Podcast Summary
New rules for EV tax credits in the Inflation Reduction Act: The Inflation Reduction Act's complex rules for EV tax credits aim to boost the US battery industry, but recent developments, including the Treasury Department's draft guidance, have sparked controversy and uncertainty.
The Inflation Reduction Act, passed in the United States almost 9 months ago, has set complex rules for qualifying for EV tax credits, aiming to supercharge the buildout of a domestic supply chain for EV batteries. While there was initial optimism about the impact on the US battery industry, recent developments have been controversial, with a huge public outcry from global leaders and automakers. Last week, the Treasury Department released draft guidance on interpreting the battery sourcing rules, which could significantly impact the eligibility for tax credits. Since our last conversation, there has been a lot of activity, including the Treasury Department's release of a white paper in December discussing the concept of constituent materials, an interim step between strategic minerals and component battery components. The Department promised to clarify how they would handle this by the end of March. Overall, the implementation of these rules is crucial for the growth of the domestic battery industry, but it remains to be seen how the final guidance will impact the industry's progress.
IRA fuels North American EV supply chain growth: The Inflation Reduction Act has accelerated the build-out of battery production plants in North America, shifting focus from Europe and addressing concerns of reliance on foreign supply chains.
The Inflation Reduction Act (IRA) has significantly accelerated the build-out of the EV supply chain in North America. Companies have announced several large battery production plants, most notably in Canada and Mexico, in response to the IRA's incentives. This shift in location from Europe to North America is a direct result of the IRA, and it's unlikely that these plants would have been announced without it. However, the IRA's domestic content provisions have caused controversy both internationally and domestically. Some geopolitical allies have expressed concerns about the potential negative impact on their economies. Domestically, there have been debates about the seriousness of enforcing the IRA's domestic content requirements. Despite these controversies, the IRA appears to be working as intended, driving the growth of the domestic EV industry and reducing reliance on foreign supply chains.
New EV tax credits with strict requirements for battery components and minerals: The Inflation Reduction Act introduces new EV tax credits with increasing requirements for US or free trade partner minerals (40-80%) and North American battery component manufacturing (50-100%). Australia, Chile, and South Korea are expected to benefit due to their lithium resources and battery manufacturing industries.
The Inflation Reduction Act signed by President Biden contains new EV tax credits with strict requirements for battery components and strategic minerals. The minerals, such as lithium, must come from the US or free trade partner countries, starting at 40% this year and increasing to 80% by 2027. For battery components, they must be manufactured in North America, starting at 50% this year and increasing to 100% by 2029. The countries most affected by these rules are Australia, Chile, and South Korea, which have significant lithium reserves and battery manufacturing industries. The US's international allies, such as Europe and Japan, which do not have free trade agreements with the US, may face challenges in complying with these new rules. The biggest winners from this legislation are expected to be Australia, Chile, and South Korea due to their lithium resources and battery manufacturing capabilities. The US Treasury Department recently provided guidance on the implementation of these rules, focusing on the definition of "constituent materials" in the gap between minerals and components.
Challenges in qualifying for Critical Minerals component under IIJA for battery materials sourced from non-free trade partner countries: The Infrastructure Investments and Jobs Act's Critical Minerals component poses challenges for battery materials sourced from non-free trade partner countries, particularly nickel from Indonesia, due to complex supply chains and manufacturing requirements in North America.
While lithium sourcing from countries like Chile and Australia, which have free trade agreements with the US, is relatively easy due to their large production quantities, the complexities arise when it comes to other critical minerals like nickel and cobalt, whose supply chains are not entirely within free trade partner countries. The largest proportion of the value in electric vehicle batteries comes from nickel, most of which is sourced from Indonesia, a non-free trade partner country. Therefore, qualifying for the Critical Minerals component under the Infrastructure Investments and Jobs Act based on battery materials is challenging. Additionally, to meet the battery components requirement, battery manufacturing or component production must occur in North America. With the increasing focus on domestic production, it remains to be seen if there will be sufficient supply to meet the market in the near term.
Expected Price Drop of Mass-Market Electric Vehicles from 2024: From 2024, US manufacturers like Jeep, Stellantis, GM, and Ford will launch mass-market electric vehicles, bringing down the price point to around $35,000. Battery prices will be a significant factor.
...the next 12 to 24 months will see the continued dominance of luxury electric vehicles in the market, with prices above $50,000. However, starting in 2024, mass-market electric vehicles from US manufacturers like Jeep, Stellantis, GM, and Ford are expected to launch, bringing down the price point to around $35,000. At this point, battery prices will become a significant factor. The US is set to produce over 200 gigawatt hours of batteries from LG-GM, LG Stellantis, and Ford, satisfying the demand for 2025. The controversy surrounds the definition of "constituent materials" in the battery supply chain. The Treasury initially classified them as critical minerals, but politicians like Joe Manchin and companies building domestic cathode manufacturing strongly disagree. The definition and classification matter as they impact government subsidies and investment in the industry.
New regulations cover strategic minerals and battery components' entire supply chain: The new US regulations consider strategic minerals those with 50% value added at each step from extraction to manufacturing in free trade partner countries or the US.
The new guidance on strategic minerals and battery components clarifies that constituent materials, which are the precursor steps leading up to the battery component itself, fall under the strategic minerals qualification. However, at each processing step from extraction to manufacturing in a free trade partner country or the US, 50% of the value must be added for the material to be considered strategic. For example, if lithium is mined in Australia, which is a free trade partner country, but processed in China, it would not qualify as a strategic mineral due to the lack of a free trade treaty with China. The process becomes more complex for materials like manganese, which require multiple stages of processing and refining, each requiring 50% value addition in a free trade partner country or the US. Overall, the regulations aim to regulate and incentivize the entire supply chain, despite its complexities.
Impact of US tax credit decision on battery industry: The US tax credit decision for EVs now considers constituent materials as critical minerals, only US or free trade agreement countries' production counts towards the value addition requirement, potentially disadvantaging domestic cathode and anode material manufacturing in the US, and could lead to more international competition.
The recent decision by the U.S. Department of the Treasury regarding the qualification of countries for the critical minerals component of the EV tax credit has significant implications for the battery industry. The decision to consider constituent materials as more akin to critical minerals means that only US or free trade agreement countries' production counts towards the 50% value addition requirement. This could potentially disadvantage domestic cathode and anode material manufacturing in the US, as countries like Korea and Japan, where a significant amount of cathode and anode material manufacturing takes place, are also free trade agreement countries. This could lead to a level playing field for building new cathode plants in these countries instead of the US. However, it's important to note that existing facilities in these countries will be able to qualify for the agreement, which is a significant advantage for them. Additionally, this decision could have been driven by Tesla's interests, as they make their battery cells in North America but source their cathodes from Japan. This decision could potentially impact the incentive for domestic battery material manufacturing and may lead to more international competition.
Understanding the ambiguity of 'foreign entity of concern' in EV tax credit guidelines: The Inflation Reduction Act's EV tax credit guidelines leave ambiguity regarding the definition of a 'foreign entity of concern,' potentially impacting eligibility of materials sourced from countries like China and disrupting supply chains and manufacturing decisions in the EV industry. Clarity on this definition is expected within the next 6 months.
The Inflation Reduction Act's EV tax credit guidelines, while aimed at protecting domestic manufacturing and reducing reliance on foreign entities for battery production, leave some ambiguity regarding the definition of a "foreign entity of concern." This ambiguity could significantly impact the eligibility of materials sourced from countries like China, potentially disrupting supply chains and manufacturing decisions in the EV industry. The regulators are currently walking a fine line between making the guidelines doable and keeping them too complex. The final clarity on the definition of a foreign entity of concern is expected within the next 6 months, and it remains to be seen whether China as a whole or specific companies within China will be deemed foreign entities of concern. This uncertainty could lead to delays or accelerations in manufacturing decisions, depending on how the guidelines ultimately shape up.
International Collaboration for Strategic Minerals in Battery Industry: Identifying strategic minerals and allowing for production beyond US/North America is crucial for battery industry's growth. Complex battery regulations necessitate international collaboration among countries.
Importance of international collaboration in the production of strategic minerals for batteries. Dale Denton emphasized that identifying these minerals as strategic and allowing for production beyond just the US or North America is crucial for the battery industry's growth. Sam Jaffe, the vice president of battery storage solutions at Esource, highlighted the complexity of battery regulations, making it essential to have a network of countries working together to make this happen. The battery industry itself is complex, and this conversation shed light on the intricacies involved. This episode was produced by Canary Media and Postscript Media, with support from Prelude Ventures, a venture capital firm dedicated to addressing climate change.
