Although EV batteries can be expensive, their quality is improving quickly. GTM Research has predicted that the price of a lithium-ion battery will fall by 65% by 2030. Tesla is a leader in this field and will likely continue to make significant improvements. However, this will require some changes in the way the car is built and the technology is used.
One example is the 60 kWh battery that was used in the first Model S models. This was not sufficient for long-range transportation. The company is experimenting with a new battery system and form factor for the Model 3. Tesla founder Elon Musk announced that Model 3 production will shift from Nevada to Reno. There, it will use bigger, commodity-grade battery cells that are easier to manufacture.
According to Goldman Sachs', solar panels continue to be priced at a 3% annual decline. This should lower the price for Tesla's lithium-ion batteries, which are expected to decrease by 3% each. Due to the increased production capacity, it's likely that Tesla cars will be more affordable. Currently, the Model 3 costs $35,000 before incentives. The Model X comes with an 85 kWh lithium-ion battery pack and costs US$17,000, almost double the Model 3's cost.
The Tesla Gigafactory aims to reduce Tesla battery cost by a whopping third. This will happen through economies of scale and vertical integration. Although the factory has not been operational yet, production was set to start in 2016. Tesla announced a partnership agreement with Panasonic, a Japanese manufacturer and distributor of aftermarket vehicle audio products. Both companies will cooperate to make batteries at the Gigafactory.
The Gigafactory is currently not operating at full capacity, and will not begin producing batteries for Tesla vehicles until sometime in the fall of 2016. Tesla has not stated what the plant will be producing, but the company's website states that it will produce battery packs for solar power storage units and the Tesla grid. The Tesla and Panasonic plant is expected to employ 6,500 people.
Tesla founder Elon Musk claims that the company will sell 500,000 cars annually. This is a relatively easy goal to reach and will reduce the price of the Model 3. The federal tax credit will end for Tesla after 200,000 cars are sold, but this will only help customers who purchase the car through aggressive subsidies.
California state rebates also cover 60 per cent of the battery price, in addition to the federal credit. The state also has incentives available for solar-powered batteries. The batteries used in solar-powered vehicles are eligible for federal tax credits equal to 30 percent of their price. The cost of the batteries is expected to drop to $125/kWh by 2020.
Assuming that Tesla's batteries continue to improve, the price of a Model S could drop to US$17,000, which is a significant reduction from the current price. However, this price is not sufficient to make the car affordable.