The average battery pack price fell to $139 per kilowatt-hour this year, down 14% from $161 in 2022.
The automotive industry has been working to solve how to make affordable electric vehicles, and now this task may be made easier by a key indicator. Following a record rise last year, battery prices are returning to a long-term downward trend.
According to Bloomberg NEF's annual lithium battery price survey, the average battery pack price fell to $139 per kilowatt-hour this year, down 14% from $161 in 2022. This is the biggest decline since 2018 observed in the survey. However, the story behind this drop in prices is a bit different from previous years.
The price of lithium battery packs continues to fall
Historically, the main reason for falling battery prices is technological innovation. But that wasn't the case in 2023. The fall in battery prices this year is mainly due to lower raw material costs.
Since January, the prices of major battery metals (especially lithium) have fallen sharply due to a sharp increase in production capacity in all aspects of the battery value chain, from raw materials and components to batteries and battery packs.
Second, demand expectations also played a role. Battery demand continued to grow year on year, but growth in some electric vehicle markets slowed in the second half of the year, mainly due to rising borrowing costs and economic uncertainty.
Battery production in China alone exceeds global demand, an indicator of global oversupply. The battery manufacturing plant utilization rate of major manufacturers this year was also lower than in 2022. The plant did not reach its maximum theoretical production capacity, which is in line with the trend of some automakers to reduce their targets.
The average battery pack price is the result of more than 300 survey data points collected from buyers and sellers of lithium batteries, covering passenger electric vehicles, commercial vehicles, buses, two- and three-wheelers, and fixed storage applications. Prices vary from industry to industry, with electric buses and commercial vehicles in China starting at $100 per kilowatt-hour. The average price of a fully electric passenger car is $128 per kilowatt-hour.
In recent years, battery prices in various industries have converged, which indicates the maturity and growth of the industry. Price differences between industries can be attributed to differences in maturity and order volume, as well as differences in battery and battery pack design requirements. While different applications continue to require different specifications, they are expected to follow similar trends in the future.
The big question is what will happen next. Bloomberg expects the battery pack cost to drop to the actual cost of $133/kWh in 2023 next year. In the long run, battery pack prices are expected to fall below $100 per kilowatt-hour in 2027. The figure of $100 per kilowatt-hour is often viewed as a benchmark for the price of electric vehicles and cars with internal combustion engines. While this is a useful reference, the reality is far more complicated. Some market segments have reached evaluation, but there are others that still need price reductions. China's city cars, for example, have crossed the threshold, while American pickup trucks face even greater difficulties because they rely on large batteries. At the same time, it is worth noting that $100 per kilowatt-hour is a nominal figure that has been used for more than a decade, and the price of manufacturing internal combustion engine cars has also risen sharply during this period.
Regional battery price dynamics will play an important role in the coming years as countries seek to localize their battery supply chains. The cheapest battery pack in China is $126 per kilowatt-hour, while prices in the US and Europe are 11% and 20% higher, respectively. Higher prices reflect the relative immaturity of these markets, higher production costs, lower production, diversified applications, and battery imports.
Localization of battery manufacturing in regions such as the US and Europe may drive up the price of locally produced batteries in the short term. As the industry matures, these costs may eventually fall. Compared to Asia, where most batteries are currently produced, these regions have higher energy, equipment, land, and labor costs, and therefore higher prices. Local policies such as the $45 per kilowatt-hour tax credit for battery and battery pack production under the US Inflation Reduction Act may offset some of the costs, but the impact on pricing is unclear.
The past few years have shown that battery prices have not always followed a simple downward trajectory. There may be ups and downs along the way due to input costs or supply and demand dynamics. At the end of the day, there is still a long way to go to make batteries and electric vehicles cheaper, and this effort requires continued investment in capacity expansion, R&D, and manufacturing process improvements.