The so-called Inflation Reduction Act signed by President Joe Biden in August 2022 expanded the purchase incentives for new electric vehicles, and also added one for used EVs. Of course, this is one way to get people interested in buying EVs. But it’s actually another part of that massive act that will likely do far more for American manufacturing and adoption of EVs than even purchase incentives.
Called Section 45X, it funds 10 years of production credits for the manufacture of battery cells, photovoltaic solar cells and components for wind energy. And it has the potential to make US-built EV batteries so cheap that large parts of Western cell and battery manufacturing will look to North America.
Lies, damned lies and battery marketing
One of the truths in the worry about electric vehicles is that no one will talk in detail about battery costs. Adapted from a quote variously attributed to British Prime Minister Benjamin Disraeli and American humorist Mark Twain, battery experts often say there are three kinds of lies: “lies, damned lies, and [battery] marketing.”
For most of the past decade, $100 per kilowatt hour (at the battery pack level, not the slightly lower cell cost) was thought to be the Holy Grail. In November 2021, battery costs for the industry as a whole were calculated at $132/kWh by Bloomberg New Energy Finance. Tesla is now believed to be at or below $100/kWh for the suit. Over the past year, however, diesel prices – and therefore pack prices – have risen due to rising prices for lithium and other battery metals due to both greater supply and demand hiccups.
In 2021, a US Department of Energy official proposed $60/kWh as a reasonable target at the diesel level. That could mean $80/kWh at the pack level for vehicles produced in 2025 or beyond, including Teslas with the company’s 4680 cells (a different format), many more VW Group models, and GM’s dozen or so announced Ultium models.
Car and Driver recently interviewed an experienced EV battery production specialist who asked not to be named. This person has worked for and consulted with numerous cell manufacturing companies in the US, Europe and Asia, and remains deeply in touch with the cutting edge of that industry today.
The gist of the conversation was that, as the specialist put it, “All the stories about the IRA bury the members” – an editing phrase meaning to focus on something other than the main story, and to downplay the key fact only pass by
Cut the cost of batteries in half?
Our expert pointed us to Section 45X, which in one fell swoop will cut one-third to one-half the total cost of any EV battery with both cells and pack built in the US. To quote US cleantech investor Ion Yadigaroglu via Bloomberg Green last week:
Very simply, if you build a factory and run it in America, and it makes a battery, as the battery pack leaves the factory, you get $45 per kilowatt hour. [The subsidy covers $35 per kilowatt-hour for battery cell production but adds another $10 for battery packs.] It is more than a third of the cost to make [the battery] pack. And the way things are going, that could be the entire cost of making a battery pack within the 10-year span of the IRA.
Our battery expert suggested that this means all automakers that assemble vehicles in the US will eventually build their own battery factories, either through joint ventures (like GM-LG) or by designing and building their own cells (like Tesla’s efforts to 4680 cells to market in large volumes). Designing and building cells directly reduces or eliminates profits for a third-party cell manufacturer, but it is far from a core competency for most manufacturers today. Then again, how could they pass up this great credit? A pack as big as the 131.0-kWh Ford Lightnings runs $5895 for each one that rolls off the line.
Do I get an incentive or not?
Meanwhile, the IRA bill’s purchase incentives — for which final rules are overdue — have received a lot of attention. They distinguish between passenger cars and light trucks, and for the first time, used EVs below a certain price can also receive incentives.
Any vehicle must be assembled in the US to even be considered for qualification. Then an increasing percentage of its battery minerals must be sourced from a specific list of countries (which does not include China), and its battery cells must be assembled in North America. The IRS’ decisions about what vehicles are eligible, and what distinguishes a passenger vehicle from a light truck such as an SUV, have been messy, to say the least.
Understandably, the prospect of $7,500 off the price of a new car is getting a lot of attention among buyers, dealers and automakers. But at an average new vehicle price of more than $47,000 (as of December), significantly lowering the price of an EV battery pack is likely to have more impact.
We cannot know how the battery production incentives will play out in real life. The rules are still being finalized. For example, we don’t know if existing cell plants (eg Tesla’s Gigafactory in Nevada, an LG Chem plant in Michigan) would qualify.
More importantly for consumers, we cannot predict how the savings will be used by automakers. If most EV models built in the U.S. today break even at best, battery makers will undoubtedly want to increase their margins — making it easier to build new plants and increase volume. At the same time, car companies can use the reduction in battery costs to increase EV profits to the same level as those on gasoline vehicles.
By now, the EV transition is not only underway, but accelerating. Automakers will want every opportunity to make their EVs competitive in the market—and lowering prices is a classic way to do that. Still, while you may see a lot of analysis about possible consequences, it’s too early to know how these battery production incentives will affect consumer EV prices.
If you take away one main point, it has to be this: Sure, a $7500 consumer rebate on a qualifying new EV is nothing to sneeze at. But this is not the most important EV-related part of the “IRA” by a long shot. In five to 10 years, automakers have a huge opportunity to make many, much cheaper EVs. That is the real goal.