Why Section 45X is a ‘game changer' for U.S. EV battery supply chain

WASHINGTON — While much of the conversation around the Inflation Reduction Act centers on incentivizing consumers to buy electric vehicles, a more obscure provision has the potential to put billions of dollars back in the pockets of companies that build EVs and the batteries that power them.

With fewer strings attached than the law's consumer incentives, the advanced manufacturing production tax credit — Section 45X — is already sparking major investments in the U.S. by EV stakeholders racing to secure their spot in a domestic supply chain.

It is also the target of political scrutiny.

The provision provides credits for certain products, including key battery components domestically produced and sold by a manufacturer. While the credit is limited to production in the U.S., it does not have the foreign entity of concern exclusions or battery sourcing thresholds under the tax credit for new EV purchases.

"It's a game changer," said Sara Baldwin, senior director of electrification at Energy Innovation, an energy and climate policy think tank.

"This incentive combined with many other incentives in the Inflation Reduction Act as well as some in the bipartisan infrastructure law and CHIPS Act altogether send a strong signal to the market that we here in the U.S. are really interested in onshoring not only the manufacturing facilities but also the broader supply chain for the EV market," she told Automotive News.

For battery manufacturers in the U.S., the credits they can receive through 2032 — in some cases, as direct payments from the federal government — could be substantial.

The credit covers 10 percent of production costs for critical minerals. For batteries, it gets even sweeter: Not only does the credit cover 10 percent of the costs to produce electrode active materials, such as for cathodes and anodes, it provides $35 per kilowatt-hour of capacity for battery cells and $10 per kWh for battery modules. For a module that doesn't use cells, the credit is $45.

Put it this way: Just one 75-kWh battery pack could mean a tax credit of $2,625 for the battery cell manufacturer and $750 for the module maker.

In a first-quarter earnings report, South Korea's LG Energy Solution, which supplies General Motors and others, estimated a tax credit of about $76 million — and that's just over a three-month period.

With that kind of cash on the table, the credits have come under scrutiny, especially amid high-stakes negotiations between Congress and the White House on the nation's debt limit, which was resolved after President Joe Biden signed off June 3. The lucrative tax credits have also put U.S. reliance on China for EV materials under a brighter spotlight and drawn criticism from Republican lawmakers.

At a May 18 hearing, Sen. Mike Crapo, R-Idaho, said American taxpayers will be "left footing the direct and indirect costs" of the Inflation Reduction Act, with China as the "one clear winner," especially when it comes to EV battery production.

"If you're a battery maker, it's probably happy days for you because you're looking at potentially pretty big checks from the Treasury Department," said Christine McDaniel, a senior research fellow at George Mason University's Mercatus Center.

The 45X credit is uncapped, meaning there is no limit to how much companies could receive — a snowballing opportunity for businesses producing eligible components but a potential avalanche for American taxpayers, some analysts warn.

In August, the Congressional Budget Office estimated the cost of the provision at $30.6 billion for the 2022 through 2031 fiscal years. McDaniel's estimates for the battery cell and module production credits are considerably higher.

Incentives received through 2032 could amount to a whopping $196.5 billion when the full $45 credit is applied, she said, noting that the figures are speculative and depend on how many EV batteries are produced, among other factors. Even McDaniel's medium projection — with just the $35 credit applied, amounting to $152.8 billion — is nearly five times the Congressional Budget Office estimates.

"Some people in the industry say that the production capacity is even greater than my numbers because of the attractiveness," McDaniel said. "This just really highlights the potentially high cost."

Since the Inflation Reduction Act's signing in August, investments by battery and EV makers have flooded into the U.S., from a proposed $3.5 billion battery plant between joint venture partners GM and South Korea's Samsung SDI to a more controversial arrangement between Ford Motor Co. and China's Contemporary Amperex Technology Co. at a planned $3.5 billion battery plant in Michigan.

Tesla battery supplier Panasonic Energy, which broke ground on a $4 billion factory in Kansas in November, said it expects to claim the $35 per kWh credit for battery cell production, while Tesla likely would get the $10 per kWh credit for modules.

"The intention then is to take that money and use it to enhance and increase our investments here in the U.S.," said Jeff Werner, Panasonic North America's vice president of corporate and government affairs.

Werner declined to put a dollar figure to the credit amount the company could receive annually — noting further guidance from Treasury is still needed and expected to come later this year — but said Panasonic North America makes 2 billion cells a year in Nevada and anticipates the same from the new plant in Kansas.

"As a company, we've made a commitment to have the U.S. as our manufacturing base for EV cells," he said. "The [Inflation Reduction Act] broadly — and 45X specifically — really helps bolster that decision and takes out some of the risk involved with such massive capital investments."

EV battery startup Our Next Energy, which is investing $1.6 billion in a new plant in suburban Detroit, said it expects to get the $35 credit for cell production, the $10 credit for module production and the 10 percent credit for costs incurred building electrode active materials.

"The opportunity is truly massive," said Deeana Ahmed, chief strategy officer for Our Next Energy. "These incentives are really fueling our ability to scale manufacturing over the next 10 years."

Automakers also are expected to benefit from 45X, though it remains to be seen whether the credits are used to lower EV prices for consumers.

In a third-quarter earnings call in October, Ford CEO Jim Farley estimated that a combined available tax credit for Ford and its battery partners in 2023-26 could total more than $7 billion, with a "large step up in annual credits" starting in 2027 as battery plants ramp up to full production.

However, the Alliance for Automotive Innovation is seeking clarity from Treasury to ensure that companies making or assembling the final battery component installed on the vehicle — whether a pack or module — are eligible for the $10 credit.

Giving the module credit to the manufacturer that installs the battery in the vehicle will "increase the likelihood that the 45X credit will be passed along to consumers," the group, which represents Ford and other major automakers, said in recent comments to Treasury.

An analysis by Energy Innovation and the International Council on Clean Transportation found that on average over the 2023-32 period, the 45X tax credit could reduce light-duty EV purchase costs by up to $2,900 depending on how much of it is passed on to consumers in the form of reduced upfront prices.

Conrad Layson, senior alternative propulsion analyst at AutoForecast Solutions, is not so optimistic.

"Part of me says that prices will rise and adjust simply because of the ways the laws of demand work," he said. If a company has battery components or critical minerals that are compliant with Inflation Reduction Act rules, "that's worth something at a premium."

It also depends on supply chain resilience, said Nathan Niese, associate director of electrification and climate change at Boston Consulting Group.

"With a whole new set of demand coming in — faster than otherwise might have been naturally expected — can the supply chains keep up?" he said. "If they can't, then you have a supply shortage, and it only takes one or a subset of materials to drive prices up on batteries again."

Republicans also worry that the credit is essentially a runaway train for companies that, despite building battery plants in the U.S., still might be reliant on China.

"The Biden administration clearly didn't consider the fact that it takes nearly a decade to permit a mine to extract the minerals needed to make electric vehicles, forcing businesses to look to China for these raw materials," Sen. Shelley Moore Capito, R-W.Va., said in a statement to Automotive News.

Building up battery manufacturing and the processing, refining and recycling plants needed to complete a domestic supply chain all come with similar timelines, she added, "without which, we remain dependent on China for each individual link."

While provisions such as 45X aim to foster a domestic EV supply chain in the U.S., China still dominates the processing and refining of key battery minerals.

"A legitimate question," George Mason's McDaniel pointed out, "is are we trading dependence on oil for dependence on critical minerals that we just don't have here?"

As one auto industry executive put it: "It's not like suddenly we're going to have mines that we can tap into and refining that can be done. It's just not going to happen quickly, and China is always going to be able to undercut anybody else's mining and processing because — let's face it — they don't have high environmental standards."

The executive, who was not authorized to comment publicly on the matter, said 45X might create a lot of battery plants but not necessarily "all the stuff that goes into them."

David Schwietert, chief policy officer at the Alliance for Automotive Innovation, said the production credits will help reduce U.S. reliance on China, but it won't happen overnight.

"There's no question," he said. "China has a 10- to 15-year head start on the U.S."

Leilani Gonzalez, policy director at Zero Emission Transportation Association, agreed.

"Folks are quite aware of where the U.S. is facing challenges and opportunities to expand domestic manufacturing operations, particularly EV batteries," she said. "They're right to say that it is going to take time. But it's either we do nothing and we lose the race, or we do everything we can to build it up as quickly as we can. I'm supportive of the latter."