In just three years, the cost of manufacturing an electric car could be the same as that of a conventional car (with internal combustion engines), according to a report by the investment bank UBS. While this could mean that the shift away from fossil fuel vehicles is closer than expected, some challenges remain.
The extra cost of manufacturing batteries for electric cars versus their fossil fuel equivalents will drop to $1.900 per car by 2002 and disappear completely by 2024, according to the analysis done by UBS. This is based on a detailed analysis of batteries from the seven largest manufacturers in the world.
Matching the cost of batteries with that of internal combustion engines (ICE) is considered a big milestone in the world’s transition from fossil fuels to renewable energy. Carmakers have so far been reluctant to stop producing ICE and move to electric cars due to the high cost of batteries, which are mainly produced by Asian companies.
Batteries account for between a quarter and two-fifths of the cost of the entire vehicle. UBS said it expected battery costs to drop to below $100 per kilowatt-hour (kWh) by 2022. Carmakers that hang on to ICE sales risk being left behind by rivals who are betting on electric cars such as Tesla and Volkswagen, the bank argued.
“There are not many reasons left to buy an ICE car after 2025,” Tim Bush, a UBS analyst, told the Guardian. He said that the drop in the costs of batteries will make hybrid vehicles, which combine a battery and a conventional engine, irrelevant based on a financial point of view.
A fast drop in battery costs is expected to promote a faster switch to electric vehicles than previously expected. Sales of electric cars are booming in Europe and China, even despite the pandemic. Matthias Schmidt, an independent car analyst, told The Guardian a million electric and hybrid cars will be sold in the EU in 2020 out of 11 million.
More than seven million electric vehicles are currently operational around the world. That’s a big step from the 20,000 that were in use a decade ago. Governments are betting on their expansion. Norway plans to ban sales of new internal combustion engines by 2025, with the Netherlands following suit by 2030.
Still, there are several barriers to overcome apart from cost. A study earlier this year showed a fleet of 350 million EVs would increase annual electricity demand by 41% of current levels. This would require a major investment in new infrastructure and new power plants, some of which would run without fossil fuels.
The shift to EVs would also impact the demand curve, which shows how demand for electricity rises and falls throughout the day, which would make the management of the national grid more difficult. At the same time, the researchers said there could be technical challenges regarding the supply of materials such as lithium needed for the vehicle’s batteries.