The prevailing wisdom about electric vehicles (EVs) is that they’ll remain a niche market until they cost the same (or less) than traditional petrol-powered cars. Most research groups reckon that price parity will happen in the next three to five years. Not so fast, says a fresh new report from MIT, which says that’s not going to happen anytime soon.
The reason: electric vehicles won’t become cheaper until lithium-ion batteries also become cheaper. And therein lies the problem.
According to a March 2019 report from McKinsey, a small- to midsize EV costs about $12,000 more to manufacture than an equivalent-sized fossil-fuel car – which means not only that few people can afford them, but for the most part OEMs are losing money on each EV sold.
The most expensive component is the lithium-ion battery, which McKinsey estimates to cost somewhere between $190 and $210 per kilowatt-hour (kWh). Assuming a 50/kWh battery pack, that’s a minimum of $9,500 – just for the battery.
McKinsey reckons the sweet spot for lithium-ion batteries is $100 per kWh – once it drops to that price point, and factoring in other cost reductions, it should cost OEMs the same to make either a standard car or an EV. Because battery costs have been dropping steadily for the last few years, McKinsey forecasts we could reach that point by 2025.
But that’s assuming the cost of lithium-ion batteries drops at more or less the same rate. The new report from the MIT Energy Initiative says it won’t, reports Technology Review:
… Reaching the $100 threshold by 2030 would require material costs to remain flat for the next decade, during a period when global demand for lithium-ion batteries is expected to rise sharply, the MIT reports notes. It projects that costs will likely fall only to $124 per kilowatt-hour by then.
That would bring the TCO for gas-powered cars and EVs to more or less the same level, but the sticker price of EVs would still be thousands of dollars higher.
And even though costs will improve in some areas of the battery-making process, the cost of mining metals can’t get much cheaper, which the report says is going to slow down declines in the cost of materials considerably after 2025.
Are there other ways to cut costs? Yes – the McKinsey report lists a number of ways electric car OEMs can cut costs, such as improvements in battery efficiency (which means a smaller and less-costly battery pack for the same range) and motor performance, as well as reductions in indirect costs.
But those cost reductions are incremental – the cost of the battery is the one component that has to come down dramatically for the economics to work.
McKinsey does suggest an innovative alternative business model – lease the battery instead of selling it. That would not only make the base cost of an EV lower than a standard car, but would also create an additional revenue stream for the EV to the tune of around $1,000 per vehicle over a five-year lease period. That said, McKinsey did admit not many consumers would go for paying an extra monthly rental fee for the battery.