Anyone watching the electric vehicle industry’s progress over the past few years has probably been dismayed at the glacial adoption rate of EVs. It’s still rare to spot an EV on the road, even in major metropolitan areas. But take heart: even if we don’t reach some sort of gas price tipping point for EV adoption, research from McKinsey suggests that the price of lithium-ion batteries could plunge by 2020, creating a space for the EV market to flourish.
The report, released in McKinsey Quarterly, says that the price of a lithium-ion vehicle battery pack could plunge from $500 to $600 per kilowatt hour today to about $200 per kWh by 2020 and $160 per kWh by 2025 due to major technological advances. If gas prices in the U.S. stay at or above $3.50 per gallon, EVs could compete on total cost of ownership with gasoline-powered vehicles (with batteries at $250 per kWh).
A boost in battery innovation will likely come from the consumer technology industry, where lithium-ion batteries will continue to power more and more of the gadgets we use every day. "[The industry] will benefit from tailwinds provided by other industries," explains John Newman, an associate principal at McKinsey.
There are a handful of macroeconomic factors at play that will influence lithium-ion battery prices, including energy prices (which could plunge because of new gasoline extraction technologies), regulations for fuel economy and safety in the auto industry, technology, and demand.
Even if gasoline prices drop, upcoming fuel efficiency and tailpipe limit regulations will make EVs attractive to automakers. "From a regulatory standpoint, we don’t need vehicles this fuel efficient but we will need them as we move toward and beyond 2020," says Russell Hensley, a principal at McKinsey. "Historically in the automobile industry, if you have a regulation, then that is the primary driver of innovation and technology uptake."
Nevertheless, oil prices will impact whether automakers favor battery electric vehicles (BEV), plug-in hybrids, or even today’s hybrid electric vehicles. The report explains: "Scenarios featuring a relatively quick decline in battery prices and flat or rising petroleum prices favor battery-electric-vehicle (BEV) strategies, as the exhibit indicates. Those anticipating slower declines in battery prices, as well as increases in petroleum prices, favor plug-in hybrid electric vehicles (PHEV) or, perhaps, today’s hybrid-electric vehicles (HEV)."
If McKinsey is correct and lithium-ion battery prices drop, power companies will have to start seriously thinking about how a glut in EVs will affect the power grid (a recent report from MIT lists all the things that will need to happen to make sure the grid can handle EVs, solar, and wind power). And if we’re lucky, automakers will start looking beyond lithium-ion batteries in the coming decades to better-performing lithium-air batteries.