Getting real: The high cost of electric cars

The eco-friendly vehicles are important, according to a new study, but we need to take a hard look at the price tag.

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By Peter Valdes-Dapena, CNNMoney.com

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NEW YORK (CNNMoney.com) -- Electric cars have a big role to play in reducing the world's greenhouse gas emissions, but it's going to cost a lot, according to a new report. It could even push automakers into further trouble.

For electric and hybrid vehicles to achieve their environmental potential, the world's governments will need to step in with high levels of financial support for consumers and industry, according to a report by the Boston Consulting Group, a management consulting firm. And the cost savings in fuel won't be nearly enough to provide the incentive without that government cash.

Electric vehicles could realistically make up a significant fraction of the world's car market in the foreseeable future, but not nearly a majority, according to BCG. "The costs of creating an automotive market dominated by electric and hybrid cars are prohibitively high," said the report.

Under what BCG calls the "most likely" scenario - where oil costs about $150 a barrel and governments enforce existing CO2 regulations - about 11 million hybrid and 3 million electric vehicles will be sold globally in 2020. Even then, they will make up just 28% of those sold in the word's biggest markets.

But even that level of market penetration will require governments in Europe alone to spend about $70 billion in industry support, BCG said. In return, a relatively small amount - about $6 billion - would be saved by switching vehicles from oil-based fuel to electricity.

The numbers would be similar for the United States, said Xavier Mosquet, one of the report's authors.

High cost of green

Most of that money would go to help the auto industry engineer and manufacturer the vehicles and to provide cash incentives to offset their high costs to consumers.

These investments will require a firm commitment to reducing greenhouse gases, according to the report, regardless of cost.

If cost-effectiveness were the goal, improving the performance of today's internal combustion engines would be the best option.

Using technologies like turbocharging and advanced fuel injection to boost engine output would cost between $70 and $140 per car for each percentage point of CO2 reduction, according to the report. A 20% improvement in fuel efficiency would cost about $1,200 per vehicle.

Partly or fully electric cars can achieve much greater efficiency, but at much higher costs. For every percentage point decease in C02, a hybrid or electric car would cost about $140 to $280 more to produce.

BCG estimates that a hybrid car today costs about $7,000 more to produce than a similar non-hybrid, but that that cost will come down to about $4,000 by 2020.

By that time, with a cost of $130 to $160 per percentage improvement in CO2 emissions, hybrid cars will become an economical solution compared to further development of non-hybrid engines.

Plug-in vehicles of various types - plug-in only, plug-in hybrids and range-extended plug-in vehicles - present greater cost challenges because of they need expensive batteries. BCG estimates that by 2020, when battery costs will have come down, a battery for an electric car with an 80 mile range will still cost about $14,000.

While some consumers will pay more for electric cars even if they don't make it up in fuel savings, most won't, the report said. That means government incentives to make up the price difference.

Hurting not helping

If automakers are pushed to produce electric cars without this sort of government support, the industry could be headed for more financial trouble, Mosquet said.

"We think the OEMs and suppliers are going to spend money on technology that won't find any market." he said.

Until governments come up with policies to support the electric car market, OEMs - meaning "original equipment manufacturers," an industry term for car companies - and their suppliers should be given grants to pay for development and manufacturing, said Mosquet.

Providing loans rather than grants, as the U.S. government has done, puts an unfair burden on the companies, he said. It assumes the companies will make money on these vehicles in the near future, which they will not, he said.

Despite the high costs, BCG fully supports the push toward electric vehicles, he said.

"BCG is known for making statements on things it believes in," he said, "even when it might seem counter-intuitive." To top of page

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