The Really Big Battery Deal In The IRA That People Are Missing

When it comes to electric vehicles and the 2022 Inflation Reduction Act, almost all of the discussion has been around the consumer tax credit for buying an electric vehicle, including the interesting new battery aspects of it. It’s a big topic, but there is one completely different battery angle separate from the consumer tax credit, and that is huge.

The short summary of it all is that The IRA incentives for almost all stages of battery production and the battery supply chain are very attractive, and when stacked on top of each other, the IRA is likely to stimulate a kind of “gold rush” in battery mineral mining, battery mineral refining, battery cell production, battery recycling and battery pack production in the United States. When you also consider that consumers will have to get batteries whose components do not come from China, and which ultimately come from North America, it is basically a given that everyone in the industry now knows that the must have battery mineral mining and refining as battery cell and pack manufacturing in North America.

SK Innovation Georgia battery factory rendering, courtesy of SK Innovation.

The current EV battery mineral situation

First of all, let’s note where we are starting from. The US currently mines and refines close to 0% of the minerals that go into EV battery packs. China, on the other hand, mines or refines the majority of all the majors, including: lithium, cobalt, nickel and graphite. Here is a chart of Chinese dominance of EV battery minerals:

Money, money, money

Looking at the data, the idea that Joe Biden would stimulate a gold rush in EV battery mineral mining and refining was a dream some of us had, but it seemed like one of the more outlandish dreams we could have in this time. and age. However, the market reacts quite well to three things: money, money, money and money. And the Biden administration, Prime Minister Manchin, Senate Majority Leader Chuck Schumer and others involved in drafting the legislation took note and decided to offer all four.

The little joke here, intended to emphasize the key point, is that the IRA appears to offer cash (tax credits) for mining battery minerals, for refining battery minerals, for assembling battery cells and for assembling battery packs (or “modules “). If you do all of these things, you won’t get one bonus you get four bonuses. In fact, if you count all the different minerals in a battery, the number of potential bonuses is much greater. These bonuses add up, and they make it much more attractive to bring full-cycle battery manufacturing to the US. At the very least, it should open up mining and refining projects – which are more or less non-existent in the US – by making them much more bankable. (Side note: Canadian and Mexican locations hoping to attract investment in battery manufacturing may not have figured it out yet, but their competitive position vis-a-vis the US took a big hit when Biden signed the IRA.)

That’s why we recently got news that Tesla reportedly decided to scrap some investments it had already made in Germany (but not all of them) and move some battery cell production to the state. That’s why Tesla is also reportedly exploring lithium refining in Texas now. That’s why GM is reportedly accelerating its exploration of EV battery mineral supplies from American soil. “Our thought process was that we would do this over a period of time, but with the IRA we are actively working to figure out how we can accelerate,” said Sham Kunjur, GM’s executive director of EV raw materials. But this is only the beginning. This is just the leak from early movers and leaky groups. Whether it’s Tesla, GM, Volkswagen, Ford, Panasonic, SK Innovation, LG Energy Solution (formerly known as LG Chem), Samsung SDI, Albemarle, Livent, Piedmont Lithium, Talon Metals, Lithium Americas, Pilbara Minerals or others, corporate teams are looking at the IRA, getting their lawyers to look at it and starting to look much more seriously at what manufacturing opportunities they can launch in the US.

Looking at the actual IRA language

Section 45X of the IRA deals with “components manufactured and sold after December 31, 2022.” Near the beginning, it states that “each taxable year, an amount equal to the sum of the credit amounts determined under subsection (b) with respect to each eligible component.” In other words, if you get a tax credit for one component of a battery (eg raw lithium), you can also go and get a tax credit for another component or even later stage of the same component (the refined lithium, for example). The tax credits are for each major step in the production process, meaning you can get them for different components of a battery and different stages of processing or assembly of those components. You can get the following credits:

  • 10% of the price of battery electrode active materials
  • $35/kWh battery cell capacity
  • $10/kW battery module capacity (or, for a battery module not using battery cells, $45/kWh)
  • 10% of the cost of producing a battery mineral.

Even though there is a phase-out for some of these between 2030 and 2032, there is no phasing out at all for the critical mineral supplements! That’s long-term stability for a market that needs it.

Which minerals and battery components are eligible?

In terms of electrode active materials, these include “cathode materials, anode materials, anode foils, and electrochemically active materials, including solvents, additives, and electrolyte salts that contribute to the electrochemical processes necessary for energy storage.”

Applicable critical minerals include: aluminum/alumina, antimony/antimony trisulfide concentrate, barite/barium sulfate, beryllium/copper-beryllium master alloy, cerium/cerium oxide, cesium/cesium formate/cesium carbonate, chromium/ferrochromium, cobalt/cobalt, graphite/graphite carbon, lithium/lithium carbonate and lithium hydroxide, manganese, nickel/nickel sulfate and many others.

Finally, of particular note is that only production that takes place in the United States is eligible for these tax credits. This creates a “USA premium” in the supply of raw materials to facilities that want to get the maximum yield of 45X. Any manufacturer will be eligible for a 45X tax credit covering annual production costs as long as their facility uses raw materials from the United States. For most manufacturing companies, raw material costs are the most important component of OPEX after labor and energy. So Biden, Schumer, Manchin and their aides have been very clever here: “want the maximum benefit, Buy American.”

So let’s go back to the example of Tesla (or you can use Ford, GM or any other company in this hypothetical if you prefer). Tesla could theoretically get a tax credit for mining lithium, get a tax credit for refining lithium, get a tax credit for mining nickel, get a tax credit for refining nickel, get a tax credit for producing battery anodes, get a tax credit for producing battery cells, and get a tax credit for producing battery modules. Of course, Tesla won’t do that all of those things. However, I think that helps to explain the potential here. While Tesla won’t do all of these things itself, companies and investors will flock to the US to do them, and some automakers will also deepen their vertical integration in the battery space.

As a final note, and perhaps as a teaser for something we will return to, while the incentives of the IRA are attractive, so is the potential for price control over commodities! Whether Ford, GM or Tesla has more secure, stable and predictable control over key raw material costs could go a long way in being competitive and financially sustainable in the coming decade. How much is that price control worth as we go from ~5% EV market share in the US auto industry to 50% or more?


 

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