Tuesday, February 12, 2019

Payback Schemes

Electric cars won't dominate the market until they make economic sense for the lower classes.

There are a lot of things you can do to save money, but chances are, you don't do a lot of them because the payback is measured in years, not months, and they might require a high capital investment.   Some things you might do because over time, they save you money, but also they provide you with some immediate benefit.

For example, we replaced our aging wooden-framed single-pane windows (circa 1970) with vinyl-famed energy-efficient double-paned insulated windows.   Yes, there were energy savings, and within about two or three years, we saved enough on our heating and cooling bill to pay back the $3000 cost of the windows (which we installed ourselves - windows installed by a "window store" would easily have been two to four times as much, stretching out the energy payback to a decade or more).

But the main reason we made the switch was we were tired of windows that were painted shut or swelled with the seasons, or let dust in the house or had broken screens.  We were also tired of the noise - we used to hear every car that went by the house.  Today, you don't even hear a car in the driveway.   The reasons we replaced it were more than mere energy savings - in fact, the energy savings were secondary.

Other "energy-saving" ideas we have not implemented because the payback is too long and the increased complexity isn't worth the hassle.  I looked into solar hot water, but the amount of money people want for these systems means the payback would take close to a decade, which means we'd have five years of actual savings before the design life of the system was reached.   In the meantime, we'd have to deal with balky pumps to maintain, along with controllers and valves, and of course, holes in the roof for all that plumbing.  And we'd have to hope a tree branch didn't take the whole thing out over its lifetime.

Hybrid cars fall along similar lines.   The payback is measured in years not months, and it can take the better part of a decade to recover the increased purchase price in terms of gas savings.  At $2 a gallon, it could take well over a decade.  And that's the problem - you buy something with a seven-year efficiency payback, and then the price of fuel drops in the interim, foiling your carefully laid plans.  And of course, if you buy a hybrid and then drive it like a jerk, you won't get better gas mileage than someone in a similarly sized non-hybrid.

One problem with these sorts of things is that they provide tax subsidies for them.   I am exhorted to buy a solar hot water heater as I might get a 30% tax credit (which I think has expired anyway) or a $7500 credit for buying a hybrid or electric car (ditto for some makes).  These are attractive to wealthy people who have high tax bills, which is why Musk was a genius for marketing $100,000 electric cars to the rich and Elio was an idiot for marketing $7500 three-wheeled cars to the poor.  At least the rich ended up getting their cars.

But the tax subsidy thing illustrated why these long-payback propositions are a no-sale for the poor.  My friend with the solar panels on his roof got some sort of tax deduction and was paid-back at retail rates for surplus electricity.   The poor person, living in an apartment, can't take that tax break or install such solar panels.

Oh, and by the way, the change in utility buy-back pricing illustrates again the pitfall of long-term planning when prices can change in the short-term.  Those solar panels would have paid for themselves in five years.   Now that the law has changed, it may be ten or twenty years before they pay back their installed cost - and that may be longer than they actually last.

The very poor don't have access to capital.  Moreover, they tend to make poor decisions, hence they are poor.  Things like buying in bulk or long-term paybacks are just not on their radar.   Hence why you see convenience stores and stores selling pints of liquor in poor neighborhoods.  That's why rent-to-own furniture stores proliferate in poor neighborhoods. Their time-horizon for investments and purchases is measured in days, weeks, and maybe months at most.   Years?  Out of the question.

The proposition of paying $5000 more for a car because in seven years, it will pay back the increased cost in gas savings is just a non-starter with the poor.   And this is not to bash the poor, only to state a fact of life.  And from their perspective, it may even be viewed as a logical choice.

In order to sell an electric car to the poor or even the lower-middle-class, it has to be a value proposition that is readily apparent.   The idea that the increased cost represents an equivalent quantity of gasoline isn't going to be obvious to them.    The only way to sell these vehicles to the poor would be if gasoline prices skyrocketed.  In the past, when gas prices hit the ceiling, people groused and complained and then went out and bought Japanese cars, or Chevettes, or whatever economy car got good gas mileage.

The problem is, of course, that if electric cars become popular with the upper classes, then the demand for gasoline will drop - and the price will drop accordingly.  Cheap gas ends up as a disincentive to the electric car - and could kill the electric car before it has a chance to kill itself.

There are also logistical problems to selling electric cars to the poor.    You already see well-used hybrid cars, on occasion in the ghetto, where some astute buyer did the math and realized that even a ten-year-old Prius was a good buy and good on gas.   For the most part, though, you see a lot of gas hogs in the poor neighborhoods - where we live, it is large SUVs and pickups.

But electrics require a charging station, and charging stations are not cheap and the price is the same for the rich as it is for the poor.  The rich guy with his $100,000 Tesla Model S can afford to hire an electrician and install a 220V sub-panel in his garage complete with Tesla charging station.  The poor cannot.   And unlike a used Prius, there are no used charging stations (or damn few of them) available to the poor - and there is still the labor to install them - assuming their electrical service is sufficient for the load (when I was poor, I lived in a house with 60 Amp service, I kid you not!   No, we did not have air conditioning or a heat pump or even an electric dryer!).

Either these things will have to charge from a 110V socket, or the government will have to subsidize the installation of charging stations on streets across the country.  Maybe some free-market entrepreneur will have to install them, along with a card-reader to charge customers for their juice.   Oh, right, a lot of the poor don't have credit cards and pay cash for gas at the convenience store.  How will that work for charging stations?

It gets me to thinking, how will that work for convenience stores?   Sure, some will still exist in the inner city.  But the vast majority make their money from coffee, donuts, beer, and lottery tickets that people buy when they stop off for gas.   The move to electric vehicles will be a game-changer.   Or will it have the opposite effect?  If people have to sit for an hour to "rapid-charge" their electric car, maybe they will sit down and eat lunch or buy even more coffee and donuts or whatever.   It is an interesting thought.

Whatever the outcome, I don't see electric cars being a value proposition to the poor and even the lower-middle-class, unless gas prices skyrocket to the point where going electric is the only realistic option.  And if the previous gas crises of the last 45 years are any indication, it seems people will cling to their gas guzzlers as long as possible before they give up and buy a smaller car.   And a smaller gas-powered car may be more of a immediate value-proposition to a poor person than a used electric car.

We'll see.  It is interesting to think about.

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