Catalyst with Shayle Kann - Is the Inflation Reduction Act a win for EVs and batteries?

Episode Date: September 29, 2022

Don’t miss our live episode of Climavores in New York City on October 20! Sign up here for a night of live audio and networking with top voices in climate journalism.  Depending on which headlines you read, the Inflation Reduction Act (IRA) will either hurt U.S. electric vehicle sales by replacing existing tax credits with complicated new ones or build out a North American battery supply chain and rev up EV sales. So which is it? In this episode, Shayle talks to Sam Jaffe, vice president of battery solutions at E-Source, about the key provisions of the IRA’s EV and battery tax credits. Sam explains how the IRA will spur a North American EV battery supply chain in the long run but will also create winners and losers along the way.  There’s a $30 billion pot of money for various tax credits and limited time to make use of them. Who will get to it first? There are already some early movers. Sam explains the key provisions: The EV components tax credit reduces the cost of EVs whose batteries contain materials assembled in the U.S. or its free-trade partner countries. This includes electrodes, electrolyte components and cells.  The strategic minerals tax credit reduces the cost of EVs whose batteries contain minerals mined and processed in the U.S. or its free-trade partner countries. These minerals include lithium, cobalt, and rare earth metals, among others. The 45X advanced manufacturing production credit reduces the cost of making batteries in the U.S. Certain credits ratchet up the percentage of materials required to qualify over several years. So once an EV model qualifies, it will have to maintain eligibility by getting a larger and larger share of its components and minerals from approved countries. They also cover which part of the battery industry will benefit more– the EV battery side or the stationary storage side. And Sam explains why he’s paying attention to the Treasury Department’s forthcoming guidance on the tax credits. Resources: The New York Times: For Electric Vehicle Makers, Winners and Losers in Climate Bill Canary Media: Private-sector reactions to the Inflation Reduction Act Canary Media: 6 clean energy companies that are ramping up US manufacturing   Catalyst is a co-production of Post Script Media and Canary Media. Catalyst is supported by Antenna Group. For 25 years, Antenna has partnered with leading clean-economy innovators to build their brands and accelerate business growth. If you're a startup, investor, enterprise, or innovation ecosystem that's creating positive change, Antenna is ready to power your impact. Visit antennagroup.com to learn more. Solar Power International and Energy Storage International are returning in-person this year as part of RE+. Come join everyone in Anaheim for the largest, B2B clean energy event in North America. Catalyst listeners can receive 15% off a full conference, non-member pass using promo code CANARY15. Register here.

from the studios of PostScript Media and Canary Media. I'm Shail Khan, and this is Catalyst. We expect over 600 gigawatt hours worth of battery manufacturing to onshore in North America over the next decade. 600 gigawatt hours. So essentially the size of the global manufacturing industry is going to be recreated in North America over the next 10 years. Almost all of that is going towards automotive.

So imagine you're an electric. vehicle manufacturer, or you're a lithium mining company or conversion company, or you make cathode materials for EV batteries. You're just in some part of the EV battery supply chain. Suddenly, the Inflation Reduction Act passes, and it contains a multitude of provisions that basically point you toward operating in North America if you can. But there's a ticking clock on some of those provisions and limited funds for others. So how quickly do you move? And stepping back, how big a difference will that make for both electric vehicle adoption and battery manufacturing in the U.S.? This week, the complicated gymnastics of the IRA EV and battery provisions.

When utilities need flexible capacity they can count on, they turn to Energy Hub. Energy Hub works with more than 170 utilities, coordinating over 2.5 million devices to manage 3.4 gigawatts of flexibility built for the moments when utilities can't afford uncertainty. Energy Hub builds and operates virtual power plants that utilities actually stake their grid planning on, coordinating EVs, batteries, thermostats, and more through a single platform built for utility scale. Predictive, verifiable, and designed to perform when it counts. Learn more at energy hub.com. Trillions of dollars are flowing into clean and critical infrastructure, but those investments aren't driven by technology alone.

They're shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, and host of a brand new podcast, Critical Capital. Each episode, I talk with people deploying capital, shaping policy, and building the clean economy. Tune in as we unpack how progress is actually made. Listen to Critical Capital on Spotify, Apple, or wherever you get your podcasts. Catalyst is supported by Fish Tank PR, an award-winning PR firm focused on climate and energy tech, renewables, and sustainability. Fishtank is known for generating prominent and effective media coverage for the brands they work with.

If you want a PR partner that's thoughtful, shoots straight, and gets results, you'll like Fishtank PR. To learn more about Fishtankpr approach, visit fishtankpr.com. That's FISCH, fish tankpr.com. I'm Shell Khan. I'm a partner with the venture capital firm Energy Impact Partners. Welcome. So of all the many components of the recently passed Inflation Reduction Act, one of the more consequential, but also more confusing, in my opinion, is the suite of incentives for electric vehicles and for battery manufacturing. If you've been paying attention to this since the bill passed, you'll have noticed articles that basically say everything from on one side, this will

rapidly accelerate vehicle electrification in the U.S. to on the other side, this is impossible to qualify for and will make no difference at all or, in fact, maybe hurt electric vehicle adoption. And that's because the tax credits themselves are tied to a fairly nuanced set of rules around domestic content that might reshape the battery supply chain or might not, but probably will. Anyway, it's worth teasing out because I think we're going to see many, many announcements over the next couple of years can be traced back very directly to this set of provisions in this one bill. So to help illuminate, we brought back on Sam Jaffe, my EV battery market guru. Sam is the VP of Battery Storage Solutions at eSource, and as you will soon hear, he is deep in the weeds of all these provisions in these various tax credits and what they might mean for the future of the market. Here's Sam. So we're going to talk about the impacts of the Inflation Reduction Act on electric vehicles in the U.S. and on the EV battery world, and EV battery service.

supply chain and all the nuances they're in. Let's start by just laying out what's in the IRA as it pertains to EVs and batteries. So let's start with the EV tax credits. What are they and how will they apply? So first of all, they got a lot more complicated. It used to be that it was a straight-up $7,500 tax credit if you make an EV and sell it in the U.S. And it was quantity, limited. So if you sold 250,000 of them, then you start to draw down and eventually not qualify anymore for them. So you only had a certain number of EV tax credits to offer. And that limitation is no longer there. Now it's time limited. So this is going to expire in 2032. But through that time, you can sell as many cars as you possibly can. You'll get the tax credit for it if you qualify for all

of the qualifications you need to jump through. And there's a lot of hoops to jump through. First of all, it's two separate tax credits. There is a component's tax credit, which is half of that $7,500. So it's $3,750 for the components tax credit. And that components tax credit basically says, if you make the components that go into this battery, including the battery itself, in North America or free trade partner country of the United States, then you qualify for this tax credit. And to be clear, sorry, it's not 100% of the components, right? There's a threshold number starting at, for the components, it starts at 50% and goes up 10% points each year after that. So until it's a full 100% by, I think, 2027 or 2028. So you need to get to a

certain proportion of the value of your components have to be made in the United States or in free trade partner countries. And free trade partner countries can include, that includes our North American neighbors, Mexico and Canada, but includes 12 other countries, including South Korea, Colombia, Chile, Australia, and a host of other countries. Interestingly, none of which are in Europe. But those 12 partner countries can be the host, can be the place where these components are manufactured. So before we move on to the other parts of the credit, maybe we should just double click on this one for a minute. Okay, so you have an EV battery in the starting basically immediately to qualify for this half of the $7,500 credit, you need 50% of the

value of that battery to have been produced in either North America or a free trade agreement country. What comprises more than 50% of the value of a battery? Are there like a couple of categories here that are like, look, if you source your, if you make your cathode materials in America, you're basically there, or if you do the battery assembly, or is it like you kind of need each little individual component and step to add up? So there's things we know and there's things we don't know. And what that means, what that question that you asked, there's a lot that we don't know yet, that we're still waiting on guidance from the federal government and the various agencies that are going to oversee the

implementation of this and the oversight of this to define and precisely say how this is going to work. So within the wording of the IRA, it says the value, it has to be 50% of the value of the components and the material. And components are strictly defined as electrodes, which means cathode and anode, electrolyte and electrolyte components, which means the salt and the solvents that go into the electrolyte, and also module. And the cell itself, so the manufacturing of the cell, and then once the cell is made, put into a module. Interestingly, they don't define the pack, but I think they just decide, once, if you've made the module here, you're going to make the pack here. You're not going to ship it to another continent to make the pack and then ship it back here to put in the car.

So what does value mean? What does that word mean? I'm still waiting for guidance to specifically define what they mean by the value of that. Does it mean all of the things are put in a bucket and 50% of the value of everything in that bucket has to be satisfied? Or does it mean 50% of each of those items have to be satisfied? We don't have specific guidance on that. A good assumption to make is that everything's going to be put into a bucket. 50% of the overall value of that battery has to be satisfied.

But they haven't specifically said that yet. Okay, so this portion of the tax credit that we've been talking about, the first half of the $7,500, this applies to the components and the battery, as you describe the anna, the catho, the electrolyte, and so on. The second half, though, reaches further upstream and relates to the minerals that go into those components, right? Right. So the other portion of the EV tax credit is the Strategic Minerals Tax Credit, and that is also a $3,750 tax credit, if you qualify for it.

And that goes into the actual minerals that are mined out of the earth that go into the batteries. And there's a list of minerals that it's about 20 to 25 different elements that are identified, ranging from the big ones, such as lithium, manganese, nickel, cobalt, etc., to a whole lot of rare earth minerals like etrium and dysprosium and those types of minerals. and also some other materials like aluminum that's used in the current collectors and, you know, things like that. So they define the actual elements that are pulled out of the ground, and those have to be mined in the United States or in free trade partner countries. And that is not a threshold percentage, as the other one is. It is a binary. It is. It is also. That is, that starts. at 40% and again goes up by 10% each year and reaches a cap of 80% by 2027. And is that related only to the location of the mining or also the location of the

conversion from the mine mineral to the battery grade chemical? So within the wording of the IRA, it talks about the mining of the mineral. and it also talks about the very specific processing of the precursor material that's going to go to the cathode plant. So, for instance, it specifically calls out nickel sulfate, cobalt sulfate, lithium carbonate, lithium hydroxide, up to a 99.9% purity rate. So it specifically talks about processing also. So, okay, so taking an example then, let's just talk about lithium because it's probably the best known. of them. So as it stands today, most lithium is mined in either South America or Australia, and South America and Brines or Australia in hard rock resources. Within South America, you know,

Chile is a free trade agreement country, but some of the other countries like Argentina and Bolivia, where there are big lithium resources are not. But Australia is, and Australia is the biggest, right. So add Chile in Australia, you know, you could imagine it's actually, maybe lithium isn't the hardest of the minerals to qualify for this tax credit. But most of the conversion from lithium that gets extracted to lithium that is battery grade takes place in China. So particularly from Australia, right, you have all this lithium that gets mine in Australia, sent to China, converted from lithium concentrate to lithium carbonate or lithium hydroxide. So do we know yet how that would be treated? So there will be a requirement to get 40% of the lithium from Australia or Chile, essentially,

and then 40% of the lithium carbonate or lithium hydroxide processing, most likely, in the U.S. or free trade countries. So there will be a big push towards hydroxide. processing probably in Australia, in Chile, but also in the U.S. and Canada. I think we'll come back to a little bit later, like, how strong a signal this is going to send to build new manufacturing facilities or mining or whatever it is in North America. But, okay, so these comprise the two elements of this $7,500 tax credit. 3750 for the components with a threshold that increases over time. another 3750 for the minerals with a different threshold that also increases over time,

slightly lower threshold, but nonetheless. And so there's like all this complicated gymnastics around, you know, I guess the ultimate calculation of, which is binary, right? You either will qualify for the credit or you will not. They're not levels of the credit you can qualify for within each of these buckets, right? Right. It's binary. You either get that credit or you don't.

And each year, the targets change. So you could qualify for it one year and then not get it the next year. Right. And so, you know, I guess putting yourself in the shoes of, or maybe you've spoken to a bunch of electric vehicle OEMs, I imagine this is a, certainly an ongoing, but probably a super complicated set of qualification criteria that you are trying to kind of wrap your head around and figure out, like, what changes in your supply chain do you need to make? what change in your supply chain, can you make? And what's existing capacity you can tap into and what would need to be new capacity for you to qualify? Well, existing capacity is pretty easy.

There's next to nothing. There's very little chemicals production going on in the U.S. for battery materials. There's very little mining going on. This is all about new capacity buildout in the processing space, in the mining space, in the mining space, in the chemicals refinery space, and in the battery manufacturing space.

So you said earlier, is this a strong enough signal? And I think it is. I mean, keep in mind that the United States has never subsidized manufacturing in this way before. This is all new to us. And I think that, in my opinion, this is probably going to work. that this will spur a U.S. supply chain, a U.S. and partner country supply chain for batteries and

batteries and battery materials. But there is a scenario, a reasonable and possible scenario, that it doesn't. It's overly complex, and people will analyze it and just say, you know what, there's too much risk involved. I'm not going to build a factory. And so, you know, I'm not saying it's a sure thing, but I do think it's a strong enough signal. And it's not just a signal of do we're telling you to build this or not, but it's also a signal of you got to build this fast. There's a speed element to this too, because this is a 10-year program. And you're going to, and it's going to take, I mean, you don't build a chemical factory in two years, in three years. You are lucky to do it in five years. You're lucky to build a mine in five years. So you really have a five-year time frame to take advantage of this program. And there's a limited... One of the other elements of this is that there is a limited pool of funds for each of these programs. They say, here's $30 billion for... set aside for this particular part of the EV tax credit, for instance.

And they don't say what will happen if that $30 billion is used up, but one of the more likely scenarios is they say, okay, the EV tax credit is out of money. We're no longer providing the EV tax credit. So there is a chance that the money, the funds will dry up before 2032 when all of this ends. without unless the unless Congress approves an extra money to at some point in the future for it. So it's a race to get things built as quickly as possible and to produce as much as possible to get take advantage of this as much as possible. And that's one of the things. It's it's not just a

yes or no decision to build this thing, but it's there is a time factor to build it as possible too, and that's what's necessary to make this work, too. Right. And it makes you super advantaged if you either, or one of the few who either already was manufacturing or converting or mining within North America or a free trade agreement country or already was planning to, because it's not that the number of those was zero. It's just proportionately very small. I think you see the same thing happening in like solar, for example. We'll talk about the manufacturing tax credits in a second. that makes a big difference for manufacturing solar components in North America.

Like, first solar is just over the moon about this, right? This is like the biggest moon for them that you could possibly imagine because they're already manufacturing here, and they can scale up relatively quickly. And so that's exactly what they're going to do, and they're going to be sold out for years as long as they do that. I imagine it's the same thing for that short list within battery world. Yeah.

And there were quite a few people that were, you know, had their poker chips in hand ready to place them. for this moment. When that, when that starting gun went off, when Biden signed this into law, there were a lot of people ready to, you know, ready to start this race. So the way that I think about it is the EV tax credits are like a carrot with a little bit of a stick, right? The carrot is the tax credit. The stick is the like qualification criteria. But then there's also a set of pure carrots for manufacturing batteries and battery components within the U.S., which is the 45X production tax credits.

Now, you've pointed out to me that this is one of these – the term production tax credit has like – I can think of at least three different applications from the IRA. There's the wind and solar production tax credit. There's the hydrogen production tax credit. And then there's these manufacturing production tax credits, which are, or 45X. So we'll refer to these as 45X. But these are the pure carrots that say, look, we'll give you a bunch of money if you manufacture stuff here. So how are those structured? Yeah. And the other way I think about it is push versus pull. If you think of the EV tax credits

as pulling market demand by incentivizing the customer to purchase a car and pulling that market demand, This is the production push part of it. You're actually giving money to somebody to produce a good. And that's, again, this is a new way of subsidizing something in the U.S. It hasn't really been done this way before. And essentially what they're saying is you produce a specific good that we have clearly defined in this law, such as batteries. And do it in the United States. So this is not in a, in, North America. This is not in a free trade partner company, but specifically in the U.S. And we will give you, in the case of batteries, they say we will give you $35 a kilowatt hour to produce a battery in the United States. And by the way, this is not just for EVs. This is a battery that could be

for stationary storage also. So build a battery factory in America under this program, and you get $35 if you produce and sell a battery in the U.S. Just to clarify, it could be more than that. It's $35 per kilowatt hour for cells, and then another $10 per kilowatt hour for modules. So they stack. Right. So it could be $45 per kilowatt hour total.

So it could be $45 if you're making the modules. And then below that, there's a 10% of the cost of making the electrolyte and the electrodes also is in there. So if you're selling your, if you're making cathode in the US for $25, you get $2.50 from the government for doing that. So maybe orient us just high level, order of magnitude, given the current or near-term projected cost of producing,

let's focus on EV batteries here, because it is different depending on what kind of battery you're producing and your chemistry and all that. So let's just say lithium ion batteries for electric vehicles. How big a difference does $45 plus 10% of the electrode active materials make on the total cost of production of a battery? So on a cell basis, our average EV price today for batteries is about $140 per kilowatt hour. It's gone up significantly because of the increase in the battery materials prices. So essentially getting $35 off of that gets you down to $105.

So that's a significant cost advantage. And of course, Chinese cells would be cheaper, but remember, there's also a tariff for Chinese cells coming in. So they're, in addition to not getting that $35, they are also, they're paying in additions, depending on the specifics of that cell, somewhere between $4.4. and a half to 12% tariff for a cell coming from China. So you're essentially talking about somewhere around 30 to 40% price advantage or advantage that this a U.S. made cell gets over a Chinese cell. And is that sufficient to overcome the cost differential for production in the U.S. versus China?

It is. It is. Assuming that we don't have ridiculously expensive materials costs because of the cost of getting the materials from the U.S. And they have a steep discount in China, which they don't necessarily have anymore, then it is enough to make it advantageous, essentially give a discount to U.S.-made sales. 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.

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Trillions of dollars are flowing into power plants, transmission lines, battery factories, data centers, but the future of energy isn't shaped by technology alone. It's shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, the capital platform for the clean economy. Join me for my brand new show, Critical Capital, 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 links? lengthy messaging briefs and decks, instead of engaging journalists or producing content? Are you wondering why your competitors are getting press and you aren't? Fish Tank PR is an award-winning climate and energy tech, renewables, and sustainability-focused PR firm dedicated to elevating the work of both early stage 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, Fish Tank can help. check out fish tankpr.com. That's F-I-S-C-H-Fish-Tankpr.com. Okay, so we've got the EV tax credits, as you said, the poll. We've got the manufacturing tax credits, the 45X, the push. I mean, I think the other component, we're spending most of our time on EVs and EV batteries,

but we should at least talk a little bit about the investment, the inclusion of standalone stationary energy storage in the investment tax credit, which has not been true historically, right? So historically, prior to the IRA, if you were building a battery project on the grid, the only way you could qualify for the investment tax credit is being paired with solar or wind. That is no longer true. Now you can build a battery project on the grid, and you can qualify for the ITC and then ultimately the production tax credit as well, the technology neutral credit, I believe, beginning in 2025. What impact do you think that has sort of further up in the battery supply chain?

It's going to have an enormous impact. I think when we look at the interconnection cues on the ISOs of the U.S. and Canada, we saw this enormous logjam of standalone storage projects that had been put in as placeholders just in case this passed. And when I talked to developers, they say we were, pretty much break-even on most of the projects that we were proposing to do with the standalone ITC, we're going to make a lot of money, which means they want to build these projects. And now the question is battery availability. How do we get our hands on these batteries?

It now becomes a battery availability problem, not a financial spreadsheet problem. If they can get their hands on the batteries, they will build out. And essentially what we're expecting to see next year now is a doubling of the entire installed capacity of U.S. energy storage in 2023 alone. In other words, everything that's been built and installed in the U.S. is about to double in what's installed next year alone. And assuming there's battery availability, that could again triple the following year. And keep in mind, most of what we have has been installed in the last couple years anyway.

You know, California has about five gigawatt hours worth of batteries, almost all of which have come in the last 36 months and essentially kept California from going into rolling blackouts in the recent heat wave. So they're about to get quite a lot more batteries. And of course, California and Texas are getting the lion's share of these of what's going to be installed over the next two. two years. I mean, it's interesting how it's similar, I think, again, to kind of renewable's world where like the economics of projects suddenly pencil much, much better than they would have otherwise, maybe even more so for standalone storage. But it transfers the, what is going to be the bottleneck in this market or the long pole, the tent, so to speak, from do the economics pencil to availability of supply, to your point, and then other things like interconnection. Like, what's going to be

the thing that stops the stationary storage market from doubling next year and tripling the year after that, it probably is either battery supply or interconnection timelines, I suspect. But nonetheless, if the demand signal is there, the supply will catch up. There's no greater problem or greater solution to high prices than high prices, except the timeline, I guess, is a little uncertain. And this is sort of a list to a bunch of this stuff. you alluded to it before when we were talking about mining and chemicals plants, what does it look like to build battery manufacturing capacity? How long does that take? How soon could we expect,

you know, a bunch of onshoreing of battery manufacturing? Is that going to meet the needs of this burgeoning market? So it's an interesting dilemma because you now have a almost complete bifurcation within the battery industry of the stationary storage market and the automotive market. You're supplying two different kinds of batteries. In stationary storage, you're now almost entirely lithium-iron phosphate batteries are what's going into stationary, and it's high nickel content cathodes going into automotive. And there are different form factors, prismatic and stationary and pouch and automotive or cylindrical and automotive. And so, it's a essentially it's now almost two different industries.

And with two different sets of decision makers, and we expect over 600 gigawatt hours worth of battery manufacturing to onshore in North America over the next decade, 600 gigawatt hours. So essentially the size of the global manufacturing industry is going to be recreated in North America over the next 10 years. However, almost all of it. that is going towards automotive. And you can build a battery factory relatively quickly, I would say,

a two-year timeline to building it once the decision is made, the capital is raised, and the EPCs have been chosen. It then, however, takes three years from the completion of that factory to get up to full optimization of that factory. So you have to learn to operate the equipment, the new workers that have been hired for that factory have to have to get good at operating it, it takes a long time to get to the full production capacity of that factory. The other problem that I'm hearing from the manufacturers is labor shortage. They would build a lot more. They're building like crazy, but they would build a lot more if they felt they had a chance to hire enough people.

And at this point, in North America, that is the main bottleneck is labor availability for people with experience in manufacturing jobs. And manufacturing of lithium ion batteries has turned into a very high-tech manufacturing industry. It's all highly automated, and you need very advanced manufacturing capabilities to do it. and to say that we're going to build a 600 gigawatt hour industry, which is essentially several hundred billion dollars worth of revenue every year out of scratch, that's highly ambitious and it's hard to do. With that said, back to your question, how do we solve this, how do we solve the problem of high prices for stationary storage batteries?

The answer is probably China. We're going to be importing a lot of batteries from China for stationary storage applications. The build-out, like I said, is mostly in automotive batteries. There's a huge opportunity for LFP stationary storage battery manufacturing in North America that's only being touched on the surface so far. And we have yet to see a tidal wave of new manufacturing for the same. the stationary demand that's out there. Have we already started to see announcements, like post-IRA, a net new announcements of any portion

of this, right? Battery manufacturing, cathode production, mines. Like, if we started to see the wave of announcements that would support the 600 gigawatt hours coming by the end of the decade, or is it going to take a little longer? Or is everybody waiting for, like, treasury guidance to be certain to pull the trigger? We've started to see a trickle of announcements. So I think the most prominent one was Honda and LG announced a joint venture partnership to build, I think, 40-gigawatt-hour plant. Others have announced expansion of previous plans or confirmation of previous plans. But we are expecting that by the end of the year or first quarter of next year, we will see a wave of announcements. And it's not just on the battle. factory front. It's the entire supply chain. And we're going all the way, you know, from mine to chemical refinery to processed chemicals to electrodes and electrolyte to battery factory. It's

all happening. And it's, we're going to see just tremendous activity. And, you know, we're, we're working with, with companies that are making these plans. We're aware of all of this activity going on behind the scenes. And I think it's going to take. about, you know, somewhere between three and six months for this to become public. Okay, so then back to the impact on the EV market. Actually, we should say first. I mean, you know, I think there's this weird divide, at least the way that I'm thinking about it, between what is the impact of all this, all these tax credits in aggregate on the EV market near term?

Well, let's just say like the next, I don't know, two years or something like that. And then what is the impact in the longer term, you know, latter half of this decade? Latter half of this decade, you can pretty easily picture all this new manufacturing comes online. We have a new supply chain in North America. It's economically advantaged because of all the combination of all the tax credits. And, you know, the $7,500 existing that whole time is fairly substantial, especially if you expect cost reductions. And, like, you know, you can imagine how that that really supercharges the EV market. But what happens in the meantime, while we actually don't have that many EV models that hit all the criteria, is the ramp in these requirements, you know, how low it starts sufficient such that it will have a glide path into that big market? Or is it actually going to be more like, you know, is there a possibility this is going to short term hurt EV adoption, long term help it?

Short term, it definitely hurts EV adoption. It's a net negative because nobody qualifies for it. Now, keep in mind, I mean, we've got a lot of cars. And look at Hyundai, for instance. They were just racking up sales of the Kia EV6 and the Ionic 5 in the U.S., which were reasonably priced. They were still overpriced because demand was so great. but they were in the $50,000, $55,000 range. And they were doing really well, and they were starting to creep up on Tesla sales numbers. And now all of a sudden,

they don't qualify for the EV tax credit because they're not made in America. So they are scrambling to accelerate their plans for production of their cars in America and start doing it by 2024. But there's no way they could do that by next year, by 2023. So they're getting hurt, for instance. They're going to get hurt significantly.

But it's, you know, in our EV forecasts, we didn't make tremendous short-term changes because remember the context that we're in, every, any EV you want, you're on a one, in some cases, two-year waiting list to get it. So we're in a period of extreme supply constraint to begin with. And the EV tax credit going away in 2023 is not necessarily, it's going to make it easier to buy an EVB, but it's not going to, it's not necessarily going to destroy the demand that's out there. What really, you know, what these tax credits are going to play a role in is getting to much larger penetration numbers. We think that we're going to get to about 6% by 2024.

6% of new cars sold will be EVs. And at that point, when you start to get to that level of penetration rate, the EV tax credits are going to play a role. And that's when you'll start to see it matter. And as it reappears in certain models, it will be important to maintain those sales levels. By the end of the decade, we increased our sales numbers in the U.S. a little bit. because of the EV tax credit availability. Other cars, though, because they're too expensive, such as Rivian and Lucid, are, you know, they're going to get hit hard by this,

by the fact that they're no longer eligible for the EV tax credit. Right, we didn't talk about that, actually, but there's a cap on the total cost of the vehicle in order to qualify, which is $80,000, right? $80,000 for an SUV, $55,000 for a car. Right. So some models just will not qualify no matter where there are equipment or components come from. And there's a individual income requirement, $150,000 individual 300,000 household income equivalent.

So you don't get the, if you make too much money, you don't get the tax credit anyway, which eliminates the typical type of buyer for high-end luxury cars too. All right. So just, I guess, wrapping up, so then it sounds like your view of what, in aggregate, what all of this does, I'll repeat it back to you, and you can tell me if this is right, to the EV market, maybe not a huge immediate impact because there's such a supply chain constraint anyway, everybody's on a waiting list. But there's probably some period for a couple of years in two to three years from now, which is like when the inflection point might have been getting hit, but the supply chain hasn't yet fully adapted, whereas, It's going to be messy. And then what will start to happen is more and more models will start to qualify as the supply chain builds up. And by the end of the decade, you've got a net benefit to EV adoption. And then meanwhile, on the supply side, there's just going to be kind of like a tidal wave starting to build of new manufacturing and mining and chemicals production in North America driven by the combination of all of these credits that are getting put in place. Is that about right?

Yeah, absolutely. Everything you said is correct. So I guess final question, like what's important that we don't know yet? There's all this treasury guidance that still has to come out. Is it all pretty nuanced in detail or is there anything that could like really swing the impacts of these provisions depending on how it's interpreted? I think the details of how the EV tax credit proportional numbers are going to be calculated are going to be really critical and understanding and getting guidance on that.

What does 40% of what is going to be really important and how that's calculated will be, will make a big difference in how successful these programs will be. The other thing that we haven't touched on is foreign entity of concern. So in addition to everything else, there is a specific language about you can't participate in these if you are a foreign entity of concern, which essentially means a Chinese company, but it has to be specifically listed as a foreign entity of concern. And so getting more guidance on which Chinese companies are foreign entities of concern. And what's expected is state-owned companies would be a foreign entity of concern

or companies that have significant minority shareholdership from government. government enterprises. And that's going to get really complicated and ugly. So for instance, Goshen, which is a private Chinese company, just announced a $3 billion investment in a new battery factory in Michigan. What if they're placed on foreign entity of concern? And then if they are, then they still won't qualify for the EV tax credit. And all of that becomes essentially a wasted investment. And that's going to go on with each of these Chinese companies, which probably would like to participate in this as investors

and as hosting domestic U.S. manufacturing. But we'll see how that plays out too. All right. A lot going on here. But maybe we'll catch back up once we'll. have all the Treasury guidance. We know who all the foreign entities of concern are, and we started to see the wave of new announcements and check back in on whether the expectations are meeting reality on the impact of all these bills. But in the meantime, Sam, thanks so much for helping

to tease out all these threads. Yeah, absolutely. Thanks for having me out. Sam Jaffe is the VP of Battery Solutions at E-Source. Well, what did you think? Are you someone who is operating somewhere in the EV or battery supply chain currently thinking about what on-shoring production might look like for your business. We always welcome feedback from people who know more about this stuff than we do. You can find us on Twitter at At CatalystPod. You can also find me there. If you like to show today, go over to Spotify or Apple Podcasts, as always, and leave us a rating and review.

This show is a co-production of PostScript Media and Canary Media. You can head over at Canarymedia.com for links and more info on today's topics. And as always, PostScript is supported by Prelude Ventures, the venture capital firm that partners with entrepreneurs to address climate change across a range of sectors including advanced energy, food and agriculture, transportation and logistics, advanced materials in manufacturing, and advanced computing. This episode was produced by Daniel Waldorf. Mixing by Greg Vilfrank and Sean Marquand, theme song by Sean Markwand. Our managing producer is Cecily Mazza Martinez. I'm Shail Khan, and this is Catalyst.