How effective is the IRA?

The landmark Inflation Reduction Act (IRA), which incentivises production and purchase of BEVs in the US, has received renewed criticism in recent weeks amid a political climate of heightened concern about Chinese influence on battery supply chains.

Spearheaded by the House of Representatives Select Committee on the CCP, lawmakers are putting greater focus on the ties that Chinese firms involved in several joint ventures (JVs) with US partners on home soil have to state-owned institutions in China. There is also a wider debate over whether IRA dollars are effectively spent if US-made batteries are reliant on Chinese IP and whether China can simply be cut out entirely from the chain.

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As well as calling for investigation into potential national security risks, the select committee says that the IRA is not achieving its stated aim of creating American manufacturing jobs, a factor also cited by the UAW in its ongoing industrial action against the ‘Detroit Three’ automakers.

Indeed, in a July letter to Ford CEO Jim Farley, the select committee wrote that “a significant portion of these well-paying jobs will be given to citizens of the People’s Republic of China — not Americans”.

In response to the pushback, Ford has pressed pause on its agreement with battery market leader Catl. But major projects are still in the pipeline, such as Chinese firm Gotion’s intention to build a battery facility in Illinois.

There are serious questions not only about the preparedness of the US workforce, but also the state of battery IP in the US, given the country still heavily relies on Chinese knowhow for its ‘localised’ supply chain. Proponents of the IRA, however, argue that the involvement of Chinese technology is simply pragmatic and unavoidable.

“The reality of it is that there is a lot of intellectual property in China and just a lot of practical know-how around how to build lithium-ion batteries and other aspects of the clean energy supply chain,” says Jay Turner, professor of environmental studies at Wellesley College.

And he concedes that if the US is to scale up the clean energy industry at the pace targeted by the current administration, “then we are going to need partnerships”.

Chinese dominance

Chinese firms produced 589,000GWh of battery capacity in September, with the year-to-date total approaching 4.5mn GWh. This includes 26,000GWh of battery capacity exported in September and 759,000GWh exported in 2023 so far, according to new data from Chinese battery industry consultancy Electrios.

The data shows that Chinese heavyweight Catl claimed a 39.4pc market share of global battery installations, followed by peers BYD and CALB, with 27pc and 10.1pc market share respectively.

“The Chinese battery industry is humming. Needless to say, another record battery production month. International demand for Chinese batteries accounts for about 20pc of the market,” says Electrios co-founder Cormac O’Laoire.

US to reduce mineral demand?

An op-ed written earlier this month by MIT academic Brian Deese and dean of the Columbia Climate School Jason Bordoff argues for the need for reducing mineral content of batteries — in order to at least lessen the US’ reliance on Chinese processing of Chinese IP in onshore supply chains.

“Rather than cram ever-larger and more mineral-intensive batteries into cars to extend driving range to 500 or 700 miles, for example, fast-charging that allows drivers to charge in minutes combined with more abundant charging infrastructure could allow drivers to embrace cheaper cars with smaller batteries and less range. Rather than use more and more minerals, technological innovation can reduce the amount and types of metals and other minerals needed for batteries,” the academics argue.

But driving range — and so-called ‘range anxiety’ — is the crux of many consumers’ misgivings about EVs. Stoked by anti-EV rhetoric, range could become a byword for personal liberties if the US tries to restrict battery size and limit consumer choice, warns Tom Moerenhout, associate professor of international and public affairs at Columbia.

“I do not think you will have any politician trying to restrict battery size,” he says. Indeed, curtailing consumer choice may be a hard sell for any politician trying to propose such measures.

There are also economic reasons why pro-auto industry politicians might be loath to support legislation aimed at restricting vehicle size. “The conundrum is the margins of EV makers are much higher for luxury, bigger SUV models than they are for smaller entry-scale electric vehicles,” says Moerenhout.

But the unlikelihood of the stick does not rule out use of the carrot instead. “Incentivising smaller battery sizes is a different thing altogether,” Moerenhout continues.

Criticism

There has also been debate over whether the IRA concentrates too much on building onshore battery manufacturing and neglects upstream portions of the battery supply chain. Critics say that the effectiveness of the legislation comes into question if batteries are built in the US with materials from friendly countries, but still relying on Chinese knowhow in the midstream.

“Everyone thinks it is cool to have a gigafactory and everyone wants one, but a gigafactory just makes the cell. There is some power and influence and industry strength that goes with that, but the bigger piece of that is the midstream,” says battery expert and editor of The Electric Steve LeVine.

“Controlling the upstream and midstream of the battery supply chain is essential for achieving the goals of onshoring and friendshoring,” agrees Allegra Dawes, energy and climate researcher at thinktank the Center for International and Strategic Studies. “The IRA has injected money and demand for domestic supplies, but there are challenges in building mines such as obtaining permits and securing the financing required to build the mine.”

The problem is not a shortage of critical battery minerals in the US. At least in the case of lithium, the US is well resourced, with Nevada’s Thacker Pass mine able to produce enough lithium for 1mn EVs per year once it is completed.

“You can go down the list of other projects. Piedmont Lithium in North Carolina and Albemarle in North Carolina are both potentially big projects. Jindalee McDermitt has another big lithium project that's out on the Oregon-Nevada border,” says Wellesley’s Turner.

However, incentivising a ramp-up of US mining or processing will be challenging, and not only because of the cost. But it is not off the table.

“I would say there are three things [needed]: additional investment, labour, and then permitting. And if the US can progress on that, I can see a lot more investments going back into chemical processing in the US,” Moerenhout says.

It will take years to reach scale in US mining and processing, even if new legislation begins incentivising it rather than simply targeting the downstream . In the short term, focus on how best to manage any Chinese role in the downstream portion of the supply chain remains crucial, in Moerenhout’s view.

“The fact that Chinese companies are now willing to accept a minority share of JVs in South Korea to be able to access the IRA — some politicians, depending on where you are, would say that is a sneaky route to get Chinese material into the U.S. But I call that geopolitical success,” he says.

For Moerenhout’s money, the current landscape is “an unfortunate consequence of having been asleep behind the wheel”. “[China] has currently the best technology in the world. And if it was any other country, that is exactly what you would do and that is exactly what you would allow.”

Ultimately, with appropriate safeguards — which Moerenhout argues are provided under the IRA —the US is simply acting pragmatically while it tries to bridge the technological gap in battery knowhow.

An upcoming white paper from EV inFocus will address the geopolitical issues affecting both the US and European battery supply chain and legislative landscape, with a particular focus on Chinese dominance in lithium iron phosphate chemistry as that looks set to take a larger-than-expected slice of the global EV battery pie.