EV batteries are an expensive component of the Tesla car, but they are improving rapidly. GTM Research forecasted that by 2030, lithium ion batteries would be less expensive by 65%. Tesla is a leader in this field and will likely continue to make significant improvements. However, this will require changes in how the car and the technology are used.
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 exploring a new battery system and form factor to power 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 lead to a decrease in the price of Tesla’s batteries. Also, they are expected drop by 3% per year. It is possible that Tesla's prices will fall due to increased production. Currently, the Model 3 costs $35,000 before incentives. The Model X comes with an 85 kWh lithium-ion battery pack and costs US$17,000, almost double the Model 3's cost.
The Tesla Gigafactory aims to reduce Tesla battery cost by a whopping third. This will happen through economies of scale and vertical integration. Although the factory has not been operational yet, production was set to start in 2016. The partnership between Tesla and Panasonic, a Japanese manufacturer for aftermarket vehicle audio products, was announced in addition to the factory's battery manufacturing plant. 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 yet to reveal the exact production plan, though the company's website says that the plant will produce batteries for the Tesla grid and solar power storage units. 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. Tesla will be exempt from the federal tax credit if 200,000 cars are sold. However, customers who have purchased aggressive subsidies will be eligible for this credit.
California state rebates are available to cover 60 percent of the battery cost, in addition the federal tax credit. There are also incentives for solar-powered batteries. Federal tax credits are available for solar-powered batteries that cost less than 30% of the 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. However, this is still far from being affordable.