rusl.net
Opportunity cost
2022-01-14

Because I’m interested in electric cars I’ve been trying to convince myself that they’re a financially sensible purchase. EV (electric vehicle) proponents often claim EVs are about the same cost or even cheaper than ICE (internal combustion engine) cars over the useful lifetime of the vehicle. More money up front to buy an EV but lower running costs, is the argument.

Many discussions about EV costs don’t mention that lots of people (including myself and most of my friends) don’t generally buy new cars. We buy used cars and often for under $15,000. The car I drive every day cost me $2,000 about 4 years ago and does everything I need a car to do. If I were to upgrade to a nicer car it would probably be a 10 year old petrol hatchback such as a Kia Rio. They can be bought for around $8,000.

The only affordable used EVs for sale where I live are Nissan Leafs that have a useful range of under 200km. These are still selling for around $20,000.

Over the last couple of years my job required me to commute a 300km return trip to one of our projects on a weekly basis for several months during the field season. It’s a drive on country roads at 110kmh with lots of hills and there are no EV charging stations along the way or at the project site itself. I also make the trip to visit family in a town 400km away once or twice a year. There is one public charging station on that route (unless you have a Tesla). I also have family who live on a farm a similar distance away that I visit. There is one public charger on the way to their farm and they don’t have capacity to charge an electric car overnight since they use low capacity off-grid solar.

I would need at least 400km of real world range for an EV car to be useful to me and with the current state of public charging even that would prove rather inconvenient every time I left the city. So this means spending at least $60,000 for a new extended range EV. The $45,000 entry level EVs for sale here all have about 400km or less of claimed range. Real world range is always much less than the manufacturer’s claimed range - see the countless blogs and forum posts where people post their real world EV stats.

In terms of running costs one of the things that works against many EVs is that (like many new cars) they have huge wheels and low profile tyres when compared to older basic cars. I looked up the price of replacement tyres for these new cars and most of the models use 18” or larger tyres costing $250 or more. As a comparison my old car uses a cheap 14” tyre size so I can have a new tyre fitted and balanced for under $100 - same for most economy hatchbacks from 10 years ago.

Another cost that doesn’t favour expensive cars (new cars) is insurance. I’m currently paying $155 annually for third-party insurance because my car is so cheap I can afford to self-insure the replacement cost. If I paid over $10,000 for a car I would almost certainly pay for comprehensive insurance. I got some quotes for comprehensive insurance for a range of new cars (both EV and ICE) and they were generally in the $700 to $1000 per annum range.

Seems like if you’re shopping for a car at the $60,000 price point and disregarding cheaper options then maybe an EV would work out cost effective compared to ICE due to cheaper fuel and the commonly claimed lower maintenance costs. I’m not shopping at any specific price point, I’m just trying to find the most economical car that meets my needs. I’d gladly spend $60,000 upfront if it really was cheaper in the long run. I evaluate big financial decisions on a long time scale.

I used a spreadsheet to simulate some different scenarios for the total cost of ownership of different vehicles.

One important cost that I rarely see accounted for is opportunity cost. This is where you compare spending money on something (such as a car) to something else (such as investing it in a share portfolio which grows and generates income). Do you spend $10,000 on a car and put $60,000 in an investment fund or do you spend all $70,000 on a car?

For my scenarios I assumed the buyer starts with $70,000 at their disposal, but this is an arbitrary number for the purpose of calculations and it doesn’t matter what number you start with. We’re only interested in the difference in cost between different vehicle purchasing decisions and the differences will be the same regardless of the starting balance. Choosing a different starting balance might result in a particular scenario running into debt at some point, but the spreadsheet will charge interest on that debt at the same rate as the annual investment return.

Some assumptions I made:

I approximated the insurance costs based on quotes I looked up online. Maintenance costs are based on my own long term experience of having ICE cars of various ages and my comprehensive expense records. Fuel consumption and petrol costs are based on my historical records and from the public fuel economy data made available by many fuel tracking apps. I’ve been very generous to the EV by leaving the fuel costs at zero (assume you already have solar panels at home, charge during the day, and never pay for public charging). I’ve been way too generous with the EV maintenance (I doubt my estimation would even cover replacing the tyres, but let’s be generous to the EV because I’m trying to convince myself they’re affordable).

20y-ice-3rdp.jpg
This scenario is based off my current car ownership experience, a Toyota Hilux. I self-insure the replacement cost of the car because it’s so cheap. It uses more fuel than a newer car and registration is slightly more than a hatchback. It’s 25 years old and many Toyota Hiluxes last well beyond 30 years old. I’ve assumed a re-sale value of nil at the 30 year end of life.

10y-ice-3rdp.jpg
I based these costs off a 10 year old Kia Rio hatchback. Insurance quotes, fuel consumption, etcetera were estimated from information available online. Low purchase price and low ongoing costs allows a large lump sum to be invested which generates a large investment return. I estimate a $3,000 re-sale price for the 20 year old vehicle. This scenario seems to be the sweet spot for affordable motoring.

10y-ice-comp.jpg
Same as above, but with comprehensive insurance. Someone who doesn’t keep enough money on hand to pay to replace their vehicle in the event of a total loss may choose this option.

new-ev-comp.jpg
For most people buying a $60,000 vehicle they would require comprehensive insurance. I’ve used a zero cost for electricity in this scenario, which is very generous and likely unrealistic. I’ve also estimated maintenance below what I expect is reasonable in an attempt to make the EV look favourable. I estimate a $30,000 re-sale price although this is hard to predict. Some of the oldest electric cars such as early Nissan Leafs sell for less than half of their new price. I decided to be generous and use half price for re-sale after 10 years. It’s still, without question, the most expensive option of those I’ve evaluated.

bike.jpg
The enemy of the car industry is non-consumption. Buying a bicycle and using a combination of public transport and rideshare is shown here. Not buying a car is the cheapest option if you can get away with mostly cycling and catching public transport. There will of course be people who are car dependent due to living in a poorly planned city or a rural setting, or who need a car for their job or other reasons.

Summary of relative costs:

Scenario Cost over 10 years
Bicycle, public transport, rideshare reference cost
10 year old ICE car with third-party insurance reference cost + $27,966
20 year old ICE car with third-party insurance reference cost + $33,576
10 year old ICE car with comprehensive insurance reference cost + $34,434
New EV with comprehensive insurance reference cost + $76,785

It’s clear to me that there is no scenario where an EV that meets my needs comes remotely close to being a financially sensible purchase. One could make the point about modern vehicle safety, how pleasant and quiet EVs are, all of the fancy features, and the environmental benefits. All true statements. This exercise, however, was all about real costs to the owner of the vehicle. It doesn’t price those other benefits. The individual would have to decide for themselves what those other benefits are worth. That’s no different to any other purchase decision. I bought an expensive mountain bike a few years ago because it looked pretty. You can’t always justify a purchase on the financials alone.

Hopefully in a few years there will be a healthy market of affordable EVs, both new and used, to cater to those of us who shop for cars on a budget. Of course it would be better still if urban design and public transport improved to a point where car ownership wasn’t a necessity for most people.