Battery cost holding back hybrids and EVs

commentary Recently BusinessWeek posted a feature entitled "The Electric Car Battery War", looking at the rush to refine Lithium-ion battery technology and posing the question "should the US government get involved?" We contend, though, that the most important thing is reducing the cost of the batteries.

"Should Uncle Sam provide billions in loans and grants to a promising but unproven business? Or should the government wait for the market to sort things out before it backs a US company?"

Those are questions posed in a BusinessWeek article last week. However, the questions are largely rhetorical: the US Department of Energy (DOE) already has a US$25 billion Advanced Technology Vehicles Manufacturing Loan Program, and many car and battery companies are counting on these loans to aid their development and production of Lithium-ion batteries.

So it's not a question of "should", it's a question of "how"?

Lithium-ion batteries will add at least US$8,000 to the price of a production plug-in hybrid vehicle, according to BusinessWeek. However, that amount is probably on the low side when you consider that when the Chevy Volt launches in the US in 2010 many predict that it will cost a bit less than US$40,000, a good portion of that price being the battery. A representative from another car maker estimates that a car Lithium-ion battery currently costs approximately US$22,000, effectively putting the electric car out of reach to all but the most well-heeled greenies.

Despite the disproportionately high vehicle price, the tax break for US buyers of the Chevy Volt is only US$7,500. This isn't as generous as the US$9,000-US$10,000 tax break the Japanese government will grant buyers of the electric Mitsubishi iMiEV when it goes on sale in Japan later this year, for around roughly the same price — ¥4 million or US$42,500.

So what's being done to lower the cost of these vehicles? Manufacturing aid for electric car development is trickling out: Ford recently received US$55 million in tax incentives from Michigan Economic Development Corporation to continue its research on advanced battery and electrical vehicle development, Tesla Motors announced approval of a US$350 million loan to build an electric car plant from the DOE, and Nissan applied for a DOE loan to build a Lithium-ion battery plant in Tennessee.

Granting loans to build plants and fund research for a better, cheaper way to build Lithium-ion batteries may pave the way for additional technologies while firming up the US's image as a thought leader. However, not much is being done to make these cars affordable for consumers.

Increased demand and mass production will likely bring down the cost of manufacturing the batteries, as they did in the Prius, but they'll always be expensive because of the precious metals batteries use. For consumers to save money buying a Volt, production will have to increase to a million cars — greatly lowering the cost of these costly batteries — while fuel costs must surpass US$5 a gallon, or about AU$2/litre at current exchange rates.

That strategy worked for the Prius, but Toyota had a boom economy, lax lending standards, and high petrol prices to help them move their vehicles. The current economy? Not so much.

This means that in the race to build a cheap Lithium-ion battery it's hardly a US versus Asia problem — it's a consumer problem. It doesn't matter from where, or from which company, car makers source their batteries if no one can afford to buy them.