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U.S.-Made EVs Could Get Massively Cheaper, Thanks to Battery Provisions in New Law

tesla cuts prices by as much as 20 as they face more ev competition
U.S-Made EVs Could Get Massively CheaperAnna Moneymaker - Getty Images

The so-called Inflation Reduction Act signed by President Joe Biden in August 2022 expanded purchase incentives for new electric vehicles, and added one for used EVs as well. That is one way to get people interested in buying EVs, of course. But it's actually another part of that massive act that is likely to do far more for U.S. manufacturing and adoption of EVs even than purchase incentives.

Called Section 45X, it funds 10 years of production credits for manufacturing battery cells, photovoltaic solar cells, and components for wind energy. And it has the potential to make EV batteries built in the U.S. so cheap that large swathes of Western cell and battery manufacturing will rush to locate in North America.

Lies, Damn Lies, and Battery Marketing

One of the truisms in the electric-vehicle worry is that no one will talk in detail about battery costs. Adapted from a quote variously attributed to British Prime Minister Benjamin Disraeli and U.S. humorist Mark Twain, battery experts often say there are three kinds of lies: "lies, damn lies, and [battery] marketing."

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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 cost for the industry overall was calculated at $132/kWh by Bloomberg New Energy Finance. Tesla is now thought to be at or below $100/kWh for the pack. Over the past year, though, cell prices—and hence pack prices—have risen due to soaring prices for lithium and other battery metals due to both higher demand and supply hiccups.

In 2021, a U.S. Department of Energy official suggested $60/kWh as a reasonable goal at the cell level. That might mean $80/kWh at the pack level for vehicles in production in 2025 or beyond, including Teslas with the company's 4680 cells (a different format), vastly more VW Group models, and GM's dozen or more 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 companies making cells in the U.S., Europe, and Asia, and remains deeply in touch today with the cutting edge of that industry.

The bottom line of the conversation was that, as the specialist put it, "All the stories on the IRA are burying the lede"—an editing phrase meaning to focus on something other than the main story, and to mention the key fact only in passing lower down.

Cutting up to Half the Cost of Batteries?

Our expert pointed us to Section 45X, which in one fell swoop will cut one-third to one-half off the total cost of any EV battery with both cells and pack built in the U.S. To quote U.S. clean-tech investor Ion Yadigaroglu, interviewed by 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 a kilowatt-hour. [The subsidy covers $35 per kilowatt-hour for battery cell production but adds another $10 for battery packs.] That's more than a third of the cost of making [the battery] pack. And the way things are going, it could be the entire cost of making a battery pack within the 10-year span of the IRA.

Our battery expert suggested this means all carmakers assembling vehicles in the U.S. will ultimately build their own battery factories, whether through joint ventures (a la GM-LG) or designing and building their own cells (a la Tesla' efforts to bring its 4680 cells to market in large volumes). Designing and building cells directly reduces or eliminates profits to a third-party cell maker, but it's far from a core competence today for most makers. Then again, how could they pass up this huge credit? A pack the size of the 131.0-kWh Ford Lightning's amounts to $5895 for every 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 garnered a lot of attention. They differentiate between passenger cars and light trucks, and for the first time, used EVs under a certain price can receive incentives as well.

Any vehicle must be assembled in the U.S. even to be considered for qualification. Then, a rising 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's decisions on which vehicles are eligible, and what distinguishes a passenger vehicle from a light-duty truck like an SUV, have been messy, to say the least.

It's understandable that the prospect of $7500 off the price of a new car gets huge attention among shoppers, dealers, and carmakers. But on an average new-vehicle price of more than $47,000 (as of December), cutting the price of an EV battery pack substantially will likely have more impact.

We can't know how the battery-production incentives will play out in real life. The rules are still being finalized. We don't know, for instance, whether existing cell plants (e.g. Tesla's Gigafactory in Nevada, an LG Chem plant in Michigan) will qualify.

More crucial to consumers, we can't predict how the savings will be used by automakers. If most EV models built in the U.S. today break even at best, undoubtedly battery makers will want to increase their margins—making it easier to build new plants and boost volume. At the same time, car companies may use some of the reduction in battery cost to boost EV profits to the same level as those on gasoline vehicles.

By now, the EV transition is not just ongoing, but accelerating. Carmakers will want every opportunity to make their EVs competitive in the market—and lowering prices is a classic way of doing just that. Still, while you may see a lot of analysis about possible effects, it's too early to know how these battery-production incentives will affect consumer EV prices.

If you take away one main point, it should be this: Sure, a $7500 consumer rebate on a qualifying new EV is nothing to sneeze at. But that's not the most important EV-related part of the “IRA” by a long shot. Five to 10 years hence, carmakers have a huge opportunity to make much, much cheaper EVs. That's the real goal.

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