Will you ever want to buy an electric car?

Note this is not an attack on electric cars – I think cars like the Chevy Volt and Nissan Leaf are the future. We cant live on oil forever, especially not with China and India adding two billion people to the working class over the next 75 years.

But my question is more a question about innovation. If Li-Ion batteries improve 8-10% per year, do you want to invest anywhere between $8,000 and $15,000 for a battery in the first few years of this decade? Even after prices level out, will a 40% increase in range (or a similar decrease in cost) be enough to keep you from buying the battery outright? What about the residual value of the battery after 8-10 years of (ab)use in a vehicle.

The first premise is that batteries improve 8% per year. This appears to be close to constant (until major step-changes like changing chemistry from NiMH to Li-Ion), and has been noted by Elon Musk of Tesla Motors.

The next premise is that if batteries are constantly being improved, and will continue to improve until at least 2030 (around the time we hit the theoretical limits for Li-Ion), that constant innovation will push prices on older batteries down, in the same way when Intel produces their fastest chip and put it in the top of their price list, everything else gets knocked down a pricing level. Beyond that, as production ramps up, per unit costs will come down. This is a double whammy on battery prices – as such A123 representatives have speculated on end-of-2012 pricing of $400/kWh from about $750 in mid 2010 (a kWh will propel a Prius-like car approximately 4 miles, and a large Ford Explorer-like vehicle about 2.75 miles.

The argument to buy says its bad to lease anything because you don’t end up owning anything. At the end of the five year financing, you own the car and battery. But over time and with each recharge, batteries lose capacity, and that could be exacerbated depending on the climate you’re in, how you treated it (faster recharge = more degradation), if it is liquid or air cooled, etc. The return-on-investment calculations vary depending on your driving patterns, so you need to make sure that an electric car is right for you. If you lose your job or change jobs and your driving patterns change significantly, you might find yourself not having a positive return-on-investment compared to buying a traditional gasoline or regular hybrid car (you might end up not driving enough or driving too much per day).

The leasing argument is much more interesting (and complicated). The reason to lease is that the battery has a fairly fixed lifespan – 1,500 cycles or whatever the cell manufacturer promises. However, even after the batteries might no longer be suitable for driving (this would adversely affect the resale value of the car), they can still be used in applications like power grid storage and stabilization. This residual value of that battery could be 50-75% the price of a new battery. Returning the car after the lease and letting the dealer replace the battery, send it back to be remanufactured into something useful, and then installing a new (lighter, more powerful) battery and updating the car’s system for that battery is an easier course for the consumer instead of having to do that and pay for it before trying to sell it, or take a hit on trade-in value.

Leasing can also bring down the per-month costs – instead of paying for the entire car, and then getting a substantial bump in the trade-in value for the battery, the user (for the most part) only pays for the depreciation of the car during its use. As seen in both the Chevy Volt and the Nissan Leaf, the price for the lease (estimated $350/mo) is much less than what you would expect on cars costing between $27,000-33,000 after tax incentives.

Another non-conventional argument for leasing is the increasing rate of technology invading vehicles. From in-car entertainment, in-car communication (think: replying to text messages verbally), to safety features. While I don’t have a problem buying a new $300 iPhone every year, I certainly will not buy a new car with such frequency because its in-car entertainment is better than the car I currently have (software upgrades aren’t likely to help much in terms of adding new features – my 2009 Ford Escape hasn’t had any new features added to its in-car computer systems since I bought it). By 2015, most cars should have anti-collision systems to stop the car before it rear-ends the car in front of it (its already on some high-end cars today). By 2025 cars will be able to drive themselves down the highway and navigate to the exit, and even around some roads. It wont be fully autonomous but it will take care of 90% of your driving.

One of the ideas being tossed around is a hybrid – buying the car (shell, interior, electric motors, transmission, etc) and leasing the battery, often in conjunction with battery quick-swapping systems instead of dealing with lengthly recharge times – while battery technology might increase 8% a year, there is no way to increase recharging times for a given level of safety and source electrical systems: recharging a battery after 3-4 hours or 250 miles of all-electric highway driving will take 11 hours at 240V/30A (the most you’ll be able to get at home), and 5.5 hours at 240V/70A (the most you’ll be able to get in a commercial environment – e.g. an office building or parking lot). Even a 480V DC 50kW fast-charge circuit will still take 90 minutes. The only way to rapidly recharge the batteries is to have parallel 50kW fast charging systems hooked to one car, however fast-charging batteries can advance their degradation rate.

Its an interesting decision – there are clear pros to each choice, whether to buy, lease, or just buy the shell only and lease the battery. I would recommend that folks lease a first generation electric vehicle if they want to drive one, simply because of how much knowledge car companies and battery makers are going to learn the first few years about automotive batteries, and you don’t want to be stuck with an outmoded design or fatal flaw. By 2015 the prices of batteries will come down enough making the purchase of a second or third generation electric car reasonable if you carefully compare it to your driving habits compared to the vehicle’s EV characteristics.

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