By Cormac O’Laoire

The Inflation Reduction Act (IRA), which was signed into law on 16 August, 2022, contains multiple provisions related to transport electrification and increased support for both deployment and manufacturing of batteries.

Lithium-ion batteries will play a crucial role in the United States’ energy transition, but currently most lithium-ion batteries are manufactured in China and US battery production accounts for about 10% of global supply. Besides battery production, China also dominates battery material refining. Developing greenfield mining projects, refining capacity and cell manufacturing in the United States could take many years. In the medium-term CEA expects global suppliers to accelerate plans to establish battery cell production closer to US soil. The longer-term goal of the law is to incentivize companies to build more mining capacity and battery manufacturing plants in the United States, and in turn reduce dependence on China.

The law contains several tax credits that relate to EVs and batteries, including an advanced manufacturing production tax credit and an extension of the investment tax credit (ITC) to battery installations. In terms of the 45x advanced manufacturing tax credit, this allows battery makers to claim a credit of $35 per kilowatt-hour (kWh) for cell and $10/kWh for the batteries they produce. There is also a 10% tax credit for electrode active materials, and incentives for mineral production. These provides a runway for incumbents and startups to compete with cheaper Asian cells. Additionally, standalone energy storage is eligible for the Section 48 ITC at 30% for new systems over 5 kWh. The tax credit is also available for co-located solar power projects and energy storage systems. Like the solar ITC, the full 30% is contingent upon meeting labor provisions, and there are adders for domestic content and installations in energy communities.

The law also contains significant domestic content requirements to access tax credits for the purchase of EVs. For the $7,500 electric vehicle tax credit, there are two separate components, each valued at $3,750. beginning in 2023 when the tax credits begin 40% of battery metals (lithium, etc.) must be mined, processed, or recycled in the United States or a free-trade partner; this increases to 80% in 2026. These metal origin requirements are a concern for vehicle manufacturers wishing to qualify for EV tax credits. Under these timelines, US EV makers will have to quickly establish battery material partnerships in either the United States or in free trade partner nations. CEA expects supply chain traceability will be a crucial part of contracts moving forward.

The second $3,750 component covers the actual location the battery is manufactured. Starting in 2023, 50% of the battery components need to be manufactured and assembled in North America, rising to 100% by 2029. In addition, electric vehicles may be excluded from the tax credits if any mining, processing, or manufacturing is conducted by a “foreign entity of concern.” This requirement takes effect in 2024 for the battery components and in 2025 for critical minerals. These changes to the EV tax credit may make the incentive useless for the next few years. E-Source, in its analysis of the IRA, states that it is “plausible” that no cars will qualify for the tax credits until at least 2025, citing the onerous domestic content requirements. Bloomberg Opinion writer Anjani Trivedi slammed the IRA’s domestic content requirements for being “off-point,” stating that these sort of actions keep the United States as a laggard behind China in EV adoption.

This is not the first time such measures have been taken in the battery industry. Over a decade ago the Chinese government created the “battery manufacture whitelist” which essentially froze Korean battery makers out of China for four years. During this time CATL and BYD grew into leading global battery makers. In the case of the IRA, we may see similar US cell manufactures and component suppliers seize domestic market share at the expense of imports.

Source: Text: H.R. 5736, Inflation Reduction Act of 2022 (U.S. Congress)