The main barrier to widespread EV adoption, from a car buyer’s standpoint, is a very simple one: they cost more to buy than legacy vehicles. On a total cost of ownership basis, owning an EV is actually cheaper than owning a gas burner, as numerous studies have demonstrated (Would you believe it can be cheaper to own a Tesla Model 3 than a Toyota Camry?), but many buyers don’t look beyond the price on the sticker at the dealership, and purchase prices for EVs still tend to be substantially higher than those of “comparable” fossil rides. However, as Christopher Mims writes in a recent Wall Street Journal article, the gap is narrowing.
Above: A Tesla Model 3 (Image: Casey Murphy / EVANNEX).
Due to a variety of factors, the costs of producing EVs could drop drastically over the next few years, and given the competitive nature of the auto industry, automakers are likely to pass on much of the savings to buyers by lowering prices.
The main reason for the steadily shrinking cost of an EV can be found in its batteries. The battery pack is the single most expensive component in an EV, and this is the reason they’ve always cost more than legacy vehicles. But battery costs have been on a steady downward trajectory ever since the advent of modern EVs, thanks to improvements in the technology, along with economies of scale resulting from higher production volumes.
“Battery costs are the biggest contributor to the overall change in the cost of EVs, and their premium compared to [internal combustion engine] vehicles,” Paul Augustine, Director of Sustainability at Lyft, told the WSJ. “We’ve seen that cost drop 90% from 2010 to 2020.”
This trend went into reverse in 2022, as the aftermath of the COVID pandemic caused raw-material prices to soar. According to BloombergNEF, the price of an EV battery pack rose 6.9% compared to 2021— the first increase since Bloomberg began following the market in 2010.
Some feared that the party was over, and that battery prices would level off or even continue to increase. This didn’t happen, for several reasons. First, the Invisible Hand of the free market went to work, and higher prices gave producers an incentive to ramp up production. Second, automakers began using different battery chemistries that don’t require as much of the most expensive raw materials.
To date, most EVs have used batteries based on chemistries that use nickel and cobalt, which are not only expensive, but also come from regions with poor environmental and human rights records. However, for some time, Chinese automakers have been using a different battery chemistry—lithium-iron-phosphate (LFP), which uses no nickel or cobalt. Tesla began offering LFP-based battery packs in 2021, and now VW, Ford and other automakers are expanding their use of LFP chemistries.
Ryan Castilloux, Managing Director at Adamas Intelligence, told the WSJ that iron-based batteries now account for almost a third of all EV batteries produced worldwide, and he expects that share to grow. Nickel-based chemistries, which offer better energy density, will continue to be preferred for some vehicle segments, but LFP, which is cheaper and more durable, is likely to become the technology of choice for lower-priced mass-market EVs.
Batteries aren’t the only components that are expected to see price drops. Every day brings news of breakthroughs having to do with motors, inverters, electronics, and even such mundane parts as brakes and tires—and increasing range and lowering costs are top priorities.
Technological advances will deliver cost savings, but economies of scale will play an even more important role—and the scale of everything to do with EVs is expected to blast off over the next few years. Automakers and battery producers have massive investment in EV production lines, battery plants and new sources of raw materials in the pipeline—consulting firm AlixPartners told the WSJ that automakers will invest a collective half a trillion dollars in EV development and production through 2026.
All of the above should be enough to deliver substantial price reductions for EVs over the next few years. And there’s much more going on. The revamped tax credits included in the Inflation Reduction Act will deliver substantial savings to some EV buyers, but there’s a much less well-known section of the IRA that could have many times the impact of the tax credits.
Section 45X authorizes 10 years’ worth of funding for battery production credits that could reimburse a manufacturer for a big chunk of the cost of building a battery. One EV battery production expert told Car and Driver that Section 45X could cut one-third to one-half off the total cost of a US-made battery pack. And here’s the kicker: Because the subsidy is based on a fixed dollar amount, if the actual cost of producing a battery pack continues to drop, the cost to the manufacturer after the subsidy could theoretically fall to zero.
Of course, there are a lot of unknowns when dealing with a new technology, so prices can’t be predicted with any precision. It does seem certain, however, that EVs will continue to get cheaper, and as the WSJ’s Christopher Mims puts it, car buyers could soon be in a very strange position: If they insist on sticking with last-generation technology, they’ll have to pay a premium.
Source: Wall Street Journal