Catalyst with Shayle Kann - Five big questions emerging from the OBBB

Starting point is 00:00:02 Latitude Media covering the new frontiers of the energy transition. I'm Shail Khan, and this is Catalyst. I think you can make a case that solar in particular would be relatively robust to an expiration of the tax credits. But I think that the semi-existence of tax credits really complicates things. It's cliche to say it, but like, you know, capitalism loves certainty, and that's like, I completely agree with you. Coming up, the wonkier questions that emerge from the one big, beautiful bill. When utilities need flexible capacity they can count on, they turn to Energy Hub.

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Starting point is 00:02:15 That's f-i-s-c-h-fish-tankpr.com. I'm Shale Khan. I invest in early-stage companies at energy impact partners. Welcome. Well, the O-Triple-B, as I guess some people call it, has passed. And like the original Inflation Reduction Act itself, it can take. a lot. So rather than speculating at the high level about every sector at effects, what I thought we should do here is pull out a few of the more nuanced questions that I think

Starting point is 00:02:47 fall out of the legislation and talk about what they might portend for the various markets that are affected from batteries to wind to solar to hydrogen to CCS. And as usual, my partner in prognostication for this one is Andy Lubershane, who is my partner at EIP and our head of research. So before Andy and I get into it, I'm hosting and asking me anything episode coming up. It's I think the third or fourth of these that we've done. I will attempt to answer as many of your questions as I possibly can. We've actually already gotten a bunch of really good questions, so thank you for sending them in. Please keep them coming. Email us at Catalyst at Latitudemedia.com. That's Catalyst at Latitudemedia.com. Episode will be soon. And in the meantime, here's Andy.

Starting point is 00:03:33 Andy, welcome. Hey, thanks, Shail. Always great to be back on Catalyst. Speaking of being back, I had, as you know, our mutual friend Nat Bullard back on a few weeks ago to talk through some interesting utility tariff finding stuff and utility docket stuff. And he pointed out to me both there and then publicly thereafter that he thinks he's the most frequent guests on Catalyst beating you out as number two. Recently, I wonder how you think about that. I heard through the grapevine that Nat was boasting about.

Starting point is 00:04:04 that and I just want to set the record straight that if you include both Catalyst and your prior podcast, the interchange, I think I win hands down. Although I will say like it's clearly not a fair competition just because I think I like I have the home court advantage. You have me on speed slack. It's true. Though you get a lot of credit for the deep cut of the previous iteration of this podcast. Anyway, let's just, we'll use this one to one-up Nat for you. I needed it. Yeah. All right. There's so much to talk about on this. Okay, first of all, what's your shorthand for this bill? What do you, what do you call it when you're just like in conversation? I've heard people say O triple B, O B, B, B, the beautiful bill, the budget bill.

Starting point is 00:04:47 You know, I haven't had to refer to it in that many times. Like, I, OBBBA, but that's too long. Too long. Yeah. The bill. Should we just call it the bill? The bill. Let's call it the big bill. All right. There's a lot to talk about on the big bill, as there was with the IRA in the first place when it passed. And this bill is mostly changing the IRA, at least as it pertains to the stuff that we're going to talk about here. But I think what we want to do, rather than a pine at the really high level, is just focus in on some areas that we think are the biggest, most important open questions that emerge from the bill. So we're going to run through five of them that you and I identified before. Let's start with the first one.

Starting point is 00:05:26 I'm going to call this one, what the fiac? So FIAC restrictions abound in this bill. Talk me through, I guess, at the high level, the FIAC restrictions. Like, where do they come into play? And then your high level view on what it means. I think FIAC is the biggest question mark because it's so omnipresent. You know, it cuts across the three most important categories, at least in my opinion, of the tax credits that are being modified here.

Starting point is 00:05:56 And those are the ITH. and PTC for renewable projects and storage projects. I mean, deployed projects, that is. And then the manufacturing production tax credit, the 45X, all of which are subject to slightly different versions of FIAC restrictions, which, you know, very simply in my mind, I'm just thinking about as, you know, you can't buy stuff that is originating in or controlled by companies in China, basically.

Starting point is 00:06:26 It's more complicated than that. sure lawyers would jump down my throat and point out all the nuance there, but that's the basic gist of it as far as, at least as far as I think I need to understand. And, you know, that has really different impacts across each of those categories, right? So for wind projects, it's not a huge impact because it's very easy to source components from non-China sources. There's plenty of, you know, wind turbine component manufacturing in America and Europe, et cetera, not a big deal. Although, you know, wind has other troubles in the big bill. For solar and battery storage, it's more complicated, right?

Starting point is 00:07:06 I think, yeah, and then for manufacturing, I think it's probably the most complicated. For solar projects, I think it's manageable largely because the supply chain has already moved outside of China. This is where you get into the nuance of it, right? Like, we're already not really buying solar panels from China. We are buying solar panels that have wafers from China. We are buying solar panels from companies that are based in China, manufacturing in Southeast Asia. And so the nuances of all the Fiat restrictions get really complicated there when it comes to solar projects.

Starting point is 00:07:41 I think on solar manufacturing side, it seems more clearly a challenge. Yeah. For solar projects, I think, I agree. I think we're pretty much fine when it comes to FIAC. I think most solar projects already can figure out a way to avoid that restriction, mainly because, like you said, the solar industry has already been avoiding companies and sources that are associated with China or that have already been found to be circumventing tariffs on China in certain Southeast Asian countries, for example. And it sounds like, you know, everything I'm

Starting point is 00:08:15 hearing and reading is that the global solar industry has done a pretty good job already diversifying to India and some other countries in South and Southeast Asia. Yeah, and there will probably be more of that, and there are new tariffs that could be introduced separate from this. There's an ongoing ADCVD case, anti-dumping case, on a bunch of Southeast Asian countries. The solar supply chain has gotten increasingly messy and complicated, but the fact that it has already been somewhat messy and complicated in some ways insulates us a little bit from basically the battery equivalent, which we're going to talk about in a second, which is where the introduction of, the FIAC restrictions in this bill, the, again, FIAC being for an entity of concern, which basically means China,

Starting point is 00:09:01 present a unique challenge. I think there's a challenge in solar, but doesn't seem like it's like it's not the end-all-be-all because the solar supply chain has already been spreading out. Yeah, I agree. With the exception potentially for solar manufacturing, like you noted, in which the one area in which the solar supply

Starting point is 00:09:24 chain has not become a lot more flexible yet is in ingot and wafer manufacturing. In fact, like, if you look across all of the areas of clean energy that we care about and everything that the IRA was focused on, you know, I think ingot and wafer manufacturing is actually probably the most concentrated of all of those like supply chain steps in China still. And from what I can gather, you know, that's okay today, right? If you were to start up a new solar cell manufacturing facility in the U.S. today, you could probably qualify even buying wafers from China, right? Because, you know, together, the ingot and wafer manufacturing steps are like ballpark somewhere around a third of the cost of a complete cell. And you only need 50% non-FEOC components, you know,

Starting point is 00:10:18 starting in 2026, but by 2029, you need 85% non-FEOC components. And so that could present a problem, like, if you were still reliant on Chinese wafers by that point. Right. And that gets to this, I guess, this bigger thing, which is going to be the segue to talking about batteries here, which is on the manufacturing side, right? So the big thing about the IRA was that it brought with it this boom in plan. and domestic manufacturing of solar, as you said, lots of solar cell and module stuff, but I think even more so of batteries

Starting point is 00:10:56 and battery components. And that was driven by this combined carrot and stick approach where you had tax credits for the ultimate consumption of a thing that were tied to either fiat restrictions or in the case of batteries, complicated stuff around friendly countries and so on. But then also the carrot on the manufacturing side, which is really the bigger one, which is the tax credits for the manufacturing itself.

Starting point is 00:11:22 And so there is this incentive, but a lot of that manufacturing has not been stood up yet. A little bit of it has, but a lot of it hasn't actually been built yet and was planned. And so the question is, what happens to all of that manufacturing in light of the changes to the IRA, which sort of remove, or at least place an early sunset on a lot of the demand side, incentives, the EV tax credit, for example, or the ITC, PTC for solar and wind, which expires earlier than it would have in the IRA. But on the other hand, keeps 45X, which is the manufacturing tax credits all the way through the early 2030s. So you still have, but of course, introduces FIAC, right? So it's like a very complicated equation to determine, is it still worth it to

Starting point is 00:12:11 stand up your new, I don't know, battery cell factory in the U.S. It's super interrelated, and that's why it's so hard to parse. But I actually think that battery manufacturing, simulating battery manufacturing, in my opinion, is probably the most important thing that the IRA was trying to do when it comes to making clean energy manufacturing overall more robust and less subject to geopolitical risk and tension in the U.S. And one, you know, so I think it's worth starting at the beginning, which is like, can you comply with these FIAC restrictions and make battery cells in the U.S. And it's tricky. I think there's some real uncertainty there, and it really depends on the kind of batteries you're making. Because especially if you're making, you know, NMC cells, so the more expensive cathode material cells, then, you know, that cathode active material can be like roughly half the cost of a cell.

Starting point is 00:13:24 Now, there is supply outside of China. There's some, you know, relatively minimal supply of that material today coming out of the U.S. With some more on the way. But if you add up that cam, the cathode active material, and then anode material, which is much more concentrated in China, that's, you know, graphite anode powders, which is another, say, 10 to 15% of the cost of a cell, then it's hard to comply with FIAC if you were buying those materials from China today, because right out of the gate, starting in 2026,

Starting point is 00:14:01 you need 60% non-China components in your battery cells. And so you're going to need to find another source probably of cathode materials. And again, you know, today, that's, it's, it exists outside of China, but the market is more limited. And so, you know, at the very least, you could see that make it more expensive to produce battery cells in the U.S. And, you know, there could also be just pure bottlenecks on supply if you were trying to ramp up a bunch of new cell manufacturing all at the same time, which, you know, we can talk a little bit more about when we get to EVs, but I am still pretty confident in the fundamental trend of electrification

Starting point is 00:14:45 of vehicles, even in the U.S., and I think there are still some pretty good signals, pretty strong signals that battery manufacturing is moving forward. Just to give you, like, one quick anecdote, our colleague Brian Ebright, who heads up our research in commercialization efforts at EIP focused on electric mobility. He sent me an article earlier today about Ford. It was in the New York Times that Ford has basically said we're moving ahead with this $3 billion battery plant in Michigan where they're licensing lithium iron phosphate technology from CATL, the Chinese battery giant. And they claim in the article that they'd been in contact with the administration frequently throughout the drafting of this bill, and they believe that they have a pathway to FIAC, you know,

Starting point is 00:15:38 to complying with the FIAC rules. And I guess I'll add one more point. This is, I think, illustrates how the architects of the IRA, especially around battery manufacturing, were being pretty clever in that they were really trying to insulate the way that they were rolling this out from political risk. And, you know, that Ford plant, for example, is in a county that President Trump won by 56%.

Starting point is 00:16:06 It's going to be serving battery cells to two, new EV facilities, also in red districts, I think, in Kentucky and one other state that reliably votes Republican. So there are a lot of jobs now on the line in, you know, in Republican supporting counties that are dependent on these EV battery plants moving forward. Well, I'll tell you one thing about this whole fiac fiasco, so to speak, which is, it's great for lawyers. It's going to be, there's just going to be so much to do, to determine compliance, to set up a supply chain for compliance. Great situation for the lawyers. All right, let's, let's move on from the FIAC bit. I mean, it's still relevant to everything else that we talked

Starting point is 00:16:52 about. As you said, it lays above a bunch of the other credits. Well, let's talk with the other thing that I think is a big open question. Certainly, we're sitting in a 45-day period right now, or in the midst of it, where there is a big remaining open question, which is around the wind and solar ITC, PTC, the tax credits for wind and solar, where the rules are set in the bill such that you can commence construction by the end of 2026 and then not be subject to a restrictive placed in service date. And so, per the historic precedent of the definition of commencing construction, there's a couple of different ways that you can go about doing it. You can begin groundwork and so on, but a lot of people would also do what's called safe harboring, which is to buy some of the equipment, 5% of the cost worth of the equipment that allows you to safe harbor and then consider yourself to be in construction. And then you can have a few years to then begin operation.

Starting point is 00:17:57 important, of course, because when solar developers don't necessarily control the timeline under which they can enter operation, that is a function of interconnection amongst many other things, which is tough to predict. So that is the bill

Starting point is 00:18:13 that passed. Then, of course, there's an executive order that came right afterwards that says that Treasury basically needs to go look at the rules for safe harboring and commence construction amongst other things, and presumably take a more aggressive stance on those. So we're not, 45 days haven't passed yet. We don't know

Starting point is 00:18:33 what those rules are going to come out to be. And so we're in this really weird limbo period right now, and I've spoken to a bunch of developers about this too, where like, clearly you want to get as much of your pipeline into quote-unquote construction as possible as quickly as possible. But how to do that and what will definitely qualify is uncertain. So, it results in a kind of a strange, I think, outlook for the next two, three, four, or five years of wind and solar, maybe particularly solar, where historically, whenever the tax credits would be about to expire, you'd see a boom. And then if the tax credits seemed like they were going to expire, there'd be a bust right afterwards, and then the market would kind of cycle, and it would come back. Here, there's so many mini boom and bust possibilities that I actually don't know how to frame it, right? Yes, yes. I mean, I started really like my career focused on renewables and clean tech looking at, as an analyst covering the wind energy industry. And I remember like the first boom bus cycle I lived through was 2012 to 2013 where we went from like 12 gigawatts of wind build because in 2012 when everyone was expecting the tax credits to expire. And then nothing basically in 2013. It was it was the steepest drop really possible. I don't think we're going to see that again, but this is probably the biggest area of uncertainty, and it's not really because of the bill. It's because of this executive order and associated reporting

Starting point is 00:20:11 around that executive order, which suggests that, you know, Treasury is going to be pretty aggressive in terms of redefining start of construction and safe harbor rules. And so I think for the 45 days until we have clarity there, and hopefully it is only 45 days, I don't think that much happens. I think people kind of sit on their hands. And then after that, if the rules are anywhere close to what we've seen in the past for Safe Harbor where you can spend 5% of a project cost and kind of continuously make progress, then I think we see a lot of the biggest developers who have balance sheets to buy, to Safe Harbor. those components like inverters or modules and also who have enough visibility and enough diversity

Starting point is 00:21:00 in their project pipeline that they know there'll be a project to eventually put them into, which favors the bigger, more well-capitalized developers, by the way. But that's just one other side effect of this. I think we'll still see probably another three, four years, well past 2017 of pretty solid, consistent wind and solar additions, because previously the bottleneck has been interconnection. Like you pointed out, it really hasn't been demand. And especially if they continue to qualify for the tax credits, the economics still look really good. You know, I think there is also just an open question in the market that we're in today. And I want to be careful about this because the tax credit.

Starting point is 00:21:48 it's clearly matter. They make a huge difference to the economics of a wind or solar project. But it's not clear how that much they matter to the near to medium term opportunity to build more wind and solar because of the demand conditions that we're seeing out in the power market. Virtual power plants are becoming a reliable way for utilities to manage capacity. But enrolling Devices is just the start. What really matters is confidence, knowing those resources will perform when dispatched and being able to prove it from the control room to the living room. Energy Hub's platform handles the full picture, from near real-time forecasting, locational dispatch, and the kind of rigorous verification that holds up when regulators,

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Starting point is 00:23:25 as I talk with people deploying capital, shaping policy and building projects. Together, we unpack how risk is priced, how incentives are structured, and how progress is actually made. Listen to Critical Capital on Spotify, Apple, or wherever you get your podcasts. Are you tired of overpaying for big-name PR firms, but not really knowing what they're delivering? Is your comms team wasting time reviewing lengthy messaging brief? and decks, instead of engaging journalists or producing content? Are you wondering why your competitors are getting press and you aren't? Fishtank PR is an award-winning climate and energy tech, renewables, and sustainability-focused PR firm dedicated to elevating the work of both early stage

Starting point is 00:24:03 and established companies. Whether you need to position yourself as a thought leader in between project announcements or translate complex ideas and technologies into tangible, compelling stories that resonate with the media, Fishtank can help. Check out Fishtankpr.com. That's That's f-I-S-C-H-F-T-T-P-R.com. I think you can make a case, and many have made the case, that solar in particular, would be relatively robust to an expiration of the tax credits. But I think that the semi-existence of tax credits really complicates things. Like if you just absolutely eliminated them overnight, the market would see a shock,

Starting point is 00:24:47 and every project would get repriced. Some projects would die. The market would have to adapt. And then it would end up at the size it ends up at, right? And it probably wouldn't be as big as it is with the tax credits, but it also wouldn't be zero. To me, the trickiest thing is if we're entering this period wherein some projects will qualify for a substantial, like it's 30% tax credit, if you still get the, you know, domestic content bonus, coal communities, et cetera. You can get, they're big credit. So some projects will have that and some projects will not.

Starting point is 00:25:22 And that, to me, actually, might be more of a risk to the overall scale of the market than if you just had certainty one direction or the other. It's cliche to say it, but, like, you know, capitalism loves certainty. And that's, like, I completely agree with you. I was looking at some, just kind of some basic math a couple days ago just to get, you know, get myself, give myself more confidence in what I thought would happen with wind and solar, if let's say there are highly restrictive new safe harbor rules that make it really hard to qualify. And so basically like 2027 is the end. And I think like if you have solar wind at $25 a megawatt hour today, which is feasible, those are good wind and solar projects, but maybe not even the best,

Starting point is 00:26:13 and you take that that's with the ITC or PTC in the case of wind and you take away that subsidy you probably go back up to you know 40 to 45 a megawatt hour in both cases you know according to a bunch of different sources and people who've really crunched these numbers with like really sophisticated cash flow models right and you know that that is a big difference because at $25 a megawatt hour, you are less than the marginal cost of natural gas generation. So you can build those wind and solar resources solely, and you'll make money solely off the avoided cost of burning gas at existing natural gas power plants. Whereas at $40 to $45 a megawatt hour, it's not so clear.

Starting point is 00:27:04 You're closer to the line. You know, it's harder to compete straight up with gas. You really need to want that energy as an additional resource, not just to offset gas you're already burning. And I think that's probably where the line is in the market and why you will see lower deployment, but still not, it's, you know, I don't exactly know how to, you know, bet on the market, but there's still a market there. It's just, it is less if the tax credits really go away in 28. So that's a good segue to topic number three, which is, you know, you're referencing solar wind versus natural gas. Now, the other category here are other forms of clean energy that did not see their tax credit expiration dates moved up, so specifically nuclear, geothermal,

Starting point is 00:27:53 and I guess you could include carbon capture, which retains its credits for a longer period of time as well here. So, you know, again, it's hard to predict how this goes without knowing exactly how long solar and wind projects will still have the tax credits. But they're assuming that this version of the law holds, there will be some period of time, starting later this decade sometime, when nuclear geothermal and CCS projects will get tax credits and solar and wind projects. Oh, and by the way, storage projects also will get tax credits. And solar and wind will not. So in your mind, does that change or does that significantly change the calculus for I don't know, the volume of nuclear and geothermal we build, and over what time period?

Starting point is 00:28:42 Yeah, I don't think it changes my calculus within the next five years, because I think for pretty much all three of those resources, nuclear, geothermal, and then gas with carbon capture and sequestration, which is the other one that, you know, continues to get subsidized. you know, I think all of those, like nuclear in particular obviously takes longer to develop. I don't think we're going to see, we might see a little bit, you know, in the 2030, early 2030s time frame, but I think for the most part we're talking 2035 and beyond when we'd actually have new nuclear power at scale coming online. And I think in that time frame, the tax credits really help. but what matters most is how much power we need, really.

Starting point is 00:29:36 Like it's nuclear, my own view is really never going to look great from a pure economic basis on paper, relative to say, just more natural gas power generation, unless we have like significant gas, natural gas resource constraints, which we might have bottlenecks in in the U.S., but, you know, there's a lot of gas underground. So I think nuclear is really, you know, we turn to nuclear as a hedge against natural gas resource constraints and because we want clean power more and more over time and because you just can't build and and extract enough new gas fast enough. And so that's where the value in starting to develop new nuclear projects today really is. I don't think it crowds out wind or solar at all, really. I think they're sort of added for separate reasons. And probably the same thing with geothermal. Geothermal is much more resource, much more geographically constrained. I think we're really only talking about the western U.S., you know, Nevada, California,

Starting point is 00:30:46 places where you have heat that still rises fairly naturally reasonably close to the surface of the earth. and in those regions, like, probably solar is still cheaper on a levelized cost of energy basis than geothermal, even subsidized. Even when geothermal is subsidized and solar is not for quite some time. But you don't add geothermal because you're competing with, you know, geothermal is not really competing with solar. It's being added as an additional energy and capacity resource. And I think similarly about CCS, the CCCS, the CETs. the CCS story is more complicated for a bunch of reasons. Yeah, I guess on the margin,

Starting point is 00:31:27 it advantages nuclear and geothermal over wind and solar. In practical terms, it might not be that important. I think that said, nuclear and geothermal really do need the tax credits, I think, more so. They are more expensive resources, at least in the near and medium term. And so if you were to remove those tax credits, it'd probably even more painful than it is for, wind and solar. So in that light, like, extending them further sort of makes sense.

Starting point is 00:31:57 There's like just a much better economic and political argument you can make that we want these resources to come down the cost curve faster. And one way to do that is to give them a little boost. I mean, that's kind of what we did 15 years ago with wind and solar. Yeah, exactly. Okay, so on to topic number four. So we've talked about wind solar fiac. Let's talk about hydrogen. hydrogen went through kind of a whirlwind over the course of the drafting and changing of the legislation in the bill. As a reminder, hydrogen in the U.S.,

Starting point is 00:32:26 it's already been a journey, right, since the IRA. There was this extremely lucrative on-paper tax credit, up to $3 per kilogram, but then the government under the Biden administration took a really, really, really long time to actually set the rules under which you could qualify. So there was a ton of uncertainty in the market. Then they set the rules, and the rules were really strict.

Starting point is 00:32:47 It's this three-pillar. guidelines for what you have to do in order to source clean energy that qualifies you to generate the $3 tax credits at least. And then basically immediately after that, Trump got elected, a bunch of new uncertainty got introduced. Then the bill gets sort of introduced first in the house, and most versions of the bill early on would have killed the credit for any hydrogen projects entirely that didn't begin construction by the end of this year, which is very few projects. I don't know, a couple under construction. Not very many.

Starting point is 00:33:23 Then, of course, the final version of the bill extends that a bit. So that gets it out to beginning construction by the end of 2027, which is a big difference, right? Two and a half years to begin construction on a project is, again, depending on the definition of commencing construction, which we talked about, it's a fair amount of time. On the other hand, those really strict guidelines for the three pillars still apply. And so I think the fundamental question in clean hydrogen is how many projects can satisfy the three pillars criteria, can source enough clean power.

Starting point is 00:34:02 Like really, you've got to go buy, you know, essentially 24-7 clean power from resources that were constructed in the last three years or new resources that are deliverable to you, you know, that are time match. You got to do that. And that gets you the ability to qualify for this credit. And because we're also sort of limiting the amount of new solar and wind that can get developed and because there's all this other demand from data centers and other things, it's really hard to find that stuff.

Starting point is 00:34:30 And that stuff is getting more expensive, as we've talked about before. So it's an interesting dynamic in hydrogen where it got a real reprieve, but it doesn't mean it's going to be easy to go qualify for the credits in the first place. So I wonder how you think about that. You know, when the election, right after the election, actually my assumption was because of some of the political economic variables around hydrogen, I assumed that actually one of the biggest, I assumed that if there were a bill like this, that hydrogen, the tax credits would be extended similarly to CCS. Largely because they're at times, and again, hydrogen's been through a roller coaster, but at least during the first, you know, big, big surge in hype around hydrogen. there was a lot of excitement from the oil and gas industry, which I thought would have made it more political, the tax credits more politically robust. And in fact, my assumption was that,

Starting point is 00:35:24 if anything, we'd get some guidance from the administration to Treasury to loosen those three pillars restrictions, which would make for a bigger hydrogen market. And I actually haven't heard anything about that recently. I'm curious if you have, because if they were to loosen those restrictions, especially if they were to do it soon, right? Like, again, if you had an accelerated, you know, rulemaking timeline, like in the next 45 days, similar to the under-construction and safe harbor rules, that made those restrictions looser, then yeah, maybe I could imagine more projects getting done or getting started in the next two and a half years. Absent that, given we're also seeing all this uncertainty around renewables builds, right?

Starting point is 00:36:13 So you need new renewables, but we're not sure what new renewables costs and how much you can build. And all the demand we're still seeing for power, period, clean power in particular, from highly price-insensitive buyers like data centers, hydrogen, anyone making hydrogen is not going to be a price-insensitive buyer. They're very price-sensitive. They want the cheapest clean power. I don't know. I'm not personally super bullish on this making, helping hydrogen make a turnaround.

Starting point is 00:36:42 But you're actually closer to this world than I am, so I'm curious if you think differently. I broadly, if you're looking at it from the high-level market perspective, I think that's right. I think you won't see, you know, a booming hydrogen economy as a result of this bill and the extension from end of 25, or I guess the early expiration being not as early as it could have been. It does mean I think some projects are going to move forward, like very, very, very few. would have moved forward if the rule was commenced construction by the end of this year,

Starting point is 00:37:12 the extra two years will make a difference. It's not zero projects. It's not one or two projects that can figure out how to source enough clean power, but it's probably not 100 projects either. So I think you're going to get a much narrower market that generally, again, favors the larger developers, larger projects who can go buy big chunks of clean power and piece together multiple resources and so on. Yeah, it's interesting because you think about the two pathways, right?

Starting point is 00:37:42 The bill was trying to incentivize clean hydrogen, and it was trying to incentivize battery manufacturing in the U.S. Battery manufacturing moved fairly quickly, and we now see a bunch of new plants getting up and running today or already under construction, and again, building constituencies for those tax credits because they are hiring jobs in specific locations. where they're going to make a big difference for the community.

Starting point is 00:38:09 Hydrogen, because of all the uncertainty around qualification for the PTC, because of the pretty strict three pillars, didn't get off the ground under Biden. And so there's not a constituency for it to, like, advocate. And I'm not sure that two and a half years and a few more projects builds a constituency, just from a, like, political economy standpoint. to make much of a difference. The hydrogen hubs,

Starting point is 00:38:40 the hydrogen hubs were where there was a constituency, and this is why you saw, I think, like Senator Shelley More Capito from West Virginia, talked a bunch about hydrogen. She seemed to be one of the advocates of continuing those tax credits. There's a hydrogen hub there. I think that's the extent there was, you're right.

Starting point is 00:38:59 But yeah, I mean, this was one of the areas where the slow rollout of guidance during the Biden administration, I think hurt the political heft of the nascent market. Nonetheless, let's see what happens. I think there will be certainly more hydrogen, large, clean hydrogen projects in the U.S. than there would have been under previous versions of the bill. Certainly fewer than there would have been had the IRA held entirely,

Starting point is 00:39:27 and the guidance come out sooner. Okay. Last one, EVs. So EVs took a beating from a tax credit perspective in the bill, and the EV tax credits expire pretty quickly. You alluded to this earlier. You know, you have a pretty sanguine view, I think, on consumer EV demand despite this. So make your case. Yeah, I continue to be very bullish on electrification.

Starting point is 00:39:53 I think at a fundamental level, EVs are a better product. I think they are going to win in the medium term globally. in fact, globally we're already seeing that happen. And I think we've basically just gotten to the point at the consumer level where the $7,500 tax credit, like, of course it makes a difference on the margins. There's no question about that. And would the market be bigger next year if the tax credit remained in place? I have no doubt that it would be somewhat bigger next year and every year thereafter. But I don't think this changes the timing of the curve, but I don't think it changes the shape of the curve all that much. And it certainly doesn't kill the market because consumers are not buying cars still, for the most part, on all that rational economic grounds, right? If you are an EV consumer, you're buying a still today, especially in the U.S., where we're at, you know, around 10% new vehicle purchases are electric. Like, it's still a pretty unusual consumer who's buying an electric vehicle and that person is probably not as price sensitive. So, yeah, it makes a difference.

Starting point is 00:41:01 but I think the market goes on, and I still have high confidence in the medium term. And in part, that's actually because I think we're still seeing American auto OEMs lean in. We're still seeing battery manufacturing in America progress, even despite some risks to the tax credits from these FIAC rules that we talked about earlier. Like there's all kinds of activity right now. LG energy in partnership with a couple of different automakers is standing up battery manufacturing facilities and an electric vehicle manufacturing facilities associated with them. So I still think we're seeing mostly positive signals from the market on the consumer side.

Starting point is 00:41:50 On the commercial front, you know, I'm less bullish in the near term. and I will say it's not just the big bill. There's this other administration action that I think will make a real impact, which is clamping down and stopping California from pursuing its own vehicle emission standards under this waiver from the Clean Air Act, which California under those standards, had extremely ambitious, aggressive targets, not just for consumer EVs, but for zero-emissions vehicles, which basically means electric vehicles at the commercial level as well.

Starting point is 00:42:37 Honestly, like targets that I would consider probably overly ambitious, and I'm a big believer in electrification. And a bunch of other states had adopted those standards under the same waiver that California had as well. And so there's now a lawsuit going on between a bunch of those states and the Trump administration, but if those states are no longer, if they are indeed no longer allowed to set more aggressive zero emissions vehicle mandates

Starting point is 00:43:05 for commercial vehicles, I think that makes a big difference too at the same time as you're losing the tax credit. Yeah, and that $40,000 commercial for like mid-heavy-duty vehicles, that $40,000 tax credit is meaningful. And that market is less, and has less of a foothold, right?

Starting point is 00:43:22 Like consumer EVs, there's a market there already. it's that there's reasonably high penetration in some places. Not true yet in the medium and heavy duty world. So it feels like you're you're sort of battering that market when it doesn't yet have solid footing, which I think is concerning. And also commercial entities, fleet owners, they're making decisions about whether to electrify and how much of their fleet to electrify mostly on an economic basis, right? They're not unlike consumers who are like, oh, I really want an EV, you know, oh, it's a little bit more expensive this year, no big deal. Um, commercial. commercial fleets are very sensitive to cost. And so when EVs are the right economic choice, and they feel confident in the infrastructure availability and, you know, in the performance, the range that they can get, they'll buy them, I think. And that's what, you know, we will still see that happen to a certain extent. But this does, this sets that decision back by a few years at least, I would imagine. All right. Well, that was five interesting questions coming

Starting point is 00:44:23 out of this bill. I'm sure there will be a dozen more as the market unfolds a little bit. But as usual, fun to talk to you about it, Andy. I think you've retaken the crown for a number of podcast appearances, but we'll have that back on. You guys... That was really my goal here. And also to force myself to think more clearly about the impacts of this bill. And I guess we're all waiting on pins and needles for 45 days in particular. Forty-two days now? I don't remember when the EO. out. I don't know how many days it is. The point is, you thought it was done.

Starting point is 00:44:57 It's not done. Andy Lubershane is my partner at Energy Impact Partners and our head of research. This show is a production of Latitude Media. You can head over to Latitude Media.com for links to today's topics. Latitude is supported by Prelude Ventures. This episode was produced by Daniel Waldorf, mixing in theme song by Sean Markwan. Stephen Lacey is our executive editor. I'm Shail Khan, and this is Catalyst.

Catalyst with Shayle Kann - Five big questions emerging from the OBBB

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