Will EV costs go down? The future of electric car prices

While it is not clear how quickly the average cost of electric vehicles will decrease, one thing is almost certain: the cost of electric vehicles will actually decrease.

The key question for the introduction of electric vehicles could be: When will electric vehicles be about the same price as gasoline cars? If that happens, the auto industry will likely be turned upside down.

What do electric vehicles cost?

The price difference between electric vehicles and gasoline cars is not as large as you might expect, especially since electric vehicle prices have decreased while the average gasoline car price has increased.

With the increasing popularity of sports utility vehicles and crossovers, the average American vehicle is getting bigger and more expensive. According to the Kelley Blue Book, the average price for a light vehicle in the United States rose to $ 42,258 in June 2021. That’s $ 3,982 cheaper than the average EV cost of $ 46,240 (after a federal tax credit; with no state or local incentives).

The cheapest electric vehicle available in the US, the humble Kandi NEV K27, was $ 15,499, while the cheapest gasoline-powered vehicle in 2021 was the Chevrolet Spark, with an MSRP of $ 13,600. (The two vehicles are hardly comparable, however, as the humble NEV K27 has three times less horsepower than the Spark.) While the lifetime cost of an electric vehicle is on average lower than that of a gasoline car, its higher purchase price is one of the reasons why the Electric vehicles in the United States will remain low – only about 2% in 2021.

Different business models, different prices

As Tesla CEO Elon Musk recently pointed out, electric vehicle startups don’t have the luxury that old automakers have of selling their cars cheaply.

According to the National Automobile Dealers Association, new car sales account for 58% of a dealer’s total revenue, but only 26% of total gross profit – that is, their vehicles are sold at or near their cost of production. Rather, the profits come primarily from service and spare parts, as well as from intangible assets such as insurance and financing – especially for older vehicles that have exceeded their warranty period.

This is known as the “Razor Blade Business Model” named for Gillette, the first razor company to sell its razors at low cost and make a profit on the replacement blades. Electric vehicles have lower service needs, longer warranties, and fewer out-of-warranty vehicles, so EV manufacturers’ gross profits must come primarily from vehicle sales themselves. This leads to higher upfront costs for customers.

Price parity predictions

Automotive experts almost unanimously assume that prices for electric vehicles will fall in the next few years and will reach price parity with gasoline cars.

What is price parity?

Price parity is achieved when two assets have the same price and value.

Volkswagen boss Herbert Diess is assuming price parity by 2025, while Bloomberg NEF predicts that electric cars will be cheaper than gasoline-powered cars “in about five years without subsidies”.

With state and federal subsidies likely to continue in the near future, this price parity could happen even sooner. It is already there in some vehicle categories. Once price parity hits the majority of vehicle types, experts predict a large-scale market disruption with sales of electric vehicles outpacing sales of internal combustion engine vehicles.

There is one main reason for the continued decline in electric vehicles and a number of secondary reasons. First and foremost are the costs of the batteries that fuel the vehicles.

Battery price goes down

Batteries for Volkswagen ID.3 electric cars.

Sean Gallup / Getty Images

A little more than half of the cost (51%) of an electric vehicle is attributable to the drive train – battery, motor (s) and the associated electronics. In contrast, an internal combustion engine in a conventional vehicle accounts for about 20% of the total vehicle cost. 50% of the battery costs are attributable to the lithium-ion battery cells themselves, the other half are made up of the housing, cabling, battery management and other components.

The price of lithium-ion batteries (which are used in almost all electronic devices) has fallen 97% since they were first introduced in 1991. EV battery prices fell accordingly, which allowed electric vehicle manufacturers to lower the price of their vehicles. This trend, if not so steep, is likely to continue. Ford expects its batteries to cost 40% less by 2025, GM expects battery prices to drop by 60%, and Tesla expects its new battery design to result in a 50% drop in price, allowing the EV pioneer to possibly get one Introduce $ 25,000 vehicle.

Innovations in battery chemistry also lead to lower EV costs. Solid-state batteries, lithium metal batteries, lithium iron phosphate batteries, cobalt-free batteries based on manganese or a number of other innovations – we live in a golden age of battery chemistry development for electric vehicles and energy storage. These new formulations already lead to cost reductions. When Tesla switched to cobalt-free batteries in its Model 3 vehicles, it cut sales prices by 10% in China and 20% in Australia.

Battery cost reductions remain the promised land of the introduction of electric vehicles: As soon as batteries cost less than US $ 100 per kilowatt hour, price parity with vehicles with internal combustion engines will be achieved. When will that be? BloombergNEF predicts this will be the case by 2023.

Reduction of fear of range

Without a sufficient charging network to satisfy potential electric vehicle buyers’ range fears, manufacturers have focused on increasing the battery size (and thus the range) of their vehicles a total of 40 km. Battery efficiency improvements and cost reductions have only resulted in larger batteries and longer range, not reduced prices. This could change soon.

China has massively expanded its e-charging network, with over 112,000 charging stations installed in December 2020 alone. This helped make the Wuling Hong Guang MINI EV the best-selling EV in the country, with a range of just 106 miles but only $ 4,700.

With a larger, high-speed charging network in the United States ensuring EV owners can charge their vehicles while driving on the road, EV manufacturers are under less pressure to build ever larger batteries with ever greater range. As the efficiency of these batteries continues to increase while their price continues to decrease, batteries can be smaller but still offer the same range, lowering the overall cost of the car.

Economies of scale

Production of the electric BMW i3.

Tramino / Getty Images

In 2020, of over 14 million new vehicles sold in the US, nearly 250,000 electric vehicles were sold – just 1.7% of the US new car market. In Europe, however, 7.6% of the new cars sold were fully electric, in China 9.4%. This reflects the level of government support around the world. In Norway, electric vehicles account for up to 64% of the new car market thanks to robust government incentives and the widespread availability of charging stations.

As the sales volume increases, the production costs per unit decrease. Vehicle manufacturers are also consumers – of raw materials and manufactured components, from lithium batteries to windshield wipers. The higher the number of their purchases, the lower the unit price their suppliers charge, which ultimately lowers production costs.

According to Wright’s law or the learning curve effect, the more units a manufacturer produces, the more efficient production and delivery processes become, resulting in lower unit costs. The EV industry is still quite young, and automakers are still learning through trial and (sometimes) error.

As the industry matures, costs will almost inevitably decrease. According to a joint study by BloombergNEF and the European campaign group: “An optimal vehicle design that is produced in large numbers can be more than a third cheaper by 2025 compared to today.”

Wider market, lower prices

Smith Collection / Gado / Getty Images

The market for electric vehicles is growing enormously and experts expect that this will continue to be the case for the foreseeable future. Market researcher Grand View Research predicts that the North American electric vehicle market will grow at an average annual growth rate (CAGR) of 37.2% between 2021 and 2028. Worldwide, Allied Market Research expects a CAGR of 22.5% by 2027.

Today, Tesla has a huge lead in the market with 20% of global sales, mostly with just two models, the Model 3 and Model Y, while Tesla’s market share in the US was a staggering 79% in 2020. As automakers enter the EV market and have a wider range of models for sale, competition will put pressure on prices beyond today’s dominant high-end models. Likewise, the increasing range of used electric vehicles will be available for sale – currently the most widely sold used vehicles.

The point of no going back

Internal combustion engine vehicle sales likely peaked in 2017, while 2020 may have been the turning point in the introduction of electric vehicles. In the short term, a shortage of chips and limitations in battery supply prevent the price of electric vehicles from falling. When these limitations are removed, electric vehicles will return to the technological advances, production improvements, and market expansions that make electric vehicle prices almost inevitable.