Although EV batteries can be expensive, their quality is improving quickly. GTM Research forecasted that by 2030, lithium ion batteries would be less expensive by 65%. 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 testing a new battery system for the 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 result in a drop in the cost of Tesla's batteries. They are also expected decrease by 3% annually. A Tesla car's price will likely fall because of its increased production capacity. The Model 3 cost $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 is expected to reduce Tesla's battery costs by a third. This will be achieved by vertical integration and economies at scale. 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 be working together to build batteries at Gigafactory.
The Gigafactory is not currently operating at its full capacity and will not start producing batteries for Tesla cars until the fall 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. The Tesla and Panasonic plant is expected to employ 6,500 people.
According to Tesla's founder, Elon Musk, the company plans to sell 500,000 cars per year. This is a simple number to hit and it will help lower the cost for 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 provide 60 percent coverage on the battery price in addition to a federal tax credit. Solar-powered batteries are eligible for incentives from the state. Federal tax credits are available for solar-powered batteries that cost less than 30% of the price. 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. However, this is still not enough to make the car affordable.