Although EV battery are a very expensive component of the Tesla cars, they are on the rise. GTM Research predicts that by 2030, the cost for a lithium ion batteries will drop by 65%. Tesla is a leader in this field and will likely continue to make significant improvements. However, these changes will require significant changes to how the car is built and how technology is used.
A 60 kWh pack was included in the Model S first models, but this is too small for a long-range vehicle. The company is trying out a new form factor and battery system for its 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 each year, the cost of solar panels falls by 3%. This should reduce the cost of Tesla's battery, which is also expected to fall by 3% every year. It is possible that Tesla's prices will fall due to increased production. 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 will reduce Tesla battery prices by a third. This will be possible through vertical integration and economies-of-scale. Although the factory has not been operational yet, production was set to start in 2016. Tesla announced a partnership to Panasonic, a Japanese manufacturer aftermarket car audio products and speakers. The two companies will team up to create batteries at the Gigafactory.
The Gigafactory does not operate at full capacity. They will not begin making batteries for Tesla vehicles before the autumn of 2016. Tesla has not yet revealed the production capacity of the plant, but its website indicates that it will make battery packs for solar power storage units as well as the Tesla grid. 6500 people are expected to work in the Tesla-Panasonic plant.
Tesla founder Elon Musk claims that the company will sell 500,000 cars annually. That is a fairly easy number to hit, and it will help to ease the cost 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's state rebates, in addition to the federal tax credit cover 60% of the battery's price. There are also incentives for solar-powered batteries. Federal tax credits up to 30% on solar-powered batteries are available. By 2020, the cost of batteries will drop to $125/kWh.
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. But, it is still not enough for the car to be affordable.