The Economics of Electric Vehicle Sticker Shock (and Why They Might Soon be the Affordable Option)

By June 22, 2017Blog

By Tim Shea

Special Contributor


When Tesla Motors debuted their original Roadster in 2008, the car was viewed by many as little more than a novelty, a toy for the super-rich. Given that its starting price ran well north of $100k, it’s hard to disagree with that assessment. They certainly weren’t about to jumpstart the “Electric Car Revolution!” with those prices.

But a funny thing has happened since then: the cost of electric vehicles (EVs) has fallen. Drastically. In fact, we’re only days away from the production start date for the much-vaunted Tesla Model 3, a compact “premium” sedan with an eminently reasonable sticker price of just $35,000. Tesla’s price-slashing story is in many ways representative of the EV industry as a whole. The question is, how did it happen? And can and continue? And what does that mean for the auto industry’s future?

Okay, that’s three questions, but they’re all important.

The answer to the first question is actually fairly straightforward. EV technology and production processes were still in their (relative) infancy way back in 2008, and prices were astronomical because production costs were astronomical. Since then, both the tech and the processes have gotten better and costs have come down even as quality continues to improve. It’s a cycle frequently seen in emerging technologies. It happened with PCs. It happened with cell phones. And now it’s happening with EVs.

Specifically, improvements in battery technology are key to understanding this pricing plummet. In 2010, the average battery pack cost $1,000 for every kWh of electricity that could be stored. That cost has since dropped more than 77 percent to roughly $227/kWh, and Tesla claims to be down to $190/kWh. With EV batteries spanning anywhere from 40-100 kWh in capacity, these improvements can be attributed to literally tens of thousands of dollars in per-unit cost savings over just the past seven years alone.

So prices are falling, but can this be maintained? The short answer is yes. McKinsey & Company are predicting that the average price per kWh of capacity will drop to $190 industry wide by 2020. Meanwhile Tesla, perennially ahead of the curve, are claiming to be down near $100/kWh by then. This can partly be attributed to constantly improving technology, but it also boils down to business strategy. By consolidating battery production into gigafactories, the EV pioneers are hoping to leverage economies of scale and streamlined logistics to drive battery costs down to the point where they are truly competitive with internal combustion engines. Likewise, though it doesn’t impact the sale price, the lower maintenance costs of a vehicle with just a fraction of the moving parts of a traditional car could push the lifetime cost equation in EV’s favor.

As would be expected from an industry that has shaved double-digits from the average price tag over the course of only a few years, EV sales are expected to increase as much as five fold by 2020, with market share climbing to 2.4 percent worldwide. In select markets, such as China, the growth in EV market share is anticipated to be even more accelerated.

That means the EV Revolution is finally here, right? Not quite. Though much progress has been made, there’s still a lot infrastructure overhauling that needs to take place before EVs are a practical choice for many Americans. Similarly, the maximum range of EVs will need to improve if people are really going to buy into the concept. To put it another way, we need more power.

Some things, it seems, never change

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