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october 27, 2012 • 07:05 AM

The Costs and Benefits of Alternative-Fuel Vehicles

Wander into the busy Tesla Motors showroom at Fashion Island mall in Newport Beach, Calif., and you'll walk out with the feeling that a whole bunch of people are about to kick the petrol habit. Half the showroom space is taken up by the crowd surrounding a single floor model of the Tesla S, the world's first premium all-electric sedan. Roving employees, à la those at the Apple Genius Bar, deliver the sales pitch with fan-boy fervor: no oil changes, 0 to 60 mph in 4.4 seconds, manufactured in California. The breathless descriptions of technical details are often followed with "Pretty cool, huh?"

Well, yes. About a month after its June debut, the Tesla S had an 11-month waiting list and the kind of buzz most automakers can only dream about. It is, without a doubt, the car of the moment. But it is also an emblem of how far and how fast alternative-fuel vehicles (AFVs)--any vehicle that doesn't run exclusively on standard gasoline--have come. According to the U.S. Energy Information Administration, the number of them on the road increased from 534,000 in 2003 to almost 940,000 in 2010, the most recent figure available. Sales of hybrid and electric cars should nearly triple by 2017, when federal mandates for higher-efficiency vehicles kick in, says John Gartner, director of Pike Research's Smart Transportation practice.

From an environmental perspective, this is a very good thing. But for business owners, the real news behind the numbers is that AFVs are finally starting to make economic sense. In a year in which analysts have predicted record-breaking gas prices, the idea of getting 50 or even 95 miles per gallon seems extremely compelling. Sexy, even. At least sexy enough to get more people into showrooms, where they discover that the price of AFVs is decreasing, while the fueling infrastructure is growing. Add in tax incentives of up to $7,500 per vehicle, and that means more business drivers can recoup the upcharge from standard models, not to mention enjoy fewer trips to the pump and access to carpool lanes in traffic-riddled parts of the country.

SunRidge Farms, a snack-food-maker in Royal Oaks, Calif., began buying AFVs in 2004 as part of an overall strategy to go green. But the benefits have gone beyond that. "We save 33 percent on fuel costs off the hybrids alone," says Kelso Ingraham, SunRidge's operations and logistics manager. The sales team's vehicles are gradually being replaced with Honda Civic and Toyota Highlander Hybrids, and weekly delivery runs to Los Angeles are handled with three low-emission trucks.

"The main reason we made the decision to transfer to an alternative-fuel fleet is to keep our carbon footprint as low as possible, but it's definitely helping the bottom line," Ingraham adds. "The hybrids especially--they're easier to maintain, and I think they will end up lasting longer than our old fleet."

The range of AFVs on offer expands every year. There are more than a dozen types of fuel in production or development--the most commercially available being natural gas, electricity, propane, diesel and, to a lesser extent, hydrogen, ethanol and biodiesel--and automakers are racing to produce models to capitalize on the growing interest. Ford and GM are pushing ahead with all-electric and plug-in hybrid electric (a gas engine combined with a rechargeable lithium-ion battery) models. Clean-diesel and compressed natural gas (CNG) cars that boast higher fuel efficiency and cheaper per-gallon costs are finally, after decades of apathy, gaining consumer attention.2012 Toyota Prius Plug-in HybridImage courtesy of Toyota

Hybrids, powered by both electricity and gasoline, can get upward of 50 miles per gallon and are by far the most common type of AFV. With the oldest Priuses now on the road for 12 years, prices have dropped to levels comparable to those of standard gas-engine cars, and you'd be hard-pressed to find an automaker that isn't working on some kind of hybrid, no matter the budget. Even luxury marques like Bentley Motors, Porsche and Ferrari are getting into the game. Of course, how much a hybrid will save on your running costs depends on how much driving you do. (See sidebar below.)

"I feel strongly that the cost of a hybrid is justified because of savings in fuel and the lowering of your carbon footprint," says Paul Goldman, founder and CEO of JuicedHybrid, an online store based in Redwood City, Calif., that sells accessories and parts for AFVs. Goldman drives a 2012 Infiniti M35h, a luxury hybrid performance sedan that gets 27 mpg city and 32 mpg highway. He started JuicedHybrid in 2007, when he couldn't find the products he wanted to customize the Prius he was driving at the time. Sales at JuicedHybrid have doubled over the last 12 months.

Clean-diesel cars, which have better fuel economy than comparable gas-engine cars, are popular elsewhere in the world, especially in regions where gas is prohibitively expensive. In Europe, diesels have made up about half the sales of light-duty vehicles over the last several years. Now these cars are gaining a hold stateside.

Lou Halperin, CEO of Omaha, Neb.-based healthcare IT company OTTR Chronic Care Solutions, chose a 2012 clean-diesel Volkswagen Passat TDI SEL (43 mpg highway and up to 795 miles per tank) because he commutes about 100 miles per day. "I looked at the full carbon footprint of a hybrid, between the battery and motors, and I felt diesel was a better choice for the environment," he says. "Gas is only 10 to 20 percent less a gallon, but I get 40 percent better mileage."

Meanwhile, CNG vehicles like the Honda Civic GX and Chrysler's new RAM 2500 pickup truck take advantage of a per-gallon fuel price currently below $2 in some places--and often 50 percent cheaper than regular gas.2012 Infiniti M35hImage courtesy of Infiniti

"I've heard of companies saving $40,000 per vehicle over the five-year life cycle of a 100-van CNG fleet," says Erik Neandross, CEO of Gladstein, Neandross and Associates, which produces the annual Alternative Clean Transportation Expo. "Well to wheels, these vehicles are the cleanest cars available today, and we'll see a lot more coming on the market in the next couple of years." Refueling stations are still few and far between, though the infrastructure is growing fast, buoyed by enthusiasm for fuels that can be produced domestically.

Like any major business purchase, the switch to an AFV should involve research and consideration of the "true cost of ownership," advises Art Jacobsen, a former group leader in Honda's R&D department and now vice president of CarMD.com, an Irvine, Calif., company that sells a diagnostic device that plugs into a car's onboard computer system and flags necessary repairs.

If your motivation is primarily fuel-cost savings, the purchase may not add up, especially with hybrids that get only marginally better mileage per gallon than high-efficiency cars. Jacobsen says that even though AFVs are seeing greater sales volume, there is generally not enough data yet to determine if these cars are more expensive to maintain than standard autos. But, generally speaking, hybrids do not seem to age well. Older-model Priuses, for example, come with some of the industry's most expensive repair costs for common problems: A hybrid battery for a 2001 Prius runs more than $2,700, while a catalytic converter and engine-control module is about $2,900.

Still, Jacobsen believes the AFV's time is nigh. "We've been hearing about electric vehicles for 25, 30 years, but as a nation we haven't taken to it," he says. "Now we're jumping in with both feet."

The scene at the Tesla showroom, with car lovers drooling over the polished black Model S, is proof of that.

Bill Lee, an angel investor based in the San Francisco Bay Area, is one of the first 10 customers to own a Model S sedan. He appreciates the car's 265-mile range, cutting-edge design and features like a dashboard screen that opens the sunroof with the drag of a finger. But he is just as quick to point out a less tangible benefit. "Founders have respect for innovation, and they like investors who work with other innovative companies," says Lee, who has invested in SpaceX, HootSuite, Yammer and, yes, Tesla. "Having the model S helps me rise above the noise." 

The Alt-Buyer's Guide

With more than 9 million hybrid, electric and clean-diesel vehicles on the road--and more on the way--the decision to purchase an alternative-fuel vehicle (AFV) can be daunting. Here are some resources to help you get started.

Get the basics. The U.S. Department of Energy website offers a comprehensive overview of alternative fuels and vehicle options, plus case studies, reports, links to interactive maps and other resources.

Do the math. Visit FuelEconomy.gov for mileage and cruising range information on most AFVs, including a simple cost calculator.

Find the credits. Look up tax credits, rebates and grants from federal and state organizations for AFV purchases. Two good places to start are the Consumer Energy Center and the Department of Energy site's Laws and Incentives section.

Scope out fuel sources. Find prices and locations of AFV refueling or recharging stations around the U.S.--including those for CNG, biodiesel, hydrogen and ethanol cars--at AltFuelPrices.com.