2012 McKinsey report says electric cars will be cost competitive by 2020

In July 2012, McKinsey & Company published a paper saying that electric cars would become cost competitive with gasoline cars, because of falling battery pack prices, by 2020. (see http://www.mckinseyquarterly.com/Automotive/Strategy_Analysis/Battery_technology_charges_ahead_2997) The key interesting thing was this graph connecting gasoline prices with battery pack prices, and showing the range of both where electric cars are cheaper to own than gasoline cars.

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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.

For gasoline powered cars the main driver for cost of ownership is the price of gasoline, while for electric cars it is the price of the battery pack. 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.

The McKinsey report claims that by 2020 the price for battery packs (price per effective kWh, assuming batteries with 70 percent depth of discharge, including the price of battery cells, battery-management systems, and packaging) will be on the order of $200 per kWh, and fall to $160 per kWh by 2025. They estimate the price for battery packs to be $500 to $600 per kilowatt hour (kWh) today.

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While the price for battery packs is hotly debated and the automakers keep that information close to their chests – some back of the envelope calculations suggests that Tesla Motors battery packs cost $411 per kilowatt-hour. This is derived from the price difference between the 60 kWh and 85 kWh Model S. That 25 kWh difference goes for a $10,000 cost differential. This suggests the cost for the whole Model S 85 kWh pack is $35,000 or so, which calculates to a cost of $411 per kWh. These are of course rough estimates that are probably wrong.

The report identified these factors leading to battery pack price reductions

  • Manufacturing at scale: The savings will come from improved manufacturing products, standardized production equipment, and amortizing the fixed costs over a larger production volume. All that business speak basically means lower battery pack prices because of better business efficiency. This should represent one-third of the potential cost savings.
  • Lower components prices: Higher volume manufacturing in turn allows the suppliers of battery components to improve their own efficiency. This represents 25% of potential cost savings.
  • Battery capacity-boosting technologies: Advances in battery technology, allowing greater energy and power density, means being able to deliver the same battery pack capacity at lower cost. Energy density is the kilowatt-hours per kilogram of weight, meaning a higher density battery pack uses less material to store the same quantity of energy. Less material required to build a battery pack should mean it will have a lower cost. Battery pack capacity could increase 80 to 110 percent by 2020-25. This represents 40-45% of the projected cost reductions by 2025.


About David Herron

David Herron is a writer and software engineer living in Silicon Valley. He primarily writes about electric vehicles, clean energy systems, climate change, peak oil and related issues. When not writing he indulges in software projects and is sometimes employed as a software engineer. David has written for sites like PlugInCars and TorqueNews, and worked for companies like Sun Microsystems and Yahoo.

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