Although EV battery are a very expensive component of the Tesla cars, they are on the rise. GTM Research recently predicted that by 2030, the cost of a lithium ion battery will drop by 65 percent. Tesla is leading this trend and will likely keep improving. This will mean that the car's design and technology used will need to change.
For example, the first Model S models had a 60 kWh battery pack, which is not sufficient for a long-range vehicle. The company is trying out a new form factor and battery system for its Model 3. In a letter to investors, Tesla founder Elon Musk said that Model 3 production will move from its Nevada factory to Reno, where it will use larger, commodity battery cells that are designed to be cheaper to manufacture.
According to Goldman Sachs', solar panels continue to be priced at a 3% annual decline. This should help lower the price of Tesla's batteries, which are also expected to drop by 3% each year. A Tesla car's price will likely fall because of its increased production capacity. Currently, the Model 3 costs $35,000 before incentives. However, a Model X with an 85 kWh battery pack costs US$17,000, which is about double the cost of the Model 3.
The Tesla Gigafactory aims to reduce Tesla battery cost by a whopping third. Vertical integration and economies of scale will enable this to happen. Although production has not begun yet, the factory was planned to start production in 2016. Tesla announced a partnership to Panasonic, a Japanese manufacturer aftermarket car audio products and speakers. Both companies will cooperate to make batteries at the Gigafactory.
The Gigafactory has not yet reached its full potential and will not produce batteries for Tesla vehicles until the fall of 2016. Tesla hasn't yet stated the specifics of the plant's production, but it states on its website that it will produce solar power storage unit batteries and the Tesla grid. The 6,500-person expected workforce at the Panasonic and Tesla plants is 6.
Tesla's founder Elon Tesla said that the company plans on selling 500,000 cars per annum. This is a simple number to hit and it will help lower the cost for 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 provide 60 percent coverage on the battery price in addition to a federal tax credit. State incentives are available for solar-powered cells. 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 Tesla's batteries improve, the Model S may drop in price to US$17,000, a significant drop from the current price. But, it is still not enough for the car to be affordable.