If we are talking about Electric Vehicles (EVs), Tesla is the leading supplier — no questions asked.

Back when EVs were much less common, major automobile manufacturers such as Ford and Honda were reluctant to produce all-electric models due to their high production costs. During this time, Tesla (led by Elon Musk) took the industry by storm with its line-up of EVs. Surprisingly, even with Tesla’s high price tag, interest remains high with consumers and has them coming in droves to purchase these eco-friendly vehicles.

This raises a question. Why are electric vehicles more expensive than conventional gas-powered cars in the first place? Are there any key factors that differentiate the costs between the two?

Fasten your seatbelt as we’ll go through the journey of finding out the reasons behind current high production tariffs and what we can expect in the future.

EV Batteries Remain Expensive

The lithium-ion batteries that go inside electric cars remain the single most expensive component of the entire vehicle. An EV needs the same lithium-ion battery as your phone or laptop, but much larger to power the engine. You can imagine how pricey the battery is if it needs to store and use electrical power to drive a car for hundreds of miles.

It’s true that the price to produce EVs batteries has gone down significantly from a decade ago, reducing the cost by an estimated 87%. Forbes analyzes that, as of 2020, Tesla’s battery cost is roughly $114 per kilowatt-hour, around 20% cheaper than the industry average of $143 per kWh.

Despite these factors, the situation remains unideal. To make Tesla EVs price affordable as conventional cars, the company needs to get the battery cost below $100 per kWh.

The good news is, we can expect this battery improvement to happen in the next few years. BNEF predicts that the industry average for battery costs can reach as low as $93 per kWh by 2024. As Tesla’s batteries are comparatively cheaper than the average, it’s safe to say that Tesla’s battery production fees will be well below $93 per kWh by that time.

Too Much Demand, Not Enough Supply

According to Energy Sage, the most affordable Tesla is the Tesla Model 3, which can be purchased for around $35,000 pre-tax. Then there is the most expensive Tesla, the Tesla Model X, with the price tag of $124,000. Despite Tesla’s high prices, the demand for Tesla EVs seems to outnumber the available supply.

Due to insufficient manufacturing capacity, the demand for EVs exceeds the supply. To address this issue, Tesla executives have made plans to add “Gigafactories” around the world, including Asia and Europe.

Two main factors drive the demand for EVs:

  • The aspiration to limit climate change. People consider EVs or hybrid EVs the alternative that can help mitigate the negative effect of carbon emissions on the environment. So if the car is a greener option, the individual is greener as well. Then there are also some folks that will always choose an EV over a conventional gas car, despite any price tag, just to have a more positive effect on the environment.
  • EVs are thought to be more cost-effective. Gasoline is subject to price hikes during petroleum supply disruptions. Depending on where you live and the current petroleum price, you may be paying $3 to $4 per gallon of gas. EVs and hybrid EVs give people diversity in terms of fuel options. EVs only need a charging station, and nowadays, you can install one at home.

Elon Musk’s Plan for More Affordable Tesla EV’s

At Tesla’s “Battery Day” presentation in September 2020, Elon Musk promised that Tesla would introduce a cheaper EV priced at about $25,000 by 2023. 2023 is the projected time when the average battery cost could potentially hit below $100 per kWh. At this time, Tesla aims to reduce the costs of future EVs batteries for no more than $6,000 per pack.

This is excellent news for folks who are hoping to own an affordable eco-friendly vehicle more quickly. That said, it’s good to remember that Elon Musk tends to be overly-optimistic with his predictions.

In 2018, through an interview with Marques Brownlee, he hoped that Tesla would be able to deliver a $25,000 EV in three years. Yet now, this plan will likely be held back a few more years. There’s no guarantee that we’ll truly be able to see a $25,000 EV by 2023.

But, at least we can rest assured that the statement, “EVs are getting cheaper” is not a lie.

Bottom Line

The higher than the average price of Tesla cars, or EVs in general, is caused by two main reasons: high battery production costs as well as an insufficient supply.

Tesla is working hard to solve these issues by increasing the number of production factories while also investing in research and development to reduce battery costs. In a few years, we can expect to see more cars from Tesla that will be kinder to your wallet.