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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Will Electric Cars Be Cost Competitive By 2020?

Tesla assembly line

The energy market is constantly transforming and advancing the way we use everyday products. Very soon, the internal combustion engines we’ve been accustomed to for over 100 years, may be replaced. The lithium-ion battery is becoming increasingly cheaper to manufacture making it near competitive with our more familiar engine design.

The cost of Lithium-ion batteries has decreased 65 percent since 2010, back when they cost over $1,000 per kilowatt-hour. These batteries now cost under $350 and some companies are finding ways to produce them for even less. Many predict that lithium-ion batteries will be cost competitive with internal combustion engines once the new age batteries are as cheap as $100 per kilowatt-hour, a plausible figure for 2020.

RW Baird estimates Tesla pays significantly less than the rest of the market for their batteries, somewhere between $150-200 per KWh. Companies that can manufacture lithium-ion batteries at this discounted level have a competitive advantage over others. Manufacturers’ main focus is to reduce these costs that comprise the majority of their operating expenses.

The reduction in prices for lithium batteries is partially due to the access and substitution of raw materials vital to production. By increasing the level of production, facilities are becoming more efficient and inexpensive. It also helps that corporations are investing enormous sums of capital into companies like Tesla to make their products more conventional.

Advanced batteries like the ones in question could also consequently transform the stationary energy storage industry. A report by McKinsey & Co. sees energy demand rising 3 percent with the growing need for consumers charging their cars. However, increased storage ability could lead to consumers accumulating power overnight during off-peak hours, hurting electric company profits. Higher performing batteries also mean increased production from natural resources at distributed generation sites.

There is a relationship with electric vehicles and the software used inside them. More powerful computers are necessary for the incorporation of more sophisticated features and altogether integration. The semi-autonomous cars currently in development by companies like Uber will see a correlation between their product’s progress and battery improvement. Related: Can Saudi Arabia Scramble Out Of The Pit It Dug for Itself?

Wolfgang Mack at Capacitor Sciences estimates that lithium-ion batteries have already reached 87 percent of their potential storage capacity in markets. To continue advancing would require an influx of increased capital for an incremental amount of progress. There is a high likelihood these batteries will become cheaper, but larger is implausible. That is why Mack’s company has begun developing batteries that they claim can be ten times as dense, meaning a far vaster potential for capacity.

The hasty replacement of internal combustion engines will reduce the demand for oil by 13 million barrels per day. The market for crude oil is already struggling with excess supply creating a growing concern for majors wishing for a price surge.

Overall, the development of lithium ion batteries will benefit electric car producers considerably. Uber, Tesla and other members of the automobile industry will enjoy the reduced costs of the most expensive component of their products and will expect higher returns on their shares. Oil prices will continue to fall short, showing less prominence in the market while power will initially grow in value but likely trail off in the long run, with increased storage of power generated from natural resources.

By Michael McDonald for Oilprice.com

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Leave a comment
  • Peter Breedveld on October 28 2016 said:
    Good luck finding a mechanic qualified to fix your electric car when something goes wrong. But don't worry I am sure the few mechanics that can fix an electric car are too ethical to take advantage of you by price gouging knowing that few others can fix your car.

    Hopefully you enjoy structuring your life around battery charges and are the type of person who's cell phone never goes dead. If you run you car battery to zero it will shorten its life and cost you big bucks ( a lot more than replacing your cell phone).
  • Mike Haworth on October 28 2016 said:
    The attraction of electric cars is undeniable. And they will have a place in the future for some urban transportation solutions. However, it is naive to think the technical obstacles will be solved in 4 years. The current generation of lithium batteries rides on flawed design concepts. The flammable electrolyte is pressurized and the anodes tend to short circuit given tiny manufacturing defects. Prone to overheating and fires, Samsung has shown that trying to pack even more power into a smaller space creates a fire hazard as have the Hoverboards. In the Oil and Gas industry we would HAZOP such a design as unsafe because of the risk of loss of containment. Tesla knows their current battery design has reached and endpoint. They can hope to make it a bit cheaper for the TESLA 3. But look for more excuses in delaying TESLA 3 production next year. And we still haven't talked about the inability to recharge batteries quickly. That limits inter-urban transportation possibilities. In short, Hybrid car designs are more promising. We need a much better understanding of physics before a true battery breakthrough can be announced.
  • Michael A Haworth on October 28 2016 said:
    Moreover, ask how lithium ion batteries can be competitive when they haven't yet started to replace the standard lead-acid battery in every car made today. Hmmm.
  • GregSS on October 28 2016 said:
    Modern gas and diesel cars are already very reliable, and an electric car should be even more reliable. I really don't see what you have to be concerned about.
  • Oilracle on October 28 2016 said:
    ..."The hasty replacement of internal combustion engines will reduce the demand for oil by 13 million barrels per day"...
    ------

    Where then will we get the cheap asphalt for all the roads to repair or expand?!
  • David Hrivnak on October 28 2016 said:
    Peter, sorry to break your bubble but finding someone to fix your electric car is not a problem at all. We live in a smallish town of 45,000 and have had no problem servicing our plug-in's. I now have logged over 52,000 gasoline free miles and will never purchase a car without plug.
  • Null on October 29 2016 said:
    Wow, did i descend into jurassic park?

    Fossils all of you.

    My 2016 Volt's battery pays for itself and then some!

    I get anywhere from 1100 to 2500 miles per 8 gallon tank.
  • Ram on October 31 2016 said:
    Somehow the same mechanics who can fix complex cars with many more parts will find it hard to fix a relatively simpler electric car.

    People will cook up whatever they think fits their lack of imagination.

    cheers

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