McKinsey & Company consultancy has released a new analysis indicating the cost of a complete electric vehicle lithium battery pack could fall from the current range of between $500 to $600 per kilowatt hour to approximately $200 per kilowatt hour within the next eight years and to approximately $160 per kilowatt hour by 2025. The study implies a relatively competitive total-cost-ownership (TCO) for electric vehicles within the United States, assuming gasoline prices at or above $3.50 a gallon.
The study develops a bottom-up methodology for cost analysis that segregates the price of lithium battery packs into over 40 underlying components. It anticipates research into materials technology and manufacturing, as well as overhead costs and margins for various segments of the value chain.
According to an executive summary, three factors suggest accelerated decline in the future price of lithium battery packs:
- Economies of scale: Manufacturing scale and productivity improvements represent approximately one-third of potential price reductions through 2025.
- Lower priced components: A reduction in component prices and materials represent approximately one-quarter of price reductions.
- Battery capacity-boosting technology: Potential technical advancements in cathodes, anodes and electrolytes could increase the capacity of batteries by between 80 and 110 percent of current capacity limits within the next 13 years. These innovations represent 40 to 45 percent of the overall savings opportunity.
A question of total-cost-ownership ?
One of the challenges of owning electric vehicles in comparison to conventional gas vehicles are the costs involved. When purchasing an electric vehicle, several factors must be included in the total cost of ownership ( TCO): vehicle acquisition, disposal and operation.
In a Green Tech Media Smart Grid report, TCO is measured by dollars per mile driven, cost of acquisition and disposal, as well as the operation of a vehicle over its lifetime.
Electric vehicle prices are generally higher than internal combustion engine vehicles, because the addition of lithium batteries could add somewhere between $10,000 and $20,000 to the cost. In Canada, base models of the fully electric 2012 Nissan LEAF start at $38,395, while the Cheverolet Volt comes with a price tag of $41,545. Comparatively, the gas-powered Nissan Versa hatchback runs for just under $15,000 while the Chevrolet Cruze starts at $15,655. Low electric vehicle adoption rates suggest that the average consumer is not comfortable with this price premium.
It is important to note the criteria for buying electric vehicles vary from country to country and between different demographics. McKinsey researchers identified two types of groups, ‘green auto affectionados’ and ‘unwilling conventionals’ whose willingness to pay more to own an electrical vehicle is markedly different.
Broader impacts of the research
Beyond the implications for potential increased market penetration of electric vehicles, lithium investors will also appreciate lithium battery price-reducing innovations will be realized first in sectors such as consumer electronics, where global demand for superior performance and cheaper batteries is strong.
“First, we would expect that the demand for energy storage will remain strong in the consumer electronics business absent a radical technological discontinuity,” Newman explained. “In addition, the demand for energy storage is expected to increase significantly in other industries as costs come down, such as the automotive and utility industries.”
Direct benefit to lithium producers and exploration companies
As such, McKinsey expects there will be considerable interest in expanding production of lithium. This is evidenced by the lithium producers and exploration companies as well as participants in the battery value chain continuing to actively seek partnerships that will secure an adequate supply of lithium while protecting against price volatility.
John Newman, McKinsey associate partner, indicated to Lithium Investing News that both lithium producers and exploration companies, “will need to assess whether [to and] how to enter into potential partnerships as they also seek to produce materials of the quality and at the delivered price that customers are looking for, while looking for security of demand.
“Given that lithium can be produced as a byproduct during production of other salts, there will likely be additional focus on finding partners and markets for these products. Finally, there may be geographic considerations around lithium production, if governments believe that the ability to produce energy storage is critical for national energy security. This could favor a more diverse geographical supply of lithium than pure economics might otherwise dictate.”
The suggestion of diverse geography is interesting as resource investors will be familiar with the recurrent theme of resource nationalism and the risk premiums that apply to companies operating in a variety of jurisdictions.
According to the Global Mining & Metals Team at Ernst & Young the overall risk landscape in the mining sector has become significantly more treacherous during the past year. While it is widely known that mining is one of the riskiest commercial acitivites, the intensity of the risk environment can fluctuate considerably, as highlighted in the just released E&Y report identifying the top 10 risks facing miners in 2012.