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While Fleets Await Promise of EVs, Hybrids Make Economic Sense Today

The promise of electric vehicles is alluring for commercial fleets: dramatically reduced pain at the pump, potentially lower vehicle maintenance costs, the PR benefits of deploying clean technology, and – in the future – the possibility of even getting paid to provide energy services back to the grid via the vehicle’s battery and plug. However, the biggest stumbling block for EV adoption continues to be high upfront costs that can run from $50,000 to $150,000 per vehicle.

So when will EV costs come down? According to research reports, there appears to be a chicken-and-egg problem where customers need lower prices to justify purchasing large quantities of EVs, but manufacturers cannot lower EV costs (mainly battery costs) enough without more customer orders. Consequently, EV sales are not projected to rise substantially until later this decade.

Despite high costs, some fleets are now taking the plunge by adopting EVs. Recently, FedEx announced it will retrofit several existing trucks with electric drivetrains. Verizon has agreed to collaboratively develop electric drive technology with a third-party electric vehicle maker. And Frito Lay recently announced that it will increase its electric vehicle fleet to more than 100 trucks in California (albeit with help from that state’s government incentives). Commitments like these by major corporations are commendable for reducing fuel usage and emissions, and they are critical to spurring the nascent commercial EV market. Customer purchases lead suppliers and manufacturers to invest more in technological advancements that increase performance and reduce the cost of components such as lithium-ion batteries and electric motors, which leads to more customer purchases.

However, even with commitments from big name fleets, EV adoption has been slow. Last year, 18,000 EVs were sold in the US, but only a few were for commercial applications. Meanwhile, projections for 2012 indicate EV sales could top 50,000 units, yet this only represents about 0.4 percent of new vehicles sold despite a significant government incentive. With EV sticker prices at such a premium over conventional vehicles, mass adoption of commercial EVs still appears to be many years away, with the biggest roadblocks being cost and payback. Other hurdles for adoption include the unknowns regarding battery life and range, and the changes companies would have to make to their daily fleet operations to plug in vehicles.

So, if fleet owners are looking for substantial fuel savings through the adoption of cost-effective electric drive technology, what should they do while waiting for EV prices to drop over the next decade? Adopt hybrid electric vehicles (HEVs), which already make economic and operational sense for fleets.

Why do the payback economics work for HEVs over EV’s? First, HEV components cost less, primarily due to a smaller battery pack. Whereas an EV uses a battery pack that can be more than 20 kilowatt-hour, an HEV uses a battery pack that can be less than 1.5 kWh. Second, despite being low-cost technology, HEVs can still yield substantial fuel savings of up to 25 percent for fleets, meaning HEVs are cost-effective today for many commercial applications without government incentives. Let’s look at some numbers. Say a fleet vehicle drives 100 miles per day for 250 work days per year in urban and suburban stop-and-go driving, and normally gets 10 mpg with gas at $4 per gallon. An HEV achieving 25 percent fuel savings would yield $2,500 in annual savings. With an approximate $7,000 premium for an HEV, the payback is less than three years. This type of payback is not achievable with most EVs today and likely won’t be for years.

Operationally, HEVs are simpler than EVs for fleets to manage. Fleets are inherently risk averse since fleet performance is often measured by benchmarks such as vehicle up-time and route efficiency. So when it comes to adopting new vehicle technology with a risk-reward tradeoff (operational changes to achieve fuel savings), fleets take their time to vet. Such is the case with EVs today due to range anxiety, especially in areas with extreme seasonal temperatures that can reduce battery performance. The required operational changes around plugging in, including the installation of charging infrastructure and rerouting vehicles based on range, also pose an issue. Meanwhile, HEVs have none of these limitations, except putting them into urban and suburban routes. Just turn the key and drive. There are no plugs to worry about. There are no refueling concerns.

Today, cost and operational drawbacks are keeping fleets from adopting EVs en masse. However, with automotive OEMs such as Ford investing $135 million in EV development and state governments such as California allotting $120 million to build EV charging infrastructure, these drawbacks will be addressed, spurring EV sales in the coming decade. In the meantime, HEVs offer fleets a low-cost bridge to the promise of EVs. HEV adoption can even help the long-term EV cause by increasing the market over time for the many components such as e-motors, batteries and power electronics that both HEVs and EVs share. While the point when electric vehicle technology makes more economic sense than conventional vehicles is approaching, the point where hybrid electric technology makes more economic sense than a conventional vehicle is here today.

Clay Siegert is the vice president of supply chain for XL Hybrids. He leads supply chain management and product development strategy. Clay holds a master’s degree in engineering from MIT.

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