Battery Costs Falling, Part 1 - Electric Vehicles

Can electric cars be built for less than gas cars? More pointedly, will electric car batteries, made of lithium-ion, ever achieve cost parity with the internal combustion engine? This all plays into a $1.7 Trillion auto manufacturing question. A change in how cars are fundamentally built can have massive implications for the auto industry.

To find answers, let's take a look at the future of electric vehicles. This future depends, somewhat heavily, on the pace of cost reductions for electric vehicle lithium-ion batteries. Unfortunately, the real cost of lithium-ion batteries remains a closely held secret by manufacturers. Estimates vary widely, making it difficult to determine how much lower lithium-ion battery costs will go before electric cars (especially those with longer ranges) can go "mainstream" in the industry.

But, new research is beginning to shed some light on these "secrets" in the industry. In Part 1 of this battery cost breakdown, we'll take a look at the electric vehicle (EV) industry and the pace of falling lithium-ion battery costs. In Part 2, we'll take a look at the electric vehicle industry leader, Tesla Motors, and how rapidly their battery costs are falling.  

First, some background: the energy stored in a battery is measured by kilowatt-hour (kWh). The more kWh stored, the further the car can go on a single charge, so a key metric for battery economics is the cost per kWh. The lower the cost, the cheaper it is to build an electric car with significant range. It's important to look back-in-time in order to recognize how earlier EV battery cost estimates have changed, and, how quickly they've changed.

So let's rewind back to the year 2013 -- the International Energy Agency (IEA) estimated that electric vehicles would achieve cost parity with internal combustion engine vehicles when battery costs hit $300 per kWh of storage capacity. The analysis projected that would happen by 2020.

Let's fast-forward to this year, according to MIT Technology Review, electric vehicles "may be close to competing with or even beating gas cars on cost... [and] depending on the price of gas, the sticker price of an EV is expected to appeal to many more people if its battery costs between $125 and $300 per kilowatt-hour." So things must've changed since those earlier 2013 estimates (see Figure 16 above)... does this mean we should update prior estimates? In short, yes. 

The MIT article references a peer-reviewed study that clearly demonstrates how lithium-ion EV battery costs are falling far faster than previously thought. The study’s authors, Björn Nykvist and Måns Nilsson explain: “We reviewed more than 80 different sources and found that in 2007, cost estimates for lithium-ion batteries for EV manufacturers were above US$1000 per kWh. Seven years later, the battery cost for leading electric car models was around US$300 per kWh…If prices keep falling at this rate, we could be on course to reach US$150 per kWh – the price point around which some people believe EVs can become directly competitive with petrol-driven cars.”

The study’s authors, Nykvist and Nilsson, research fellows at the Stockholm Environment Institute, reason that, "it’s quite possible that the earlier estimates, with little evidence to go on in terms of actual EV production, were overly pessimistic... We’ve seen it for years in solar cells, and now we’re seeing it in electric vehicles."

Separately this month, findings reported in Bloomberg demonstrate this very point: "costs are plunging in the electric car business as quickly as they did in the solar industry in the last decade. The price of lithium-ion batteries that power most electric cars has fallen 60 percent from 2010 and will keep declining at the same pace.”

Back to Nykvist and Nilsson, the research fellows conclude their study with this: "Tesla Motors, together with Panasonic, have started the construction of a [Gigafactory] battery plant... [this] alliance expects more than 30% cost reductions from economies of scale... a trajectory close to the trends projected in this paper."

In Part 2, we'll take a closer look at the Gigafactory (and Panasonic) to better understand the rate at which battery costs are falling for the electric vehicle industry leader, Tesla Motors.