Rising EV battery costs are delaying affordable electric cars — and it'll get worse before it gets better

• Battery costs jumped 7% this year.
• That has many worried about EV affordability.
• But industry experts say these prices won't always be volatile.

After a decade of decline, the price of electric car batteries jumped seven percent this year, BloombergNEF reported last week.

The about-face threatens the future of more affordable EVs and intensifies the industry's race to find a cheaper way to electrify. It also raises the question of whether, in making this shift, automakers are entering a new era of uncertainty — and bringing car-buyers with them.

This year, the high cost of battery materials — especially lithium, nickel, and cobalt — sent shock waves through the auto industry. As automakers competed to ramp up EV offerings, lithium alone skyrocketed 500%, according to McKinsey.

Those costs are largely to blame for the fact that electric cars aren't affordable for the masses yet. The average new EV cost a whopping $65,041 in November, according to Kelley Blue Book, compared to $48,681 for an average new gas-powered car. The EV price tag is driven by today's expensive electric pickups and luxury sedans.

Such costs make it tougher for automakers to make their EVs more affordable, a crucial factor in encouraging widespread electric car adoption.

"We'll see an excess of demand relative to supply building up over the next few years," McKinsey partner Andreas Breiter said, meaning costs will rise.

The rise before the fall

Demand for EV battery materials, and the resulting prices, might get worse before they get better, experts say.

Automakers, who are spending more than $500 billion to electrify, are competing for the available existing supply to keep up with their demand.

To see the exact level of urgency, advisory firm Alvarez & Marsal assessed forecasted sales of EVs and the capacity of current lithium mines, managing director Tony Lynch said.

"There becomes a gap where there isn't enough lithium for about three or four years, until it catches up," Lynch said. "There's basically a lack of lithium in that period of time, one to five years from now where — as mines are coming on and they're meeting the demand — they're not keeping up with the pace of the EV penetration."

Car companies are also navigating parts of this summer's climate law that requires them to have a certain percentage of their supplies for EVs to come from the US or countries with trade agreements in order to qualify for critical tax credits. All the while, it takes time and expense to get new supply opportunities up-and-running.

That will all result in a near-term, mad dash for battery materials that could send prices soaring.

"That means the only kind of EVs you're going to make are really expensive, luxury, $100,000-plus vehicles," Lynch said.

But prices that go up should come down. In particular, "the lithium prices will trigger more supply to enter the market," Breiter said.

When will this change?

In the short-term, automakers are experimenting with different types of batteries, to see if they might be able to cut some reliance on certain highly-in-demand materials. But alternatives take time to develop, and might not cut it if they mean trade-offs with performance.

Automakers are desperate to expedite the permitting and construction processes for new mining projects, especially in the US. Once there's enough supply to meet car makers' needs, material prices may drop.

One estimate suggests the hikes could drive the cost of batteries up 22% between next year and 2026. BloombergNEF expects the drop to come sooner in 2024.

"There is no shortage of materials in the foreseeable future," said Alexei Andreev, managing director at VC firm AutoTech Ventures, who has a background in material science. "But you need to open new mines and you need to start digging.

"In 10 years," he said, "we can massively increase supply of pretty much everything and anything in terms of lithium batteries."

That's what's needed to drive down EV prices.