Unpacking the Total Cost of Electric-Vehicle Ownership

The industry should emphasize to customers that battery-electric vehicles are approaching cost parity with internal-combustion vehicles over 5 years of ownership.

3 Min Read
Polestar 2 in showroom (Getty)
BEVs' residual values improving significantly.Getty Images

While battery-electric-vehicle (BEV) sales have increased noticeably in the past few years, high MSRPs compared with internal-combustion-engine (ICE) offerings and complicated total cost of ownership (TCO) calculations could put current momentum at risk.

Being in uncertain economic times, it is critical for BEV manufacturers to determine how best to communicate their own BEV TCO story.

The good news for the BEV industry is that several factors make a solid objective case for a positive TCO outcome when comparing BEVs to ICE counterparts in the long run. Indeed, according to J.D. Power analysis, about one-fourth of all BEVs on the market, today cost less to own and maintain across a 5-year period than comparable ICE models.

The bad news, however, is that arriving at this conclusion requires a little more math than most shoppers are used to when making a car-buying decision. This poses a challenge for dealership sales teams, who often adhere to the adage, “If you are explaining, you're losing.”

It is a dynamic that puts the burden on consumers to decipher the economics of BEV ownership. However, the challenge for prospective buyers is that information about current and projected BEV values is all over the place. It isn't easy to aggregate and analyze data from a wide array of sources to land on a concise and accurate conclusion. Many moving parts are constantly evolving. For instance, comparative cost analyses of BEV options in 2022 will change as we enter 2023, depending on income levels and whether vehicles under consideration are covered by tax incentives included in the Inflation Reduction Act of 2022.

The picture is also evolving at the state, county and municipal levels. Local authorities and institutions such as utilities are developing their ownBEV policies for their specific communities. Consequently, TCO analysis will vary based on how much you earn, what you buy and where you buy it, begging the question: How can the industry simplify the dialog?

From the General to the Specific

The path to mass adoption will move from those who have developed an initial interest in BEVs to those anxious to get a vehicle in their driveway.

While the overall price is generally higher on a BEV versus an ICE vehicle, significant federal, state and local incentives offset the initial price. Additionally, the operating costs are lower because the cost of electricity is lower than gasoline. Furthermore, most utility companies offer rebates for charger installations and incentives for time-of-use charging. And finally, retained values in dollars tend to be higher on a BEV, also offsetting the initial price.

BEV residual values have come a long way in a short period of time. Currently, the average retained value of a 3-year-old EV is just under 60%. It represents a significant improvement from BEVs in the market back in 2015 when average BEV residual values were below 20%.

This all adds up to a complicated equation, but also helps to explain why affordability is approaching parity with ICE with a 5-year total cost of ownership. 

This basic analysis (below) should stop consumers from falling out of the funnel:

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22-US-JDP-EVI-Afforability-TCO-122022-ChartOnly (002)

A Path Forward

To keep prospects in the showroom, automakers and dealerships can apply these key TCO attributes to the specific BEVs in which prospects are interested. Beyond providing economic clarity, running the numbers puts dealers in the consultative position of tailoring vehicle recommendations to the needs of their customers.

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Given that 30% of BEV rejectors cite a "lack of information necessary to commit to a purchase" for staying with ICE options, offering clear TCO context represents a strategic opportunity for all stakeholders. If the industry wants to maintain current momentum – or better yet, build on it – sales leaders, rather than customers, should move first to develop a transparent BEV TCO conversation.

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David Paris 2021 (002)_1

Elizabeth Krear (pictured, above left) is vice president of electric-vehicle practice at J.D. Power. David Paris (pictured, left) is director of market insights and valuation services at J.D. Power.

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