The high initial purchase price of electric cars compared to ICE equivalents prevents many from buying EVs today.
Thankfully, electric cars are expected to have price parity with ICE equivalents by 2026, but this depends on several factors.
The biggest factor is the cost of EV batteries coming down. Forbes estimates that batteries make up around 15% of the cost of an electric car, but Statista figures show that this can be as high as 32% depending on the vehicle.
The larger the battery, the more it costs because it requires more raw materials like nickel, cobalt and lithium.
Right now, prices for these materials are going through the roof due to supply issues, inflation, and soaring demand. For example, lithium prices increased by 478.3% between January 2021 and January 2022.
However, the price to manufacture EV batteries is falling over time. According to Statista, battery prices fell from $300 per kWh in 2016 to $132 in 2022, and from $1,200 per kWh in 2010 – an enormous drop.
By 2026, battery prices are expected to drop below $100 per kWh, the price where making an electric car is as cheap as an ICE car.
According to Visual Capitalist, 54% of an EV battery’s cost is in the cathode, while 24% is in manufacturing and depreciation.
Let’s look at Tesla’s price cuts
Say what you will about Elon Musk, but he’s killing it with Tesla and they are leading the way for price cuts in the automotive industry.
Tesla is on a radical price-cutting spree in 2023, carving away the insane inflation from 2022. Yes, early buyers are peeved about their car’s value deflating almost daily. But for the rest, it’s Christmas in November.
Tesla cut prices of the Model 3 by £3,000 in the UK this year, and in the US, they trimmed $2,000 off the Model Y Long Range and Performance versions, now starting at $48,490 and $52,490 respectively.
But the real showstopper is the Model 3. This electric darling just got sweeter, with prices slashed by $1,250 on the Rear Wheel Drive and Long Range models. Even the souped-up Performance version took a $2,250 cut.
Rival automakers pitching tantrums about “demand issues” should take note. While they cry stalled sales, Tesla continues innovating and lopping five-digits off price tags. Adapt or get bulldozed by the EV juggernaut.
Batteries aren’t the only factor driving prices
Research published by MDPI shows that, on average, components in electric vehicles are more expensive than components in ICE vehicles. One of the key reasons for this is that EVs tend to have more advanced technologies.
Batteries can account for up to one-third of total vehicle cost, but the following components also play a role in total production cost:
- Electric motor
- Power electronics
Electric motors – the components that drive the wheels and provide power – cost between $4,000 and $15,000. This is around the same as equivalent ICE engines, and some state-of-the-art electric motors cost significantly more.
MDPI’s research is interesting because it considers how the cost structure of an electric car is different to an ICE car. For example, EVs tend to have more advanced ADAS systems and semi-autonomous driving aids, increasing costs.
In total, the electric motor, gearbox and power electronics make up an additional 35% of an EV’s cost, reaching 50% with sensors and technologies.
Other factors contributing to sky high EV prices
- Electric vehicle technology is less mature and still rapidly improving, unlike internal combustion engines which have had over 100 years to evolve and optimise.
- Developing advanced battery chemistry is costly and still ongoing to find better materials and designs.
- Batteries themselves keep getting bigger and more powerful, requiring more raw materials.
- Designing EVs from scratch rather than just adapting existing platforms adds engineering costs.
- Economies of scale have not yet kicked in fully to bring down manufacturing costs.
- There is strong market demand for bigger, heavier SUV style EVs which use more materials.
- Tight supply of some key battery elements like cobalt is constraining production volumes which would reduce costs.
Used electric car prices are falling fast
Prices of used electric vehicles in the UK have fallen dramatically over the past year, declining over 40-50% for some models like the Renault Zoe and Nissan Leaf. This contrasts sharply with petrol and diesel cars, which have remained stable or increased in value.
The falls started in late 2021 during the cost of living crisis and accelerated after automakers like Tesla cut new car prices in early 2023. However, data shows the used EV market is now bottoming out as the declines slow down.
In a sign of renewed interest, used electric car sales hit record levels in the second quarter of 2023, jumping over 80% from the previous year according to industry figures.
Attractive pricing has sparked demand again after months of downward price movements driven by economic conditions.
While uncertainty persists, there are now deals to be had for consumers and opportunities for dealers able to source the right used EV stock.
The market remains in flux amid wider changes in the automotive industry, but appears to be stabilising after a exceptionally volatile year.
The used electric car shake-up is emblematic of the fast-moving transition to electric vehicles happening globally.
Electric cars are predicted to get cheaper over time with the latest estimates pegging price parity with ICE cars by 2026.
Technological developments and mass production will drive down battery manufacturing costs, as well as costs for electric motors, power electronics, sensors and other components.
If the high cost of electric cars is putting you off buying one today, there are several reasons why they still make financial sense:
- Road tax exemption (for now).
- Super-low running costs – around 3p per mile if you charge at home with an EV tariff – versus around 15p with petrol.
- Significantly cheaper servicing costs – typically 50% less because the only serviceable parts are brakes, tyres and windscreen wipers.
Some drivers save hundreds of pounds per month running an electric car, which more than offsets the high initial cost to buy it.
If you do make the switch to electric and have off-street parking, a smart charger lets you charge rapidly at home and you can also upload your tariff information to collect cost data. Check out our EV charger reviews and our best EV chargers guide for ideas.