Will EV Costs Go Down? Understanding the Future of Electric Car Prices

Electric car prices are bound to go down, but when? And how quickly?

Electric car driving through neighbourhood
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While it may not be clear how quickly the average cost of electric vehicles will go down, one thing is nearly certain: the cost of EVs will indeed go down.

The key question for EV adoption may be: When will EVs be roughly the same price as gasoline cars? Once that happens, the automobile industry will likely be turned upside down.

What Do Electric Vehicles Cost?

The difference in prices between electric vehicles and gasoline cars is not as high as you might expect, especially since EV prices have been declining while the average gasoline car price has been increasing.

With the increasing popularity of sports utility vehicles and crossovers, the average American vehicle is getting larger and more expensive. According to Kelley Blue Book, the average price for a light vehicle in the United States increased in June 2021 to $42,258. That's $3,982 cheaper than the average electric vehicle cost of $46,240 (after a federal tax credit; not including any state or local incentives).

The least expensive EV available in the United States, the modest Kandi NEV K27, cost $15,499, while the least expensive gasoline-powered vehicle in 2021 was the Chevrolet Spark, with an MSRP of $13,600. (The two vehicles are hardly comparable, however, as the modest NEV K27 has three-times less the horsepower of the Spark.) Even if the lifetime costs of owning an electric vehicle are on average lower than those of a gas-powered car, their higher purchase price is one of the reasons sales of EVs remain low in the United States—only about 2% in 2021.

Different Business Models, Different Prices

As Tesla CEO Elon Musk recently pointed out, electric vehicle startup companies don't have the luxury that legacy automakers have of selling their cars cheaply.

According to the National Automobile Dealers Association, new car sales account for 58% of a dealership's total sales but only 26% of their total gross profit—meaning their vehicles are sold at or near their production cost. Rather, profits primarily come from service and parts, as well as from intangibles like insurance and financing—especially on older vehicles that have outlived their warranties.

This is known as the “razor blade business model,” named after Gillette, the first razor company to sell its razors at low cost and make profits on the replacement blades. Electric vehicles have lower service requirements, longer warranties, and fewer vehicles out-of-warranty, so EV manufacturers' gross profits must come primarily from vehicle sales themselves. This results in higher upfront costs to customers.

Price Parity Predictions

Automotive experts are almost unanimous in their expectations that EV prices will decline and reach price parity with gas-powered cars in the next few years.

What Is Price Parity?

Price parity is achieved when two assets maintain the same price and are equal in value.

Volkswagen CEO Herbert Diess anticipates price parity by 2025, while Bloomberg NEF predicts that EVs will be cheaper than gasoline vehicles “in about five years, without subsidies.”

With state and federal subsidies likely to continue into the near future, that price parity could come even sooner. In some vehicle categories, it is already here. Once price parity reaches the majority of vehicle types, experts predict large-scale market disruption, with EV sales outpacing sales of internal combustion vehicles.

There is one primary reason for the continued decline in electric vehicles, and a number of secondary reasons. First and foremost is the cost of the batteries that fuel the vehicles.

Battery Price Declines

Batteries destined for Volkswagen ID.3 electric cars
Batteries destined for Volkswagen ID.3 electric cars.

Sean Gallup / Getty Images

Just over half of the cost (51%) of an electric vehicle is in the powertrain—battery, motor(s), and their associated electronics. By contrast, a combustion engine in a conventional vehicle constitutes roughly 20% of the total vehicle cost. Of the battery's cost, 50% comes from the lithium-ion battery cells themselves, with the housing, wiring, battery management, and other components making up the other half.

The price of lithium-ion batteries (used in almost all electronics) dropped 97% since they were commercially introduced in 1991. EV battery prices dropped correspondingly, allowing EV makers to reduce the price of their vehicles. That trend, though not as steep, is likely to continue. Ford expects its batteries to cost 40% less by 2025, GM expects a 60% drop in its battery prices, and Tesla expects its new battery design to lead to a 50% price drop, allowing the EV pioneer to potentially introduce a $25,000 vehicle.

Innovations in battery chemistry are also leading to EV cost declines. Whether it's solid-state batteries, lithium-metal batteries, lithium-iron-phosphate batteries, cobalt-free manganese-based batteries, or a number of other innovations, we are living in a golden age of battery chemistry development for EVs and energy storage. Those new formulations are already leading to cost declines. When Tesla shifted to cobalt-free batteries in its Model 3 vehicles, it dropped the sales price by 10% in China and by 20% in Australia.

Cost reductions in batteries remain the promised land of EV adoption: Once batteries cost less than $100 per kilowatt-hour, price parity with internal combustion vehicles will be reached. When will that be? BloombergNEF predicts it will happen by 2023.

Decreasing Range Anxiety

Without a sufficient charging network to satisfy the range anxiety of potential electric vehicle buyers, manufacturers have focused on increasing the battery size (and therefore range) of their vehicles, with many EVs promising over 200 miles of range, far above the average American daily travel total of 40 miles. Improvements in battery efficiency and decreases in cost have only lead to larger batteries and longer range, not to reduced prices. That could soon change.

China has made a massive push in the expansion of its EV charging network, with over 112,000 charging stations installed in December 2020 alone. This has helped make the Wuling Hong Guang MINI EV, with only 106 miles of range but costing merely $4,700, the top-selling EV in the country.

In the United States, as a larger high-speed charging network assures EV owners that they will be able to charge their vehicles on road trips, EV makers face less pressure to build ever-bigger batteries with an ever-greater range. As the efficiency of those batteries continues to increase while their price continues to decline, batteries can be smaller in size but still provide the same range, lowering the overall cost of the car.

Economies of Scale

Production of the electric BMW i3
Production of the electric BMW i3.

Tramino / Getty Images

In 2020, nearly 250,000 electric vehicles were sold in the United States out of over 14 million new vehicles sold—merely 1.7% of the American new car market. In Europe, by contrast, 7.6% of new vehicles sold were fully electric, while in China the figure was 9.4%. This reflects the level of government support across the world. In Norway, with robust government incentives and widespread availability of charging stations, electric vehicles are as high as 64% of the new car market.

As sales volumes increase, production costs per unit decrease. Vehicle manufacturers are consumers, too—of raw materials and manufactured components, everything from lithium batteries to windshield wipers. The higher the number of their purchases, the lower the price per unit their suppliers will charge, ultimately reducing production costs.

According to Wright's Law, or the learning curve effect, the more units a manufacturer produces, production and delivery processes get increasingly efficient, leading to decreased unit costs. The EV industry is still quite young, with automakers still learning by trial and (sometimes) error.

As the industry matures, costs will almost inevitably decline. According to a joint study by BloombergNEF and the European campaign group: “An optimal vehicle design, produced in high volumes, can be more than a third cheaper by 2025 compared to now.”

Broader Market, Lower Prices

Tesla vehicles being delivered to customers

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The electric vehicle market is growing tremendously and experts expect it to continue to do so for the foreseeable future. The market forecaster Grand View Research predicts the North American electric vehicle market will expand by a compound 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 broad lead in the market, with 20% of worldwide sales primarily with just two models, the Model 3 and the Model Y, while in the United States, Tesla's market share was an astounding 79% in 2020. As more automakers enter the EV market and put a wider range of models up for sale, competition will put downward pressure on prices beyond the higher-end models which dominate today. So too will the increasing supply of used electric vehicles for sale—the top used vehicles sold today.

The Point of No Return

Sales of internal combustion engine vehicles likely hit their peak in 2017, while 2020 may have been the tipping point in the adoption of electric vehicles. In the short term, a shortage of chips and constraints on battery supplies are keeping EV prices from dropping. Remove those constraints, and electric vehicles will return to the technology advances, production improvements, and market expansion that make EV price declines nearly inevitable.