For car buyers, a new reality is setting in: You don’t necessarily have to pay more to go electric. The automobile industry may never be the same.
There are some qualifiers, but the bottom line is a potentially momentous change.
With recent price declines, the cost to to buy and operate some electric vehicles over several years is now roughly on par with their gasoline-powered counterparts. The considerable government subsidies available to EV buyers—including a federal credit of up to $7,500 for qualified buyers and vehicles—play a part in this. But in some cases, EVs and their conventional equivalents are at cost parity even without those.
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It’s true that many electric vehicles still have a higher list price than their gas equivalents. But that gap is closing. We are now at the point that the considerable savings on fuel and maintenance costs that an EV offers can make up that difference, for some vehicles, over the first 2 to 5 years of their lives. Those savings also translate to an equal or lower monthly cost to own many EVs, when you add up the loan payment and fuel costs.
One remarkable detail about this development: It wasn’t Tesla that got us here, though the company has played a big part, by spurring the rest of the industry to roll out new models. Nearly all of the vehicles at cost parity with their gas equivalents are non-Teslas. At the company’s investor day Wednesday, Chief Executive Elon Musk said Tesla is working on slashing the cost of production, but he stopped short of announcing the next-generation affordable EV that many had hoped for.
There are other reasons EVs are becoming more attractive, including improvements in charging technology and the availability of public chargers. But the main reason for the disappearing cost gap is the declining price of battery packs—the single most expensive component in EVs, and the primary reason they typically cost more than conventional vehicles.
We can thank two things for the falling cost of those batteries. One is economies of scale. Domestic and international producers have gotten substantially better at churning out batteries, for what market research firm Adamas Intelligence projects will be nearly 20 million vehicles in 2023.
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The other factor, just as important, is the gradual—and often overlooked—accretion of countless technological improvements to the battery-manufacturing process over the past decade.
“Battery costs are the biggest contributor to the overall change in the cost of EVs, and their premium compared to [internal combustion engine] vehicles,” says Paul Augustine, director of sustainability at ride-sharing company Lyft. “We’ve seen that cost drop 90% from 2010 to 2020.”
From the earliest days of electric vehicles, skeptics and proponents have argued that until electric vehicles cost the same as gas-powered ones, most people are unlikely to switch. Mr. Musk repeated the sentiment Wednesday, saying: “The desire for people to own a Tesla is extremely high—the limiting factor is their ability to pay for a Tesla.”
Given the significance of batteries, this has led to an almost single-minded focus on bringing down their cost. It’s not just that scientists and engineers have figured out how to make batteries less expensively. They also are learning to make new kinds of batteries that use fewer expensive components. Some, like new iron-based batteries, known as LFP, that are used in some models by Tesla—and, in the future, by Volkswagen and Ford—don’t use metals such as nickel and cobalt that are increasingly supply-constrained and expensive.
As the global share of these nickel- and cobalt-free batteries has grown, they have helped to keep the prices of those elements from spiraling out of control, says Ryan Castilloux, managing director at Adamas Intelligence. Iron-based batteries now represent nearly a third of all batteries in electric vehicles, worldwide, and that share may continue to grow, he adds.
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Comparing apples to apples in EVs and conventional autos
Robbie Orvis is senior director for modeling and analysis at Energy Innovation, an energy- and climate-policy think tank. He recently published a paper that found that many new EVs are cheaper to own and operate than their gasoline equivalents, on a monthly basis.
Take, for example, the Mustang Mach-E, Ford’s popular electric crossover SUV. This varies by location, but the base model would cost around $46,000 total, if the buyer bought it with cash in New Jersey, according to Edmunds. Assuming a one-time $2,000 tax credit—the amount varies, but that is at the low end of what a consumer can expect—the total cost to own such a vehicle over 5 years, including depreciation, insurance, fuel and maintenance costs, is coincidentally also about $46,000. The full federal tax credit, and state credits, could bring that amount even lower for those eligible.
Compare that to a comparable gas-powered Toyota RAV4. If a buyer pays cash and purchases it in the same location, that RAV4 costs around $34,000, according to Edmunds. But, thanks mainly to gasoline costs, the RAV4’s total cost of ownership over 5 years is about $45,000.
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In other words, in this case opting for the Mach-E over the RAV4 costs the user only about $200 more a year, assuming gasoline prices stay around current levels. (If gas prices spike again, the electric vehicle could save its driver a considerable amount.)
Similar calculations can be done for low-end EVs, including the Chevrolet Bolt, the lowest-priced EV in America, with a list price of $26,500. That’s about $2,500 more than a comparable gasoline-powered Hyundai Kona, which has similar dimensions and cargo capacity. Assuming it is driven 15,000 miles a year and charged primarily at home, the Bolt can easily make up that difference on fuel savings alone, in the first couple of years a person owns it, according to Edmunds.
That doesn’t include state and federal tax breaks a buyer of such a Bolt can take advantage of. These can be tricky to navigate, but both the U.S. Energy Department and various nonprofits operate websites that can display them by vehicle type and buyer location. For many buyers, those incentives bring even the upfront, cash cost of a Bolt well below its gasoline equivalents. In a very real sense, the federal government decided to pay drivers to go electric.
An unexpected source of cheaper batteries
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In 2022, the price of a battery pack for an electric vehicle ticked up 6.9% from the year before, according to BloombergNEF, which compiles data on transportation and renewable energy. The main reason for this was spiking prices for critical components in the batteries used in most EVs, including lithium, nickel and cobalt. Cobalt in particular has seen rapid price appreciation, and some portion of it is mined under inhumane conditions, by hand, in one of the poorest countries on earth—the Democratic Republic of Congo.
That sparked fears that the EV revolution might be constrained for decades to come. But several things happened.
First, new sources of these critical minerals have rapidly come online, just as the global economy has cooled and consumers have pulled back on purchases of new vehicles and consumer electronics. In recent months this has damped prices.
At the same time, the auto industry has been rapidly adopting iron-based battery technology, an alternative to the conventional battery tech that is used in almost all our gadgets, and most EVs. These iron-based batteries still contain lithium, but don’t contain nickel or cobalt, and so are unaffected by those metals’ price fluctuations. At Tesla’s recent investor day, Mr. Musk said “the vast majority of the heavy lifting for electrification will be iron-based cells.”
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The initial research that made iron-based batteries possible was conducted by Arumugam Manthiram in the mid-1980s, at both the University of Oxford and the University of Texas at Austin, in the labs of John Goodenough, who in 2019 shared the Nobel Prize in chemistry for research leading to the development of modern lithium-ion batteries.
The reason Dr. Manthiram was working on batteries that could use iron, he says, was that even back in the mid-1980s he anticipated that if batteries became widespread in energy storage, there could be problems with obtaining enough nickel and cobalt to build them all.
While Dr. Manthiram pioneered the chemistry required to make iron-based batteries, it was China-based battery manufacturers, using considerable subsidies from the Chinese government, that built the manufacturing capacity to make them at scale. Such batteries now power the majority of EVs in China and are an option on some Tesla Model 3s in the U.S. Ford has committed to importing them from China and using them in some of its vehicles. Ford also has committed to building a $3.5 billion factory in Michigan to produce them, with help from China’s Contemporary Amperex Technology.
One reason the future will continue to be full of electric vehicles powered by both conventional and iron-based batteries is that each has its strengths and weaknesses. The ones used in consumer electronics and most electric vehicles in the U.S., which contain nickel and cobalt, are more energy-dense, which means they can give cars longer range. Iron-based batteries, on the other hand, are cheaper, tougher and can last longer.
Ever-cheaper EVs
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There are reasons to believe EVs could become even cheaper than their conventional equivalents in the near future.
Collectively, the world’s auto makers will spend more than half a trillion dollars through 2026 on building and developing EVs, according to consulting firm AlixPartners. That investment, supplemented by billions of dollars from the Infrastructure Investment and Jobs Act, will lead to further economies of scale in building EVs.
Mr. Augustine, of Lyft, says that some of the company’s drivers who clock hundreds of miles a week have for years found that existing EVs cost them less to own and operate than gasoline vehicles. As prices for EVs continue to fall, and models proliferate, a much larger portion of drivers for ride-hailing companies will shift to EVs, and the same will be true for everyday buyers of cars for personal use, he adds.
“Four years ago, there were only two affordable models, the Bolt and the [Nissan] Leaf,” says Mr. Augustine. Now there are nearly a dozen models available for less than $40,000 list price. Dozens more are arriving by the end of 2024, and more than a hundred by the end of the decade.
As this transition unfolds, it could soon put buyers of gas-powered vehicles in an unprecedented position: They’ll have to pay a premium to stick with last-generation technology.