The economics of lithium-ion battery pricing

What will it take to spur mainstream adoption of electric vehicles? New McKinsey & Co. research suggests costs could drop up to 70 percent by 2020, which would make EVs truly competitive to gas-powered options.
Written by Heather Clancy, Contributor

I've already written two other stories about electric vehicles this week, why not a third?

Today's rant actually is about something with far broader ramifications: pricing for lithium-ion battery technology, which is important not just for electric vehicles but for applications in energy storage and, of course, all the mobile gadgets that most of us cannot live without.

New research from McKinsey & Co. (registration required) takes a deep look at this issue, suggesting that lithium-ion batteries need to cost about $250 per kilowatt-hour in order for automakers to design and manufacture electric vehicles (specifically all-electric passenger sedans) that are priced competitively (from a total cost of ownership perspective) to vehicles that use advanced internal-combustion technologies.

Right now, though, lithium-ion batteries cost from $500 to $600 per kilowatt-hour. That's a lot of ground to cover, but McKinsey believes that the industry can get there if the following things happen:

  • Manufacturing at scale: According to the McKinsey research, this one area could influence up to one-third of the cost reductions needed for a more competitive EV industry. This would come from improved processes, standardizing production equipment and higher unit volumes. Plants built between now and 2015 should be vastly more efficient than those built before 2011, the researchers suggest.
  • Lower component prices: Better prices for the materials that go into lithium-ion batteries along with better decisions about where to produce components could account for savings of about 25 percent, according to McKinsey.
  • Technical advances in capacity: The factor that will fuel better pricing scenarios is innovation, specifically new developments when it comes to cathodes, anodes and electrolytes that help boost capacity. The view into current and anticipated advances suggest that capacity will improve by 80 percent to 110 percent by the 2020 to 2025 timeframe, the McKinsey researchers report. Overall, this will account for 40 percent to 45 percent of the hoped-for price reductions.

Will all this come to pass? And when?

Personally, I think we should look first to how things play out in the consumer electronics world, where the interest in cheaper batteries is far more acute. But the McKinsey analysis underscores, yet again, the increasing relevance of battery technologies for many cleantech applications.


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