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The costly secrets of hybrid cars

Car makers are rushing to bring out fuel-saving hybrid models. But they don't tell you that these hybrids won’t always save much gas -- though they cost substantially more.

By Liz Pulliam Weston

Behold GMC's new hybrid, the K15 Sierra. This pickup truck scores a 3 on the EPA's 0-to-10 emissions scale, with 0 being the worst. It gets a whopping 18 miles per gallon in combined city and highway driving. That compares with the 16 mpg attained by its non-hybrid sibling, the K1500 Sierra.

So what, exactly, is green or even fuel-efficient about this vehicle?

You might ask the same question about Chevrolet's C15 Silverado hybrid (19 mpg, compared to the regular C1500's 18). Even some of the new vehicles touted as significantly less gas-hungry than their peers still post mileage ratings that could be bested by a regular old Toyota Corolla with a headwind.

Meanwhile, drivers of cars that actually have impressive EPA mileage ratings complain that their real fuel economy is far less advertised.

A focus on performance

What's going on here? Are car manufacturers perpetrating a scam on unsuspecting consumers?

Not quite, car experts say. Any car maker has to balance fuel efficiency with performance, said Bob Kurilko of car-shopping site Edmunds.com. With the latest generations of hybrids, manufacturers are simply leaning more toward the performance side of the scale.

The earliest incarnations -- the Toyota Prius and the Honda Insight, for example -- were stingy with gas, getting EPA ratings of around 60 mpg. But "they weren't much fun to drive," said Perry Stern, editor of MSN Autos.

"With the (hybrid Honda) Accord or the new Lexus RX, a buyer doesn't have to make that compromise," Stern said. "You get more power, and you get better fuel economy than other vehicles in the same class. It's not going to save tons of money at the pump, but you're not having to give up on fuel economy to get a more powerful vehicle."

Hard to justify

The problem is that car manufacturers are charging substantially more for these new hybrids than for their gas-using counterparts. Though the car makers tout extra performance, the bigger sticker price can make it harder to justify the economics of buying a hybrid.

For example, the hybrid Accord gets a combined 32 mpg, compared to the regular Accord's 24. But it also costs $3,300 more, Perry said.

Assuming you drive 15,000 miles a year and gas averages $2.50 a gallon, you'd be saving $391 a year on fuel. That means it would take you about eight years to break even.

And, under the new energy law, hybrid vehicles that don't achieve significantly better mileage won't share in the generous tax credits available to those that do.

The Lexus RX 400h, a luxury hybrid, carries a sticker price about $10,000 higher than that of the RX 330, the regular version of the crossover SUV. The hybrid clocks 31 mpg in city driving, compared to the gas-powered's 18 mpg.

"The Lexus story is that the new hybrid gets 13 mpg better than the standard V6 RX, but also gets 38 more horsepower," Stern said.

Lexus is also trying to bridge the price gap by making standard some of the features that are optional in the gas version. But there's still a pretty big difference in price tags.

There's a smaller gap between the hybrid and gas versions of the Ford Escape. The all-wheel-drive hybrid costs about $28,000, compared to $26,000 for a gas version with similar performance.

Now, the savings realized by today's performance-conscious hybrids could get a lot more compelling if gas prices rise over $3 a gallon and stay there, as some predict. But the numbers could start working against you if gas prices sink.

The new hybrids

Car makers will introduce at least 15 new models over the next few years.

Do they deliver on mileage?

Then there's the issue of whether these cars actually get the mileage they claim. This is actually a pretty big deal with the vehicles that are the most fuel-efficient: the Prius and the Insight. Owners have been yowling for years that their mileage isn't anything like the EPA's numbers.

"I drove a Prius for a week and never saw 60 mpg," Perry said. "I averaged around 42 mpg."

Now, that kind of mileage should make any Hummer driver blush. But it's not that much better than a fuel-efficient small sedan, like a Honda Civic. (The EPA clocks the Civic with Honda's "Lean Burn" engine technology at 36 mpg city, 44 mpg highway.)

So while hybrids might not be a scam, they are pretty expensive for what you're getting.

That's largely because hybrids are still a bit of a novelty act. As more models are introduced in coming years and competition heats up, at least some of that premium for hybrid technology should evaporate, predicted auto writer Terry Kosdrosky of Crain's Detroit Business.

In other words, if you're thinking about a hybrid, consider waiting a few years.

Rolling forward

If you're in the market for a car now, here are a few thoughts:

Consider all your alternatives. You don't have to go hybrid to get better-than-average mileage -- and you don't have to stick to small cars, either. FuelEconomy.gov keeps a list of the most and least fuel-efficient vehicles in each class of cars. You might want to take a look at today's diesel cars as well. The diesel versions of Volkswagen's Beetle and its Jetta and Passat Wagons were named the most fuel-efficient in their class.

If you're going to buy one of the "tax deduction" hybrids, get going. The waiting list for Priuses is six months long in many areas. Tax credits of up to $3,000 are available for cars delivered after Jan. 1, 2006 -- but only to the first 60,000 vehicles each automaker sells.

Whether you buy hybrid or not, consider ways to reduce your fuel consumption. Those ways haven't changed much since the energy crisis of the early 1970s:
Avoid jack-rabbit starts and stops; rapid acceleration wastes gas.

Keep your speed to 60 mph or less.

Reduce your trips by carpooling, combining errands, walking or biking.

Use public transportation.

Keep your tires properly inflated.

Replace clogged air filters.

Clean out your trunk (the more weight you carry, the worse your mileage)
(For more tips, read "14 ways to deal with $2-a-gallon gas.")

Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.

Power surge
With oil prices rising, alternative energy stocks have been on fire. But are they good bets for you?
September 27, 2005: 1:35 PM EDT

By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) – It's human nature: Some people see a bad situation and look for ways to profit from it. After all, greed and fear are the two key emotions that drive stocks.



With that in mind, it should come as no surprise that shares of many alternative-energy firms have soared during the past few weeks. The group includes companies that develop fuel-cell technologies, solar-power cells and microturbines for backup-power generators.

The devastation from Hurricane Katrina and Hurricane Rita in the Gulf of Mexico has helped lift the price of oil and gasoline to near record-high levels. And that has a lot of people both fearful of what can happen if those prices keep rising -- and greedy for the potential profits from so-called "cleaner" energy companies.

Shares of Capstone Turbine (Research) have surged more than 12 percent in the past month. Fuel-cell company Ballard Power Systems (Research) is up 15.5 percent. And Evergreen Solar (Research) has soared nearly 27 percent.

Short-term hype leads to sky-high prices

But are alternative-energy stocks good bets? It certainly seems like any company that will help lessen the nation's dependence on reliance on oil and gasoline would benefit in the next few years.

Investors have to be careful though.

"A few alternative-energy companies are going after the right markets but that doesn't mean you should go buy every name in the sector," said Sanjay Shrestha, an analyst with First Albany Capital. "Investors need to be cautious about chasing the stocks."

Shreshta said two companies that he likes right now are Distributed Energy Systems (Research), which owns a company that generates electricity from a variety of cleaner energy sources and another unit that makes hydrogen-generation systems, and Impco Technologies (Research), which manufactures fuel-efficient components for internal combustion engines.

Brion Tanous, an analyst with Merriman Curhan Ford & Co., also said there is legitimate long-term interest in alternative-energy companies. Specifically, he points to Evergreen Solar, which develops photovoltaic (PV) cells that convert sunlight into energy, and Energy Conversion Devices (Research), which makes nickel-metal-hydride (NiMH) batteries used in hybrid cars, as well as solar panels.

But he agrees with Shrestha about the need for caution. Even the companies that he likes may be too risky for average investors in the short-term, given their big run-ups. "These companies have already been discovered and people are piling into those stocks," Tanous said.

And he's more skeptical of fuel-cell companies like Ballard since fuel-cell technology is earlier along in its development, particularly when it comes to fuel-cells in cars.

"The strength of the hybrid market is pushing out development of fuel-cell vehicles and as a result, it is too early to get excited about Ballard," Tanous said.

Still, another problem for investors is that nearly all of the major alternative-energy pure-play firms are early-stage companies with relatively small, albeit rapidly growing, sales and no history of earnings or expectations of profitability in the near future.



So the prices for these stocks look frothy to say the least. Capstone Turbine, for example, has a market value of $347 million even though sales are expected to reach just $24 million next year. So it's trading at 14.5 times estimated revenue. FuelCell Energy (Research) and Plug Power (Research) also trade at price-to-sales multiples in the low-teens.

Safer ways to play the trend

As such, one professional investor said that it's smarter to make bets on established firms that are working on alternative-energy solutions.

"We don't play around in the tiny cap stocks that have technology and not much revenue -- the hope stocks. We invest in companies with clear cash-generation plans in place," said Ben Walker, senior portfolio manager with the Gartmore Global Utilities fund in London.

Walker said that rather than invest in the smaller pure plays, his fund has bought stakes in British water utility Pennon Group, which has a waste-disposal subsidiary that uses methane emissions from trash in landfills to generate electricity, French utility giant Suez (Research), which has a nuclear power unit, and Finnish firm Fortum, which uses hydroelectric power sources.

"A lot of companies are seeing the vast potential of renewable energy and efficient motor vehicles," Walker said.

Finally, there's another safer way for investors that are interested in the concept of alternative energy to bet on the sector. They could buy the PowerShares WilderHill Clean Energy Portfolio (Research), an exchange traded fund (ETF) that tracks the WilderHill Clean Energy Index.


The PowerShares WilderHill Clean Energy Portfolio is an exchange-traded fund (ETF) that may be the safest way to invest in the alternative energy sector.

That index is made up of 36 companies in the industry. In addition to many of the more speculative pure-play stocks, the index also includes larger, more diversified companies investing in alternative energy, such as Japanese tech firm Kyocera (Research), utility Scottish Power (Research) and chemicals firms Air Products (Research) and Praxair (Research).