An expected sharp fall in the price of automotive lithium ion batteries over the next decade could make electric vehicles competitive with conventional cars, raising wide-ranging questions for the future of the electric power and petroleum industries, as well as for car makers, according to a new report from the management consultants McKinsey & Co.
The study predicts prices for the automotive battery packs could drop to about $200 per kilowatt hour by 2020 and $160 by 2025 from $500-$600 currently because of manufacturing economies of scale, lower component prices, and improvements in battery capacity.
Batteries that cost less than $250/kWh could allow automakers to offer EVs at a competitive price to cars powered by internal combustion engines, assuming U.S. gasoline costs $3.50 a gallon, said the report, in the McKinsey Quarterly bulletin.
“Given the path to substantially lower battery prices, which are now coming into view, executives should be considering bold actions to capitalize on one of the biggest disruptions facing the transportation, power and petroleum sectors over the next decade or more,” the report said.
Whether the EV adoption rate increases will also depend on a range of other factors including the vehicle’s performance, economic and regulatory conditions, and whether cheaper batteries spurs improvements in conventional engines, the report said.
But the prospect of a significant reduction in battery prices is likely to prompt automakers to re-examine their assumptions about advances in other power-train technologies, and to consider whether to invest in a range of technologies that would allow them to respond to changing market conditions.
“Scenarios featuring a relatively quick decline in battery prices and flat or rising petroleum prices favor battery-electric vehicle strategies,” the report said. Automakers anticipating a slower fall in battery prices, together with rising gasoline prices may favor plug-in hybrids or hybrid-electric vehicles.
Cheaper batteries could have reverberations well beyond the auto sector, the report said. Affected sectors could include the power industry which could face lower demand if low-cost batteries enable more distributed generation, or if EV charging affects the pattern of demand.
The technological improvements that result in lower automotive LI battery prices will be initiated in other sectors, particularly consumer electronics, which is spurred by strong demand for cheaper and better-performing batteries, the report predicted.
The most important driver of lower battery prices, accounting for as much as 45 percent, will be advances in cathodes, anodes and electrolytes, increasing battery capacity by 80-110 percent by 2020-2025.
About a third of the expected battery price decline will take place through economies of scale and productivity improvements by manufacturers, according to the report, which was based on interviews with battery plant designers, automotive suppliers, and battery assembly companies. Most of the gains will be achieved by 2015, and will come from improving manufacturing processes, standardizing equipment and spreading fixed costs over higher unit volumes.
Lower prices of materials and components for the batteries are expected to account for about 25 percent of the battery price reduction, the report authors said, on the basis of information from component makers, materials suppliers and commodities experts. For component manufacturers, the price decline will sharply cut margins, which could be offset by improving productivity and moving to less-expensive locations.