE vehicles. Some recent research has identified that this may be lower for electric vehicles, however the general industry sentiment (e.g. this, this and this) is that electric vehicles depreciate far faster than equivalent ICE vehicles.
There are a few additional government benefits to driving an EV, for example EVs and PHEVs are exempt from the London Congestion Charge (once an initial £10 registration fee has been paid).
It is estimated that 80% of drivers in the UK finance their vehicles. Of that, the typical purchase would involve a 20% down payment. One way to reduce your monthly costs is to pay a larger down payment.
Maintenance and Repair
Most cars come with a three year warranty. A lot of calculators that look at the difference in vehicle costs therefore consider the maintenance costs as equal. Once out of this period however, the benefits of electric vehicles shine.
Due to having a small fraction of the movable parts (like 20 versus 2000), electric vehicles need far less maintenance than ICE vehicles.
Although many sources believe that EV’s costs no more to insure, the average cost to insure an EV is 45 percent higher than the average cost of insuring an ICE. This is probably due to the higher average purchase prices. As EVs become more common and less pricey, expect insurance premiums to fall too.
Luckily though, fuel cost savings represent the most significant TCO savings available to EV owners. Compared to a petrol car, EV fuel costs in the UK are about a quarter that of petrol cars. If you charge with the sun, then it’s about a tenth.
Battery replacement costs
One significant uncertainty to note is that the cost of battery replacement is notoriously difficult to estimate. Most electric vehicles currently on the road haven’t yet had to have their batteries replaced and so data availability is limited.
Additionally, a battery’s lifespan will be reduced the more frequently the battery is discharged, which is largely dependent on driver behaviour.
So which is better – petrol or electric?
Aside from the performance and environmental benefit, as this and this research shows, the TCO of owning an EV is already comparable, and sometimes lower, than the TCO of owning an ICE vehicle (admittedly only for reasonably priced EVs).
The Hagman study (2016) compared the return on investment of EV’s against ICE vehicles and found that a BMW i3 has a lower TCO despite having a significantly higher purchase price. This was based on a generous 20% government subsidy, which demonstrates how close to parity EV’s are becoming.
Reducing your TCO
Many of the contributing cost factors are out of your control, like the initial purchase price of your vehicle or the specific government subsidies available to you.
Other factors can be influenced however, and their associated costs reduced, by making smart choices as an EV buyer and driver.
Buying second-hand rather than new
Selecting the most cost effective purchase option – leasing, financing, or buying it outright
Keeping the car for a long time, in good condition – particularly if you bought it outright
Charging at home versus public charging
Selecting a low cost or two-rate tariff
Driving conservatively to enhance the efficiency and battery life
Driving defensively to avoid bumps and bingles
Maintaining the car well
Avoiding calling on insurance where possible
The TCO for EVs will only get better
Electric vehicles are still in their infancy. Over time, we can expect significant efficiency gains in manufacturing processes and improvements in battery efficiency as well.
These improvements will not only lead to a decrease in purchase price for an EV, but will also decrease their operating and maintenance costs significantly as well. The following diagram by Goldman Sachs shows the intersecting factors that are driving reductions in costs.
This shift is being driven to a large extent by the commitment of major automotives to an electric future. Most major brands have made this commitment as the following table demonstrates.
Other factors to consider are the cost of electricity as more EVs enter the vehicle fleet, as well as the phasing out of government subsidies and incentives.
Furthermore, if you have solar panels on your roof and are able to charge your EV using that energy, you’ll be able to also significantly reduce the fuel costs for your EV, depending on your charging behaviour.
The process of estimating TCO is complex for any type of drivetrain, but despite the relative infancy of electric vehicles and the technologies at their core, the cost of owning a reasonably priced EV is by and large no greater than owning a comparable ICE vehicle.
As more manufacturers start to catch up to Tesla, and the technology underpinning the core components of EVs continues to improve, we can expect to see the TCO for EVs fall as well.