2011 Year of the Hybrid: Last week's milestones show hybrids are at tipping point

Is the market for hybrids finally at a tipping point? Last week, the U.S. hybrid market passed a series of significant milestones. Now, shifting public preferences, new lower-cost hybrid models, and clarity that standards will be strengthened are aligning in favor of hybrids as well as other fuel-efficient cars. And with no sign of high gasoline prices receding, all indications are that 2011 will be the year hybrids move into the fast lane.

The market begins with that people want – and the market has spoken. Since arriving at American auto dealers in 2000, the one millionth Prius hybrid was sold in the U.S. In March, overall hybrid sales shot up by 46% as compared to either March 2010 or the previous month of February. Hybrid sales easily outpaced the market; nearly triple the 16.8% increase in overall auto sales compared to March 2010 and almost double the 25.5% increase in overall auto sales compared to the previous month.

The boom in hybrid sales is no surprise. The market was primed to take off with widespread consumer interest in hybrids naturally translating into actual sales when gasoline prices rose in March. According to a February 2011 USA Today / Gallup Poll, about six out of every 10 American consumers said they would already consider a gas-electric hybrid when they have to replace their current car.  AAA reports that national average prices for regular gasoline jumped $0.60 a gallon between February 1 and April 1.

The future looks even stronger due to persistent high gasoline prices, more hybrid models, and the acknowledgement that pollution and fuel economy standards will be strengthened.

According to Kevin Riddell, an auto analyst at consultant J.D. Power and Associates, hybrids and electric cars market share will almost double by 2012, to 4.5% of all new vehicles purchases by 2012 from 2.4% last year. With a possible 13 million total sales this year, this could mean hybrid sales are on pace to top half a million units in 2012, vastly exceeding the 275,000 units sold in 2010.

High gasoline prices show no signs of abating and will likely continue to drive increased consumer demand for hybrids. The same USA Today / Gallup poll mentioned before found that at $4 a gallon 36% of consumers would accelerate their new car purchase and replace their current vehicle with a hybrid. Gasoline prices are already approaching or topping $4 a gallon in the West Coast and Northeast where hybrid sales are concentrated. Typically gasoline prices continue to rise in the spring as refiners switch over to cleaner burning blends and more people start to take trips.

Sales will also be fueled by the fact that more, lower cost models are arriving at dealer showrooms this year. According to auto forecaster Baum & Associates, the number of hybrid models (not including plug-ins) is expected to double by model year 2012 from the current 22 models to 43 models. [Note: The tragic earthquake in Japan will likely reduce hybrid supply but it’s unclear by how much.]

Many of this next wave of hybrid models will use an innovative new, lower-cost design called the “Parallel 2-clutch” or “P2”. This simpler system is being introduced on new hybrids by Honda, Nissan, BMW, Hyundai-Kia, and Volkswagen/Audi/Porsche. According to a new Society of Automotive Engineer report, the technology can lower the cost of today’s dominant design by at least a third and probably more. As I was quoted in USA Today as saying, these low-cost systems are “system[s] for the masses that’ll really push (hybrids) into the mainstream.”

The final, critical driver of growth in the hybrid market is the now near certainty that U.S. carbon pollution and fuel economy standards will be significantly strengthened. U.S. Congress no longer has a route to block the U.S. Environmental Protection Agency or California from moving forward with model year 2017 to 2025 standards this fall. President Obama also recently announced a 33% import target cut which will undoubtedly necessitate stronger fuel economy standards.

This next phase of standards could result in average fleet fuel efficiency as high as 62 mpg. It will clearly accelerate hybridization of the fleet, with perhaps over half the market by model year 2025 being hybrids, according to joint US EPA, DOT and California analysis.

Together, these trends paint a clear picture that the long-term fundamentals are driving sales growth for hybrids and other fuel-efficient vehicles: strong consumer interest driven by high gasoline prices, hybrid technology that is getting more widespread and cheaper, and U.S. energy security policy goals requiring stronger pollution and fuel economy standards.

Is this the long awaited tipping point for the hybrid market? All the signs indicate that 2011 will be the year of the hybrid. And that’s great news for our environment, energy security and our economy.