As battery prices drop, will electric cars finally catch on?

July 12, 2012

At the moment, Americans aren't exactly dashing out to dealerships to buy electric cars. The plug-in Nissan Leaf, which runs 75 miles on a single charge, has seen sales plummet since June 2011. Chevrolet's Volt, which contains both an electric motor and  back-up gasoline engine, has been faring slightly better, but still sold a mere 8,817 units in the first half of this year.

Waiting for battery prices to drop (REBECCA COOK/Reuters)

A big reason for those sluggish sales has been cost. Both electric vehicles and plug-in hybrids promise big savings at the pump, but they also have a hefty initial price tag. The Nissan Leaf has a starting cost of $36,050, while the Volt will set you back about $39,995 (though buyers of both vehicles can qualify for a $7,500 federal tax credit). That's a lot of money to plunk down upfront. Drivers would have a hard time recouping these extra costs even if gas prices were to double to $6 per gallon, according to the Energy Information Administration. It still makes more financial sense to buy a hybrid, like Toyota's Prius, or an efficient gas-powered vehicle.

And the biggest reason why electric cars are still so costly is the battery. It's big, clunky, and pricey. Ford CEO Alan Mulally recently revealed that a battery pack for the all-electric Ford Focus costs somewhere between $12,000 and $15,000 — which means it makes up roughly one-third of the cost of the vehicle. "So you can see," Mulally told an audience in April, "why the economics are what they are."

But what if the economics of car batteries changed drastically? New research from analysts at the McKinsey & Company suggests that the price for lithium-ion batteries could fall by as much as two-thirds by 2020. Instead of $600 per kilowatt-hour today, batteries would cost just $200/kwh in 2020 and $150/kwh in 2025. And that, the report suggests, would upend the entire automobile industry.

It's a bold prediction. Many analysts, including those at the Energy Department or at Pike Research, expect battery prices to come down only slowly, short of any radical technological breakthroughs. But the McKinsey report, written by Russell Hensley, John Newman and Matt Rogers, takes a closer look at three factors that they expect will have a powerful effect. As new factories come online to produce more and more batteries, economies of scale will drive down the price. So will a reduction in the cost of components, as well as smaller technical advances in cathodes and electrolytes that increase the capacity of batteries.

So what will this all mean for electric cars? The authors offer a useful chart that gives us a sense for when electric cars and plug-in hybrids will become competitive with regular internal combustion engine vehicles. If gas prices are high enough — and batteries cheap enough, then it makes more sense for a person to buy an electric car.

ICE = Internal combustion engine, PHEV = plug-in hybrids like the Chevy Volt, Hybrid-electric = hybrids like the Prius

Right now, we're at the point where batteries cost about $500 to $600 per kilowatt hours, and gas prices are hovering around $3.50. That's the purple square above. That means it makes sense for most people worried about gas prices to buy either a fuel-efficient vehicle or a hybrid like the Prius. (And that's exactly what we're seeing — sales of both are surging.)

But if battery prices fall down to the $250/kwh mark, as the McKinsey researchers expect to happen within the next decade, then suddenly electric vehicles make a lot of financial sense, even with gas prices at their current levels. The economics shift drastically. The McKinsey authors call this "one of the biggest disruptions facing the transportation, power, and petroleum sectors over the next decade or more."

Granted, there might be other reasons why electric cars may not catch on as fast as some enthusiasts are hoping — for instance, there's the much-discussed phenomenon of "range anxiety," where drivers don't want to be limited to a mere 75 miles before recharging, even if most of us don't drive much further than that on a daily basis. But, for now, battery economics seem to be the big thing holding back electric cars. And if battery prices come down as quickly as the McKinsey authors argue is possible, then that could all change in short order.


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Suzy Khimm · July 12, 2012