Hybrid and electric cars are becoming increasingly popular. In late 2020, Hummer announced that it would be creating an electric vehicle. Now, small cars like the Toyota Prius as well as large trucks like the Hummer can be electric. Hybrid and electric vehicles are often more expensive than their gas-exclusive counterparts. At the same time their operating cost is lower. With federal and state tax incentives in the mix it can be difficult to discern if electric and hybrid vehicles are worth purchasing.

If you are evaluating a hybrid or electric car, it is essential to know what they are and how they may impact your budget before you buy.

What Are Hybrid and Electric Cars?

There are three types of hybrid / electric cards to consider:

1. Hybrid vehicles (hybrids) are powered by an electric motor that runs off energy stored in batteries and gas that powers a combustion engine. Hybrids do not plug in, but fill up their gas tank like a conventional car. Their MPG (mile per gallon) rating is usually double that of an equivalent gas powered vehicle.
    
2. Electric vehicles (EVs) only run off battery power and must plugin to recharge. EVs have a limited range in comparison to hybrids or conventional cars. The MPG of an EV is rated in terms of MPGe (miles per gallon of gasoline-equivalent) which accounts for the cost of electricity. MPGe is usually very high, above 100.
    
3. Plugin hybrids are a combination of an electric car and hybrid. Plugin hybrid electric vehicles (PEHVs) include a battery that can be used for a limited range, such as a daily commute. The gasoline engine kicks in when more power or range is needed. Plugin hybrids are worth looking at because they don’t suffer from range issues yet they are still great on gas mileage and low on carbon emissions.

While the price point for a new electric or hybrid vehicle is higher than a gas alternative, drivers can save money on gas and ease their environmental impact. Federal and state tax credits can bring the total cost of ownership for an EV or PHEV below that of a conventional vehicle.

What You Should Know Before Going Hybrid or Electric

Not all hybrid or electric cars are the same. You may need to install a charging system or plan your road trips a bit differently with an electric or hybrid car, so it is vital to understand a few things before you make the switch.

Savings on gas vs extra cost of hybrid / EV system

If your current vehicle averages 20mpg and the hybrid you are considering averages 40mpg, that will effectively halve the cost of gas. Over 5-10 years that could be more than what the hybrid system costs extra. If you drive an average of 10,000 miles per year and gas is $3.00/gallon they hybrid saves $750/year or $7,500 over 10 years.

With a plugin hybrid, the savings could be even more if the majority of your driving can be done using the battery only. If the battery is used 80% of the time (100 MGPe) and the gas engine gets 40mpg, the overall MGP would be 88, which would save about $1,100 / year in gas or $11,000 over 10 years.

With electric vehicles the concept of ‘mile per gallon’ doesn’t make much sense because there is no liquid fuel involved. However there is the cost of recharging the vehicle each day / week (unless you can use a free public charger), plus the cost of installing an in-home charger. In terms of the electricity cost EVs get a MPGe (electric mile per gallon rating) that is typically over 100.

Here is a comparison of fuel economy between the Toyota Rav4 Conventional, Hybrid and PHEV.

The actual savings depends on where you live. Some places have very high energy costs (such as Hawaii). Others have very low gas prices (such as Mississippi). Joule did an in depth study that shows which regions benefit the most or the least from switching to an electric vehicle (PDF version).

It also depends on what happens with electricity prices and gas prices in the future. Gas prices are generally a lot more volatile than electricity prices so buying an EV or PHEV is a way to lock out the risk of rising gas prices.
 

Cost of Ownership

Conventional cars run exclusively off gasoline or diesel using an internal combustion engine (ICE) which has lots of complex moving parts requiring regular maintenance. In general, electric vehicles have fewer moving parts and cost less to maintain.

One of the highest costs of owning an electric or hybrid vehicle is the battery. If you need to replace or fix the battery, it can be a significant expense and may not be covered by a warranty or insurance. It is difficult to predict how long any electric vehicle’s batteries will last. Therefore, you should do plenty of research before deciding what to purchase.

Additionally, many people charge their electric vehicles at home. You should look into how you will charge your car and if you will need to purchase additional equipment. If you charge your car at home, you will be responsible for the power bill each month.
 

How Many Miles You Drive

Before you purchase an electric or hybrid vehicle, do the mileage math according to how much you drive and where you drive. For example, if you are traversing hilly roads, high traffic areas, or continuously stopping, your hybrid vehicle may never switch to electric mode.

However, if most of your driving is done on the highway, your car may continuously be running on battery and saving you a ton of money on gas. Your electric or hybrid car may end up paying for itself!
 

Federal and State Incentives

The federal government offers a $7,500 tax credit for purchasing a qualifying EV or PHEV. You can only access the credit if you have more than $7,500 in taxable income in the year you purchase the qualifying vehicle. The credit has expired for Tesla but is still available for many manufacturers.

Some states offer tax incentives for fuel-efficient vehicles that stack on top of the federal credit. For example Colorado, Oregon and California each offer a $2,500 tax credit.
 

The Bottom Line

Factors such as where you live, what type of driving you do, what you currently drive, and more contribute to whether it is worth switching to an electric or hybrid vehicle. It is likely that switching to an electric or hybrid vehicle makes sense for your budget. Given the trend of dropping battery prices and advances in battery technology the savings will only continue to go up in the future. However most people who are interested in these kinds of vehicles are looking at the intangible environmental impact with reduced carbon emissions.

Additional Resources:

• Federal Tax Credits for EVs and PHEVs – list of vehicles and credit amount
• Enelx - State electric vehicle incentives
• NCLS – State electric vehicle incentives
• Stats on EV sales and status of federal tax credit
• Joule study showing which regions benefit the most or the least from switching to an electric vehicle (PDF version)
• Federal fuel economy ratings

Image Kia Niro at charging station, close-up view by Marco Verch Professional Photographer is licensed under CC BY 2.0.