Will electric cars reach price parity with petrol, diesel cars?

One of the big selling points of electric cars is that, despite the current increases in energy prices, they are cheaper to run than fossil-fuelled cars but the higher purchase price is the biggest deterrent to sales.

New car buyers opting for an electric model are still paying a large premium over a similarly sized petrol or diesel car, Euronews reports.

It has long been expected that cost parity between electric, petrol and diesel models will be the tipping point in favour of electric car sales. Given how cheap electric vehicles (EVs) are to run, it will not make financial sense for most people to choose a petrol or diesel car.

Price parity will also mean the end of subsidies and grants that currently exist to bridge the cost gap between EVs and internal combustion engine cars (ICEs).

In Norway, where parity already exists owing to extensive government support, almost 80 per cent of new cars bought are electric.

So, how will parity be achieved?

The two main drivers of the price difference between internal combustion engines and electric cars are the costs associated with batteries and car manufacturing.

The anticipated reduction in EV costs is likely to come from falling battery prices and by carmarkers switching to vehicle platforms specifically designed for EVs as this allows for simpler assembly, standardised battery packs and higher volumes.

Meanwhile, the price of petrol and diesel cars is expected to increase due to stricter EU emission regulations, so all of these factors will combine to close the price gap.

But are electric cars getting cheaper?

Recent events, however, threaten to undermine the assumption that the cost of electric car batteries will continue to decline.

Following Russia’s invasion of Ukraine, battery costs began to rise as key raw materials rocketed in price. Nickel prices roughly doubled in the months after as Russia is a significant producer of battery-grade nickel, accounting for around 15 per cent of the global supply.

Nickel is a key component of electric car batteries as it has energy density and therefore affects the overall driving range.

While prices of nickel and cobalt have since stabilised, Bloomberg reported in December a 7 per cent year-on-year increase in average lithium-ion battery price prices in 2022.

Any increase in the price of raw materials will inevitably cause EV battery costs to rise and could reverse a trend of falling battery prices.

How much of a premium do you pay on Evs compared to ICE cars?

The extent of the premium differs from country to country, depending on the rate of tax on cars and what government incentives and grants are offered.

In Ireland, for example, the Peugeot 208 petrol in the Allure trim is available for €27,880, a diesel 208 costs from €30,280 but the electric is priced from €34,685.

Similarly in Denmark. the price premium is considerable; an entry-level 208 petrol is priced at 189,990 DKK (€25,537) whereas the electric version starts from 289,990 DKK (€38,978).

In the Netherlands, an Active trim 208 petrol starts from €23,210, a diesel from €28,370 and an electric model from €32,250.

However, to make a full comparison you need to consider the running costs of petrol versus electric.

Comparing the fuel costs of a battery electric car (Volkswagen ID.3) with a petrol car (Volkswagen Golf) based on a motorist with an annual mileage of 18,000 km, the EV cost €710 a year to fuel the petrol €1,677.

So, it’s more than twice as expensive to power an ICE car than an EV — this was based on petrol at a cost of €1.694 a litre and consumption at 5.5 l/100 km.

Electricity was calculated at a cost of 25.28c per KWh and consumption at 15.6 kWh. EV owners availing of a night rate or discounted electricity tariff could potentially make even more savings.

How far away is price parity?

A significant increase in the purchase price of electric cars could undermine the EU’s ambitious electric car plans as the targets are dependent on EVs dominating new car sales by the second half of the decade.

Price parity will crucially mean the end of government tax relief and grants that currently exist to bridge the cost gap between EVs and fossil-fuelled cars.

With the current cost of living crisis, how feasible would it be to increase the grants and supports to artificially create affordability? A need to incentivise the sale of EVs for longer than expected would be a considerable toll on already diminishing state resources.

Industry analysts predict higher prices will continue for at least a year or two, so the extent to which increased battery costs may end up slowing down the transition from fossil fuels is dependent on how high prices and long waiting times will weaken demand for electric vehicles and lessen their appeal.

One thing is certain – the electric car tipping point is now further away than was planned.