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Electric vehicle manufacturers in the United States have increased clarity on how to qualify for Inflation Reduction Act tax credits in the new year. But with that clarity comes a sense of urgency, as companies face a changing policy landscape starting in January.
Starting in 2024, to qualify for tax credits that could make a real dent in the cost of manufacturing EVs, the cars can’t include battery components manufactured or assembled by a “foreign entity of concern,” i.e. companies with more than 25% ownership in places like China and Russia. And in 2025, vehicles can’t contain critical minerals extracted, processed, or recycled by FEOCs.
At present, most EVs sold in the U.S. are also assembled domestically. According to research from Argonne National Laboratory the batteries used in those vehicles are primarily produced domestically as well.
In the last decade, more than half of consumer EVs sold in the country contained cells produced in the U.S.; 70% contained battery packs produced in the U.S. In 2021, those numbers reached 65% for battery cells and 73% for battery packs,thanks in large part to Tesla’s supply chain dominance.
Now, EV adoption in the U.S. is increasing exponentially (with help from the IRA), according to the IEA; 1.5 million sales are expected for 2023.
But near-term challenges remain for battery component manufacturing.
According to an October report from Bain & Company, announced supply of IRA-compliant electrolyte salts and separators isn’t sufficient to meet U,S. consumer market demand. Less than 50% of announced capacity is already operational or under construction, the report found. And separators, which have no new capacity under construction, may pose an additional challenge, Bain found, because a proportion of current North American supply may be ineligible for IRA tax credits.
In the immediate term, it might be more compelling on a volume or cost basis for OEMs to source certain battery chemistries from manufacturers that aren’t IRA-eligible, Albert Gore, executive director of the Zero Emissions Transportation Association, told Latitude Media. But while that may be the reality on day one, there’s a “strong market cycle” for manufacturers who can produce similar products that are IRA compliant.
“There’s at least one major manufacturer that’s going to do it in the United States, and I assume there will be more, particularly on a five to ten year timeline,” he added.
When it comes to critical minerals, domestic supply chains may have even more catching up to do.
China accounts for up to 70% of rare earth mineral extraction, and up to 90% of processing. And, due to the relatively long lead times for bringing processing capacity online, that dominance isn’t likely to wane before 2030.
That leaves a sizable gap when it comes to IRA-approved critical mineral processing capacity. According to Bain’s report, the U.S., Europe, and trading partners like South Korea will only have up to 75% of the processing capacity required to meet their own demand for lithium, nickel, and cobalt by 2030.
“There’s going to be a challenge with several minerals where you have a really high concentration of processing within FEOC borders,” said Gore.
The good news is that processing capacity is easier to set up than production capacity, and on that front, China’s slightly looser grip may provide a window, he added. With lithium, for example, more than 75% of raw material is coming from countries like Bolivia, Argentina, Chile, and Australia.
Just how quickly new processing capacity can be set up remains to be seen, but Gore declined to speculate on how resilient supply chains might be by 2025: “On critical minerals we’ve still got a year!”