The higher cost of owning an electric car versus a gas-powered car is a key factor for many people looking to buy EVs. Now, the price of a key EV component is falling, raising hopes that automakers can close the gap as they grapple with declining demand.
Batteries make up about a third to a fourth of the cost of producing an electric car, according to analysts at Goldman Sachs. The firm predicts global costs for car manufacturers for batteries in 2024 will average $115 per kilowatt hour, which is about 23% lower than last year. Prices are expected to drop again by 20% by 2025.
Tesla CEO Elon Musk ( TSLA ) recently noted that costs have fallen for lithium-ion cells used in EV batteries, a big change from the “big spike” during the pandemic when automakers installed ” big, big orders.”
Musk said at the company’s shareholder meeting in June that “battery cell suppliers have increased their supply, and orders from other automakers have decreased.”
The drop in demand has affected the price of lithium. The precious mineral used to make current EV batteries has dropped more than 70% in the past year.
“Raw material costs are an important factor in the overall cost of EV batteries. As battery prices decrease due to technological advances, the contribution of raw material costs becomes more important,” Kieran O Regan, co-founder of a battery data and software company. About:Energy, told Yahoo Finance.
Of course, batteries are only one factor in how much EVs cost, which includes everything from research and development to assembly and production. But it’s one of the most important features as the industry races to catch up in China, where the cost of owning an electric car is already lower than a gas-powered car.
Alan Taub, director of the Michigan Materials Research Institute at the University of Michigan, said the battery industry has come a long way in lowering the price of EVs.
“Costs are coming down a lot with technology,” Taub said. “Now, nothing looks like the Achilles heel of ‘you can’t get there.’
This year US automakers have scaled back their plans to offer electric vehicles amid waning demand. Price is another reason for strong interest, along with various concerns and consumer preferences for hybrids.
Auto companies have tried to make EVs more affordable for consumers through financial deals and cash incentives, according to a report in the Wall Street Journal.
However, prices in the US haven’t dropped enough to make it cheaper to buy an EV than a gas-powered car.
The average cost of an electric car stood at $56,371 in June, compared to gas-powered cars at $48,644, according to Kelly Blue Book.
One reason for the price disparity is the tendency of US drivers toward larger vehicles that require larger, more expensive batteries. There is also a lag between when battery costs come down and when they are included in the price of new cars.
“There is a period that we have to account for here, that’s why 2024 is still a difficult year from an EV demand perspective, but we see the catalysts opening in 2025 from a demand perspective,” Nikhil Bhandari, CEO of the company. Asia-Pacific natural resources and clean energy at Goldman Sachs, he told Yahoo Finance.
Analysts at Goldman Sachs estimate the break-even point between EVs and internal combustion engine (ICE) vehicles, without accounting for government subsidies, will be reached in the US between 2025 and 2026 as battery prices continue to rise. they are even lower next year. The cost of owning a car includes not only the price of the car but also fuel or battery charging, repairs and maintenance throughout the life of the car.
Goldman’s timeline appears to be consistent with comments made by Elon Musk during the company’s recent earnings call when he said “we are on track to deliver a low-cost model in the first half of this year coming.”
Interest rate cuts by the Federal Reserve along with government incentives for electricity may also play a role in boosting demand.
Once prices move well below breakeven, “then [the electric vehicle] it basically becomes a money machine,” said Tom Narayan, global automotive analyst at RBC Capital Markets, highlighting the cost benefits of not including converters, engines or transmissions, found in cars of ICE.
Ines Ferre is a senior business reporter for Yahoo Finance. Follow him at X to @ines_ferre.
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