What the Tesla Model S Battery Replacement Price Doesn’t Say

By · December 04, 2012

Tesla Model S

Tesla Model S battery pack.

In March of this year, there was a minor uproar over Tesla Roadster batteries being “bricked,” a way of saying that the battery pack was fully depleted and needed to be entirely replaced. The controversial incident revealed that Tesla was exacting a price of $40,000 to replace the 53-kWh hour pack in the Roadster. That’s why some EV market observers were surprised when George Blankenship, Tesla vice president of worldwide sales and ownership experience, announced last week that the company will replace the larger 85-kWh pack on the Model S for just $12,000.

Before taking out your calculator to crunch Tesla’s apparent dollar-per-kilowatt-hour price of its batteries—or jumping to the conclusion that Tesla has unlocked the great secret of EV battery affordability—it’s critical to consider a few points. The very attractive replacement cost for the largest pack—and equally compelling prices of $10,000 and $8,000 respectively for the 60-kWh and 40-kWh packs—much be purchased within 90 days of taking ownership, but only will be honored “after the end of the eighth year” of ownership, according to Blankenship.

In other words, folks taking ownership, and paying for the replacement coverage now, will not be eligible for the replacement until the end of 2020. So Tesla’s calculation to some degree represents an assessment of where battery prices will be in the next decade—not where they are right now.

Rate of Change

This past June, I did a fairly exhaustive evaluation about the current price per kilowatt-hour for an EV battery. It’s a tricky thing to nail down, because experts aren’t always talking about the same thing—any one source or another might be talking about prices at the cell level, pack level, fully installed, and with or without profit. (Also, we won’t know which manufacturer is taking cost-saving short cuts now that will only emerge as a problem in five years or so.) Let’s not forget that the price of a pack is closely guarded trade secret, with a lot of hype and obfuscation going on.

The best I could determine as a price for a fully installed pack today is somewhere between $450 and $650 per kilowatt-hour. Even if we lower that price to $400/kWh for the big-battery Model S, we’re talking about a $34,000 component. (I’m guessing there will be some readers who will say that Tesla’s or Nissan’s price is already much lower, but we can agree that it’s a lot more than $12,000 for a 85-kWh pack.)

So then we need to think about the likely rate at which battery prices are following. John Gartner, my colleague at Pike Research, pegs it about 10 percent every year for the next three years. Then, when economies of scale hit 100,000 packs or more—still a few years away—it could drop at an even faster rate. I’ll let our more actuarially-oriented readers run the numbers on when the 85-kWh pack price will drop to the $141-per-kWh price represented by Tesla’s $12,000 offer. But frankly, that’s beside the point.

Tesla Model S

Tesla's offer to replace the Model S battery pack, eight years down the road, is about selling more cars now.

In the world of an automotive start-up like Tesla, eight years is an eternity. The headline-grabbing offer of a cheap battery placement is not about actually replacing a single battery pack in eight years. It’s entirely about selling more cars, and adding to the transaction price, today. Tesla’s leadership is smart. They are reinventing business models in all kinds of ways to make sure the company survives a ramp-up of Model S production, and continues to fill the sales pipeline and bring in as much money as possible via more vehicle reservations.

Tesla is also offering free fuel for road trips via the company’s supercharger network. Of course, it’s not free for Tesla to install fast charging stations all across the country, and to cover the cost of maintenance and electricity. But executives aren’t assigning that cost to production—it’s a marketing line item. The company knows that free highway fuel is a powerful sales tool. That’s also how we should look at the $12,000 battery replacement offer—a nice way to overcome customer doubts about battery longevity, not as any indication of what batteries really cost.

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