EV batteries are an expensive component of the Tesla car, but they are improving rapidly. GTM Research predicted that the cost of a Lithium-Ion battery would drop by 65% by 2030. Tesla is leading in this area and will most likely keep making improvements. However, this will require some changes in the way the car is built and the technology is used.
The 60-kWh battery pack in the Model S's first models was not enough for long-range vehicles. The company is testing a new battery system for the Model 3. Tesla founder Elon Musk wrote to investors to announce that Model 3 production would move from Nevada to Reno. The company will use smaller, more common battery cells, which are cheaper to produce.
According to Goldman Sachs the price of solar panels is continuing to drop by 3% every year. This should reduce the cost of Tesla's battery, which is also expected to fall by 3% every year. The increased production capacity will likely result in a decrease in the cost of a Tesla car. The Model 3 currently costs $35,000 without incentives. A Model X, with an 85 kWh battery, costs US$17,000 and is almost twice the price of the Model 3.
The Tesla Gigafactory is designed to reduce Tesla battery costs by a quarter. This will happen through economies of scale and vertical integration. The factory has not started production yet, but it was slated to start production in 2016. In addition to the battery manufacturing plant, Tesla also announced a partnership with Panasonic, a Japanese manufacturer of aftermarket vehicle audio products and speakers. They will collaborate to produce batteries at the Gigafactory.
The Gigafactory is currently not operating at full capacity, and will not begin producing batteries for Tesla vehicles until sometime in the fall of 2016. Tesla has not revealed what the plant will produce, but the company's website stated that it will produce battery packs to power solar power storage units and the Tesla Grid. The Tesla and Panasonic plant will employ approximately 6,500 people.
According to Tesla's founder, Elon Musk, the company plans to sell 500,000 cars per year. That is a fairly easy number to hit, and it will help to ease the cost of the Model 3. Tesla will lose the federal tax credit once 200,000 cars have been sold. But, this credit will still be available to customers who purchased aggressive subsidies.
California state rebates also cover 60 per cent of the battery price, in addition to the federal credit. Solar-powered batteries are eligible for incentives from the state. The batteries used in solar-powered vehicles are eligible for federal tax credits equal to 30 percent of their price. The price of the batteries will fall to $125/kWh in 2020.
If Tesla's battery technology continues to improve, the Model S's price could drop to US$17,000; this is a significant decrease from the current price. However, this price is not sufficient to make the car affordable.