McKinsey Quarterly

Electric cars to become inevitable, cost competitive, by 2020ish says report

Falling battery pack prices will contribute to lower cost of ownership for electric cars, and a few years into the future electric cars could be cheaper to own than gasoline powered ones, according to a report from McKinsey Quarterly.

A study released recently by McKinsey & Company says that, because of falling battery prices, electric vehicles are inevitable. Shifting prices will make electric cars cost-competitive with gasoline in the 2020's. That would erase one of the two resistance factors to buying an electric car: the price. The other resistance factor, electric car driving range, will be erased along the way, according to the report.

McKinsey, a business management consulting company, published the study on its website late last week. Researchers developed a cost model for battery packs based on 40 underlying cost factors. With it they identified three factors that would accelerate the mass adoption of electrified vehicles, by decreasing the cost for battery packs, and improving the total-cost-of-ownership.

The report points to two major factors in vehicle ownership cost. For gasoline powered vehicles, the main cost driver today is the price of gasoline. That price is much higher, at approximate $3.50 per gallon nationwide, than it was a few years ago, and there are many factors indicating gasoline prices will rise significantly in the coming years. Over the short term gasoline prices will rise and fall with market manipulation, and the opening of new oil fields in the U.S., but over the long term fossil oil supply will become ever-more constrained, leading to higher gasoline prices. In electric vehicles the main cost driver is battery pack prices. For example the price difference between the 60kwh and 85kwh Tesla Model S's is a $10,000 price jump, for 25 kilowatt-hours of battery capacity. That suggests roughly one-third or so of the cost of a Nissan Leaf is the battery pack, and that the price of the 85 kwh Tesla Model S battery pack is approximately $35-40,000.

Along with the report came a chart showing the range of battery pack prices and gasoline prices in which different vehicle technologies were price competitive. For all electric battery-only vehicles, the sweet spot is battery pack prices under $250 per kilowatt-hour. If gasoline prices rise, the sweet spot for all electric vehicle battery packs increases. The actual price for battery packs is a hotly contended topic, with the automakers holding their cards close to their chest. However, because Tesla Motors is selling the Model S at different prices based on battery pack size, we have a rough estimate of the cost of Tesla's battery packs. Based on the $10,000 price jump between the 60 kilowatt-hour and 85 kilowatt-hour models of the Model S, we have estimated the 85 kilowatt-hour Tesla Model S battery pack costs $35,000 or so, or $400-500 per kilowatt-hour.

If the McKinsey estimates are accurate, battery pack prices could drop to $200 per kWh by 2020 and to about $160 per kWh by 2025. That by itself would knock $17,000 or more off the price of a Tesla Model S dropping its price from the $75-80,000 range to $60,000 or so. The Nissan Leaf, if battery pack prices fell that much, would lose $5000 or more off its price, to have an MSRP close to or less than $30,000. All these numbers are rough ballpark estimates, because as we said the actual price for battery packs is a closely guarded secret.


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