By Brian Dumaine, senior editor-at-large
FORTUNE -- Despite rumblings in the press, it's not time yet to give up on the electric car. Currently 14 plug-in models are available from eight automotive manufacturers including the Tesla S (TSLA), the GM Volt (GM), and the Nissan Leaf (NSANY). But sales have been disappointing. According to the Electric Drive Transportation Association, only 68,000 plug-in hybrids and all-electrics have been sold in the U.S. so far this year. That compares to 11.7 million cars sold in total. That rate is well below industry estimates, suggesting that the public is wary of the high costs of EVs plus the dreaded range anxiety -- running out of juice on a dark country road.
A new study by PWC, however, argues that the future of EVs might be brighter than most think. The consulting firm, in its study "Battery Update," surveyed major automakers and battery manufacturers such as LG, Samsung, and Sanyo, and found that economies of scale will significantly drive down the price of car lithium ion batteries by the end of the decade. Says Oliver Hazimeh, who leads the clean transportation practice at PWC, "It's a nascent industry that will suffer a lot of ups and down. But we still believe fundamentally that the electric car is a matter of not if, but when."
His optimism springs from what he sees as a steep, downward pricing curve. According to PWC, electric car batteries now cost a little more than $600 a kilowatt, meaning a 20 KW battery needed to power an all electric car runs about $12,000 dollars -- compared to about $2,000 for a conventional combustion engine. PWC believes that by 2020 battery costs will drop by half to $300 a KW, reducing the gap between electric and gasoline to about $4,000. Considering that electrical cars don't need costly transmissions and drive trains, that gap would be smaller still.
Add in that electricity per mile is much cheaper than gasoline, and the equation for the consumer starts to get very attractive -- even without government subsidies. And about that range anxiety? Carmakers will offer two choices, EVs that are cheap and have a low range for city driving, and ones that are more expensive for longer trips. Tesla already offers different battery sizes with different ranges on the S model.
What will it take to drive battery prices down this much? PWC estimates that the global EV market will only need to grow 2.5 to 3% annually. Already in the U.S. sales are growing about 5% a year; in Europe 4% and in China 3%. Maintaining this kind of growth rate hardly seems a stretch.
As for the fate of EVs beyond 2020, Hazimeh says new innovations now being tested in the labs should drive the price of lithium ion batteries down to $200 a kilowatt by 2025, which will make EVs straight-on competitive with conventional cars. Says Hazimeh: "It's the holy grail."
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