What it means for BEV TCO
February 18, 2020
By Mark Boada, Executive Editor
One of the long-standing selling points of electric vehicles – both hybrids (HEVs) and battery-powered-only (BEVs) – is lower fuel costs, electricity being cheaper to buy than gasoline or diesel. Given that electric vehicles’ purchase prices are higher than comparable models powered by internal combustion engines (ICEs), that differential is supposed to make EV total cost of ownership competitive if not superior to the alternative, as long as you hold onto your EV long enough.
Now, this fuel cost advantage isn’t the only one EVs are supposed to deliver. Other operating costs are also lower, as fully electric cars and SUVs don’t have spark plugs, transmissions, radiators, oil and fuel filters, exhaust systems, and other gasoline-specific components that require routine maintenance. In addition, their brakes last longer, since their stopping power is supplemented by the inertia of the electric motor.
Still, a variety of other obstacles to widespread adoption of electric vehicles — like limited range except for the highest-priced among them, limited recharging infrastructure and hours-long recharging times — have confined BEVs to a minuscule percentage of vehicle sales and roadway presence. Add in the fact that the five to seven years for fuel cost savings to cover the higher acquisition cost of BEVs are out of reach for most fleets, whose holding period is usually three to four year, and the TCO case just isn’t there yet.
Lately, though, there have been encouraging notes from several expert EV world observers. Earlier this month, Fleet Management Weekly re-published an article claiming that EVs are already more cost-effective than more than 90 percent of fleet sedans that are taken home at night, and another that forecast that EVs will achieve cost parity with ICEs within two to three years.
Highway funds are drying up
But for fleets looking to add BEVs to their inventory, there’s a fly in the ointment: plug-in electric vehicles’ fuel cost advantage is shrinking, and may be destined to disappear altogether. The reason? State and federal funds to build and repair roads and bridges are going dry, and legislators at both levels are looking for ways to raise revenues.
The principal way that highway funds are raised are through federal and state excise taxes on gasoline and diesel fuel, paid at the pump. To reduce tailpipe emissions and consumer expense, auto manufacturers have been improving fuel economy, which means less excise tax revenue even as total miles driven has continued to increase (in fact, in the U.S. it set a record last year).
Now, federal excises taxes – which stand at 18.4 cents a gallon for gasoline and 24.4 cents for diesel – aren’t indexed to inflation and haven’t seen an increase since 1993. Meanwhile, U.S. highway infrastructure has been deteriorating, and the cost to maintain or replace them has continued to go up. The result is that the U.S. Highway Trust Fund has been laying out more than it takes in for the past decade, and without an increase in fuel excise taxes is forecast to run out of funds by 2021 or 2022.
Raising federal fuel excise taxes has been and remains political kryptonite for Congress, but most states haven’t been shy about it. Every state has them, and over the past decade 31 have raised their fuel excise taxes, and 22 have adopted variable rates that will tend to rise over time. State excise taxes now average about 25 cents a gallon, and range from a low of 9 cents a gallon in Alaska to 58.7 cents in Pennsylvania.
New, higher state fees for EVs
What many state authorities haven’t failed to notice, though, is that hybrid electric vehicles contribute even less to fuel tax revenues that the most fuel-efficient ICE vehicles, and BEVs escape the tax altogether. As a direct result, a growing number of states have increased registration fees for electrified vehicles.
As of the end of 2019, 28 states have laws that levy special fees on electric and hybrid vehicles, compared to just two in 2013, but more states are contemplating them. This year, for fully-electric vehicles they range from as little as $50 in Colorado, Hawaii and Wyoming, to $200 in Arkansas, Alabama, Georgia, Ohio and West Virginia. Most of the 28 states charge about half as much to register hybrids, and two charge more for trucks: $235 in Michigan for BEVs over 8,000 pounds, and $300 in Georgia for “commercial vehicles”.
Instead of a higher registration fee, in Oregon and Utah, BEV owners can opt into the states’ voluntary vehicle miles traveled tax (VMT). In either case, and in either state, owners of electrified vehicles are guaranteed not to have to pay more than the fees the state otherwise charges.
By themselves, none of these fees remove the fuel cost advantage electric vehicles – they chip away at it, and only marginally raise the TCO of BEVs. But their significance lies in what they mean for the future: the possibility or, it says here, the likelihood of a national VMT that could eliminate the BE fuel cost advantage.
A national VMT pilot coming soon?
This September, the last five-year surface transportation act expires and Congress is scheduled to reauthorize it, along with a multi-billion spending plan to support highways, bridges and railroads. Congressional observers report that there is bi-partisan reluctance to raise federal fuel taxes, but at the same time there is support on both sides the aisle for a VMT.
In the House, there’s a bill sponsored by Rep. Sam Graves (R-MO), the ranking member of the chamber’s transportation committee, that calls for a full-fledged national VMT that applies to all cars and trucks before the end of this year. In the Senate, its Committee on the Environment and Public Works has come out in favor of a voluntary national pilot program to be launched this year, which may be limited to trucks only – a proposal opposed by the ATA, the trucking industry’s largest trade association.
Details on tax rates in either proposal have been vague. Nor is it clear whether a VMT would be instituted to replace federal fuel taxes altogether, or to supplement them. And that leaves out the issue of whether electric vehicles would pay a higher rate than gas- and diesel-fueled vehicles.
Parity at 9 cents a mile
So, let’s indulge in a little brain-storming here. Take a fleet sedan that runs on regular gasoline, gets 26 miles per gallon and travels 20,000 miles a year, and compare its annual fuel cost for a BEV that runs on electricity, costing the current national average of 12 cents a kilowatt hour and driving the same mileage.
At $2.44 a gallon, fuel costs the ICE-powered sedan around $1,877 a year, compared to $720 for the all-electric sedan. That’s an advantage of more than $1,100 for the BEV. But if lawmakers seek parity, it would take a VMT charge of a little more 9 cents a mile.
Nobody knows the outcome of this fall’s Congressional deliberations over how to keep the U.S. Highway Trust Fund solvent. But the tea leaves seem to indicate that sooner or later, a VMT that extracts more money out of electric vehicles will arrive. When it does, keep an eye on the BEV rate: 9 cents a mile is the bogey for losing the fuel advantage. Without significant reductions in the price of BEVs, anything more than zero cents will keep BEV’s TCO higher than the most fuel efficient, fossil-fueled vehicle.
