Hybrid Economics: How Far Does Buck Go?

By LIAM DENNING

News that truck sales have bounced back a little since gasoline prices dropped back below $4 a gallon will have environmentalists tearing their hair out -- and auto-company planners losing sleep.
Whichever way the current retooling of Detroit plays out, the industry is betting big on better fuel efficiency.
Foreign entrants such as Toyota Motor owe their rise partly to early development of hybrid vehicles mixing battery- and petroleum-driven technology to deliver fuel efficiency of more than 40 miles per gallon.

In response, the likes of General Motors are racing to develop innovations such as plug-in hybrids, which some claim might achieve 100 mpg or more.
Churlish as it might seem to ask, will consumers care enough to pay up for it? Geoffrey Styles, founder of GSW Strategy, an energy consultancy, suggests, that deep down, most drivers care less about miles per gallon, and more about getting somewhere as cheaply as possible (in reasonable comfort). In other words: the dollars per mile.
Framed like this, fuel efficiency becomes subject to the law of diminishing returns.
Assuming a long-term gasoline price of $4 a gallon, 20 mpg translates to 20 cents per mile, while a conventional hybridlike 45 mpg equates to nine cents.
For a driver traveling 15,000 miles a year -- the average in 2006 -- the implied annual saving is almost $1,900.
Now compare the 45 mpg conventional hybrid to what a plug-in hybrid might do.
This is trickier, because these vehicles are expected to travel, say, 40 miles on battery power alone.
Still, assuming multiple short journeys and an electricity cost of 10 cents per kilowatt hour, our driver pays two cents per mile and saves about $1,200 a year compared with the regular hybrid.
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Chevrolet Volt
Industry executives have spoken of GM's forthcoming plug-in Chevrolet Volt costing in the mid-$30,000 range. Assume, after tax credits, consumers end up paying $30,000. That is almost $6,000 more than a conventional hybrid such as the Toyota Prius Touring.
Discounting the fuel savings calculated above at, say, 5%, it would take about six years for our driver to make back the extra outlay.
On journeys above 40 miles, however, the economics change, and the payback period grows.
Imagine a plug-in hybrid that can get 40 miles on its battery and achieves 50 mpg when burning gasoline. On that basis, a journey of 100 miles costs 5.6 cents per mile. Theoretically, the payback period stretches to 17 years.
In reality, journeys span a range of distances, so most drivers' economics, based on these assumptions, would probably fall between these two extremes.
To be clear, this does not mean plug-ins are pointless. Some consumers prioritize environmental issues above cost. And a plug-in's relative economics improve as gasoline prices rise, which is almost a certainty over the medium term.
At this stage, it is also unclear what a plug-in's resale value would be. If it holds up better than a conventional hybrid because of rising gasoline prices, then the payback period shortens.
While the price of plug-ins will fall, however, so will that of conventional hybrids: Honda's Insight, for example, is expected to retail for $20,000 or less.
By the time consumers emerge from the current economic slowdown, their will to pay much more for being even greener will likely be diminished.
Even if it isn't, tougher auto-loan terms will likely curb their ability to do so.
Bigger tax breaks would help bridge the gap.
Like much else with Detroit these days, the length and depth of the current recession, and Washington's willingness to help, could be crucial to persuading truck-loving drivers to plug in to the future.
Write to Liam Denning at liam.denning@wsj.com