Are EVs Cheaper Than ICE Vehicles in 2023?

Are EVs cheaper than ICE in 2023? Automobile industry experts disagree about when Electric Vehicles (EV) and Internal Combustion Engine (ICE) vehicles reach price point parity. EV manufacturing companies want us to believe we’ve reached that point today. Yet, EV prices continue to increase. In the time it takes to perform market research, the market has changed, and EV prices have gone up or down.

Automobile manufacturing executives agree that there are “moments” of price point parity today based on government tax credits and rebates. The same executives disagree about when long-term price parity will arrive without government incentives.

In December 2022, the average cost for an ICE automobile was $45,578, and the average price of an EV was $61,448. There’s a large cash delta of approximately $16,000 between an ICE and an EV. Will EV prices drop closer to ICE prices this year? Will EVs be cheaper than ICE? Let’s dig into the details to understand this complex topic.

Why Have Electric Vehicles Been More Expensive?

Let’s take a look at a few of the reasons why electric vehicles have been more expensive:

1. Lack of competition: Lower consumer demand equated to fewer automobile companies investing in EV manufacturing lines. Fewer EVs manufactured equals higher prices. The demand outstripped the supply, so EV manufacturing companies could have a high price and still sell all the EV inventory each year.
2. Economies of scale: The more widgets you manufacture, the cheaper the widgets become. Fewer widgets manufactured equal higher prices. In this case, the auto manufacturing companies manufactured significantly more ICE than EV automobiles. Based on economies of scale, the gas-powered automobile is cheaper to manufacture.
3. What you’re willing to pay: Consumers viewed early EVs as luxury items and were willing to pay a higher cost for that luxury. The legacy continues. You pay more today because you paid more from the very beginning.
4. Batteries: Lithium battery costs are higher than other battery types. An EV may have anywhere from 5,000 to 12,000 battery cells. A typical gasoline-powered automobile may have a single battery with six battery cells.
5. Sticker shock: To offset the cost of EVs, automobile manufacturing companies relied on federal or state tax credits and national or local automobile dealer rebates. The tax credits and rebates decrease the price of the automobile. Consumers found (and still find!) the pricing needing to be clarified as rebates and credits cycled in and out of favorability.

The items listed above don’t make EVs cheaper than ICE vehicles, but instead make EVs more expensive than ICE vehicles.

Are Electric Vehicle Prices Actually Decreasing?

In 2022 EV car sales increased 66% as more auto manufacturing companies released new products. The increase in sales should (theoretically) drive down prices. Yet, the price reductions aren’t showing up at the auto dealers. The average cost of an EV Sedan in 2020 was $54,700. Today the cost is $64,000.

Common Baseplates Will (Eventually) Drive Down Costs

Gasoline engine models require a different manufacturing “template” or base footprint for each automobile type. GM uses an EV template that joins batteries, suspension, and steering into a single baseplate that GM calls the “Ultium Skateboard.” The Ultium skateboard platform allows GM to use the same template for ten EV automobile models. Enter the economies of scale to the discussion. GM reports that new car development times have been reduced by approximately two years. The use of a common baseplate decreases the cost of manufacturing because manufacturing lines don’t need to be reconfigured for different EV models.

Competitive Pressure Will Make EVs Cheaper

As more and more automobile manufacturing companies release EV models, the competition heats up, and consumer prices decrease. More competitive pressure will make EVs cheaper than ICE.

Battery Prices are Slowly Decreasing

EV battery cost is over 50% of the total manufacturing cost of a new EV. As battery prices increase or decrease, so too does the price of the EV. Lithium cost decreased by 30% from its peak price in November 2022. Cobalt prices have decreased by 50% since May 2022 as EV manufacturing has switched away from Cobalt.

Car manufacturing companies are aggressively pursuing cheaper battery options in their quest to make EVs cheaper than ICE. Some of these technologies include solid-state batteries with lithium metal and sodium-ion batteries. Likewise the lower cost of cathode materials has made lithium iron phosphate (LFP) a leading contender.

Inflation Reduction Act

Feder legislation passed in 2022 subsidizes battery manufacturers. The subsidy may lower EV costs by up to $9,000. Tax credits for consumer EV purchases are included in the legislation. A goal of the legislation is to help EVs be cheaper than ICE through tax credits.

The 2022 Inflation Reduction Act provides a maximum of $7,500 EV tax credit in the year the EV goes into service. If you buy a qualifying EV in December 2023 and take ownership/delivery of the automobile in January 2024, the tax credit will be applied to your 2024 taxes. In 2024 you can transfer the tax credit to the automobile dealer at the time of purchase. That’s an immediate discount.

A tax credit is available for used cars if the EV is at least two years old. The credit is a maximum of 30% of the vehicle purchase price or a $4,000 credit, whichever is less.

Tax Credit Requirements (The Fine Print)

As with any rebate, tax credit, or subsidy, there are many qualification rules.

Maximum Vehicle Prices Allowed for Tax Credits

• There’s a $55,000 price cap (maximum) on sedan vehicle types.
• The purchase price may not exceed $80,000 for pickups, sport utility vehicles, or vans.
  • Fun fact! Tesla slashed prices on several EV models in January 2023, including the Model Y, to meet the US Treasury Department sedan pricing guidelines. This allowed Model Y to be available for tax credits.
  • The US treasury department adjusted which “rules” it will follow to classify vehicles as either SUVs or sedans in February 2023. This raised the purchase cap maximum from $55,000 to $80,000 for the Tesla Model Y.
  • Tesla raised the prices of the Model Y within hours of the US treasury announcement.
  • Automobile manufacturing companies are paying keen attention to trying to make EVs cheaper than ICE but still aggressively working to maximize profit.

Income Qualification

There are income criteria that your household must meet to qualify for the tax credit.

• Single: If your adjusted gross income (Modified) is greater than $150,000, you don’t qualify.
• Married couples filing jointly have a $300,000 income limit.
• Head of household has a $225,000 income limit.

Imitation is the Sincerest Form of Flattery

EV OEMs are trying to mimic the Tesla sales model to reduce manufacturing costs. Automobile manufacturing executives believe that Tesla has a $2,000 cost advantage by eliminating costly showrooms and dealerships. Ford is somewhat following Tesla’s lead by not developing EV showrooms and will sell all EVs through an online portal with no haggle, non-negotiable pricing. Toyota has announced that it will continue to use showrooms and the existing franchised dealerships. There is no current plan for an online-only purchasing model, but that could change at any time.

State Rebates

Good news! Many US states will reward you for an EV purchase. The combination of state-level rebates and federal-level rebates has the potential to reduce the purchase price of an EV dramatically. Judging by the number of states working to improve infrastructure for EVs, it seems more and more states are warming to the idea of EVs.

Will Electric Vehicles Be Cheaper Than Internal Combustion Engine Automobiles in 2023?

It’s fascinating how many different factors play into what makes or doesn’t make EVs cheaper than ICE. To return to our original question: Is an EV cheaper to purchase than an ICE automobile today? The good news is some electric vehicles are reaching price parity with ICE vehicles. For example, Chevrolet 2023 Equinox Compact SUV (LS trim), a combustible gas model, has a starting price of $26,300. The Chevrolet 2024 Equinox EV Compact SUV has a starting price of $30,000. If you factor in rebates and tax credits, the Equinox EVs will be cheaper than ICE. However, lacking subsidies, government rebates, or tax credits, EVs are still more expensive than ICE automobiles on average.

With careful homework, a savvy EV buyer can find a combination of credits, subsidies, and rebates that may bring the purchase price of an EV down to near purchase price point parity with an ICE automobile in 2023. However, the real “bang for the buck” may be in 2024, with tax credits directly removed from a new EV’s purchase price.