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For those hoping to drive an electric car, price reductions are on the horizon.

Key points

  • Subsidies will likely drive demand for electric vehicles.
  • At production peaks, manufacturers must compete for customers, driving down prices.
  • Competition historically promotes innovation and innovation will also push prices down.

The average price of an electric car (EV) in the U.S. hit $66,000 in June, but according to Kelley Blue Book estimates, that's not the entire story. There are several reasons for the high price tag, and chief among is inflation. Simply put, the price of everything has gone up -- including EVs. There's also the fact that nearly all EVs are new cars, which come with a higher price tag anyway. So, when can we expect the price of EVs to come down? Here are three factors that play a role.

1. Demand

As demand for EVs ramps up, industry experts say prices will become cheaper. According to Treehugger.com, experts anticipate that EVs and gas-powered cars will cost about the same by 2025. As even more EVs are manufactured, they will become less expensive to produce, with some experts claiming they will be even cheaper than their gas-powered counterparts in just a few years.

One factor that may speed up demand is subsidies. As states and the federal government offer to subsidize the cost of purchasing EVs, more drivers will consider purchasing one. And that's where demand for EVs drives down the price. In an effort to get drivers into their vehicles, manufacturers will have to stay competitive. After all, between a monthly car payment and auto insurance, owning a car is a huge financial investment.

2. Lithium-ion batteries

Although lithium batteries were invented in the U.S., production eventually moved offshore. As COVID-19 raged around the globe, it became clear we depend on other countries to provide us with lithium batteries, and when their operations shut down, we were in trouble.

Two recent developments are designed to cut our dependence on EV batteries produced in other countries. The first is the Strategic EV Management Act, a bill designed to maximize EV battery recycling for federal fleet vehicles. The bipartisan bill plans to bolster recycling and reuse EV batteries rather than depend on the international market for more.

In addition, the U.S. Department of Energy recently announced over $3 billion in funding to manufacture our own battery materials. In addition to new manufacturing sites, a number of established companies have announced plans to expand their operations in the U.S.

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A little over half the cost of an EV is the powertrain, which includes the battery -- and about half of the battery's cost comes from lithium-ion battery cells. The good news is the price of these batteries has dropped by 97% since 1991, according to a study by Micah C. Ziegler and Jessika E. Trancik published in Energy & Environmental Science. That trend is expected to continue. For example, Ford plans to drop the price of its batteries by 40%, and GM expects a 60% drop in price, according to Treehugger. And those decreases will hopefully lead to EV prices that won't break the bank.

3. Innovation

One of the positive by-products of competition is innovation. As auto manufacturers vie for new customers, they'll want to be on the cutting edge of technology, continuously coming up with cheaper and better ways of doing things. Chances are, this will lead to innovations in lithium-ion batteries that drive the cost down even more. After all, the less expensive it is to manufacture an EV, the better the profit margin for the manufacturer.

It may help to remember that when the first commercially made television was sold in 1938, the least expensive model with a 12-inch screen cost $445. That's equivalent to more than $8,000 today. As technology advances and demand increases, prices come down.

While it appears that price reductions will not be immediate, it's good to know they're on the way. What makes it even sweeter is how much the average American household will save in gasoline costs.

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About the Author

Dana has been writing about personal finance for more than 20 years, specializing in loans, debt management, investments, and business.

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