By Richie Lin    Photo：CANVA

The Inflation Reduction Act (IRA) is a significant piece of legislation passed in the United States that aims to combat inflation, promote renewable energy, and reduce greenhouse gas emissions, among other objectives. A key component of the IRA focuses on accelerating the deployment of clean energy technologies, including electric vehicles, electric vehicle (EV) chargers and energy storage equipment. 
 

Electric vehicles, electric vehicle (EV) chargers 
The federal government passed the Inflation Reduction Act, extending the current tax credit of up to $7,500 for the purchase of new electric vehicles until 2032, and canceling the upper limit of 200,000 subsidies for a single car manufacturer, but the subsidized vehicles are limited to sales of less than $55,000. Passenger cars and SUVs, vans and trucks under $80,000.

The bill also adds localization requirements for the electric vehicle battery mineral materials, components and vehicle assembly industry chains. Not only must the vehicles be produced and assembled in North America, but also stipulate that key mineral materials and battery components for electric vehicle batteries will be required starting from 2023.

A certain proportion of components must come from the United States or a country that has signed a free trade agreement (FTA) with it before they can enjoy full tax exemptions. The purpose is to attract car manufacturers and battery manufacturers to establish production in North America by setting a car purchase subsidy threshold base to build a local supply chain system for electric vehicles.

The IRA includes provisions to encourage the installation of EV charging infrastructure across the United States. This is part of a broader effort to support the transition to electric vehicles, reduce dependency on fossil fuels, and decrease greenhouse gas emissions. The act provides financial incentives, such as tax credits, for both businesses and individuals who invest in EV charging infrastructure. These incentives are designed to lower the upfront costs of purchasing and installing EV chargers, making it more feasible for a wide range of entities to participate in the expansion of the EV charging network.
 

Energy Storage Equipment
Energy storage plays a critical role in the integration of renewable energy sources, like solar and wind, into the electrical grid. Storage technologies, such as batteries, help manage the variability of renewable energy production and ensure a stable and reliable power supply. The IRA supports the deployment of energy storage technologies through various mechanisms, including tax credits for businesses and individuals who invest in energy storage systems.

These financial incentives aim to lower the cost barrier for energy storage projects and accelerate their adoption, contributing to a cleaner, more resilient energy system. At the end of 2022, grid-level energy storage data in the United States shows only 9 GW, equivalent to 25,000 MWh of electricity. At present, a total of 11 GW has been completed, equivalent to 31,066 MWh of electricity.

In the past two years, the battery energy storage capacity under development has more than doubled, and there are currently as many as 260 energy storage projects under development. Among them, hybrid projects are still playing major role, accounting for 56% of energy storage capacity under development, but this is down from 70% at the end of 2022.

The rapid growth of energy storage may be attributed to the U.S. Inflation Reduction Act (IRA). The IRA contains many supportive policies for clean energy, such as investment tax credits for independent energy storage equipment. The reason why the United States should vigorously develop energy storage is that according to observations, the proportion of new energy sources represented by solar energy and wind power in the United States is increasing year by year.

The randomness, volatility and intermittent nature of these renewable energy sources have increased the difficulty of power dispatching, and 70% of the United States Transmission lines and transformers are over 25 years old, and 60% of circuit breakers are over 30 years old.
 

Impact on the global trade and logistics
The U.S. Inflation Reduction Act clearly stipulates that starting from 2024, electric vehicles will not be allowed to use battery components manufactured by "questionable foreign entities" such as mainland China and Russia, as well as the refining, processing and recycling of key mineral raw materials for batteries in these countries. Otherwise, they will not be allowed to use battery components. Eligible for tax deduction.

This move shows that the United States is eager to get rid of its dependence on mainland China and prompts automakers to accelerate the adjustment of their production layout of battery components and manufacturing raw materials. In addition, the IRA also provides production tax credits (PTC) to advanced domestic manufacturers in the United States, but also restricts the supply chain of battery cells by supporting electric vehicle subsidies produced in the United States.

Although today’s battery cell production capacity is mostly concentrated in China, localized production may increase costs in the short term. With the focus on bolstering domestic manufacturing capabilities in clean energy and technology sectors, there may be a realignment of supply chains. Companies globally may need to adjust their strategies to either enter the US market by partnering with domestic firms or by establishing their own manufacturing presence in the US or the countries friendly to US to avail of the tax incentives and subsidies offered by the IRA.

Therefore, we will see more and more countries step up the share or even compete with China to build up the supply chain for electric vehicles, EV charges, and energy storage equipment. Even Chinese companies were forced to set up factories outside China to receive the orders from US customers. This trend will make the supply chain and logistics more and more complicated in the following two decades. 
 

Appreciate if you could share TGL Blog among your friends who are interested in first-hand market information of supply chain and updated economic incidents.