When Volvo announced plans in June 2009 to produce a plug-in diesel hybrid, green car fans understandably got excited. Consider the possibilities of a safe, stylish and highly functional Volvo V70—but one with plug-in capacity, the ability to go 30 or so miles on electricity alone, and the rest of the power coming from an efficient diesel engine. Media reports said this would be “a reality” by 2012.

At the press conference, Volvo chief executive Stephen Odell said, “This is a significant leap compared to our earlier plans of offering a regular full-hybrid on the market by 2012.” Volvo engineers now are working feverishly to achieve that goal. What you may not know is that Volvo is hardly a Johnny-come-lately when it comes to plug-in hybrids. As far back as 1992, Volvo—with its ECC, Environmental Concept Car—had identified hybrids as the most promising future auto technology.

In 2007, the company announced that it would work with Swedish energy company Vattenfall and battery manufacturer ETC Battery and Fuel Cells Sweden AB on a $10 million demonstration project to put 10 plug-in hybrids on Swedish roads by 2009. At that time, Volvo also unveiled the Volvo ReCharge, a flex-fuel plug-in concept hybrid that uses electric motors housed in each wheel. The ReCharge promises 0 – 60 mph performance of nine seconds, a top speed of 100 mph, and 60 miles of all-electric driving on a three-hour charge.

From Prototypes to Real Cars for Sale

Volvo is aiming to make the transition from prototypes and evaluation—to real vehicles that consumers can buy in Europe in 2012. The company admits that a diesel vehicle with a lithium ion battery will be expensive—and that’s the main point of the company’s announcement this week. Working with Vattenfall, Volvo hopes to gain a better understanding of the driving and charging habits of plug-in drivers. In this way, it can refine the design of its plug-in hybrid and determine if the lithium ion battery—the most expensive component in a plug-in hybrid or electric car—can be made smaller. If so, then the vehicle can be made more efficient, cheaper and especially safer. After all, it’s a Volvo.

The current Volvo V70 plug-in hybrid demonstration car uses a 11.3 kWh battery pack, that at current prices could cost $10,000 or more. Volvo expects those prices to come down, especially if the battery is downsized to meet, but not exceed, consumer needs. The battery pack is combined with a front-wheel drive diesel engine with a rear-wheel drive electric motor. The high cost of combining hybrid and diesel technology so far has prevented auto companies from introducing diesel-powered hybrids—with or without a plug.

Promotional video explaining the joint venture between Volvo Cars and Vattenfall to produce plug-in hybrids for the European market by 2012.

The announcement about Volvo’s plug-in hybrid test program comes at a time when the company’s future is uncertain. Ford, its parent company, is shopping the brand and there are reportedly several interested buyers. The severing of ties with the US auto company allows Volvo to fully reclaim its Swedish identity—and fully adopt the Swedish government’s goal of becoming the world’s first oil-free economy by 2020.