Benchmark Mineral Intelligence is reporting that Tesla and Panasonic are expected to receive about $1.8 billion in Inflation Reduction Act production tax credits this year. That will put the two companies far ahead of the estimated $480 million that General Motors and LG Energy Solution are expected to receive. Ford won’t begin to reap any benefits from the law’s battery manufacturing credits until 2025.
The rewards from the production credits that are part of the IRA are simple. The more batteries and EVs a company makes in the US or in countries that are included in the Treasury regulations that implement the IRA, the more money it gets via tax credits. Having started battery production at Gigafactory 1 a decade ago has put Tesla and Panasonic far ahead of their competition.
“We’re pretty well positioned over the coming years to take advantage of [the IRA],” Zachary Kirkhorn, Tesla’s CFO, told investors in January.
The income from the IRA production credits could allow Tesla to lower its average selling price by $900 a unit every quarter for the next two years without impacting margins, Piper Sandler analyst Alexander Potter told Bloomberg. As Tesla lowers prices, it puts pressure on legacy automakers like GM, Ford, and Chrysler as they struggle to make electric car manufacturing profitable.
Even Musk has acknowledged the enormous potential rewards from the IRA. In a recent interview with CNBC, he said the credits were “helpful” and that the IRA was a “very well-written” bill. His endorsement sounds disingenuous coming from someone who has referred to President Joe Biden as a “damp sock puppet.” Musk has also embraced the candidacy for president of the current governor of Florida, who would take an ax to many of the clean energy and clean transportation policies enabled by the Biden administration.
If your name is Elon, you don’t have to make sense or even be consistent in your positions. During his visit to China last week, the great and powerful Musk didn’t utter a peep about anything that might upset the Chinese Communist Party despite his ongoing tirades about free speech in the US. Some might say Elon is the very definition of situational ethics.
Tesla & Panasonic First Mover Advantage
When the IRA was signed into law last August, most people focused on the tax credits for consumers who purchased electric cars. Now they are realizing production credits are the real prize, especially for Tesla because it dominates the EV market in America. (We wrote about this in September in “The Really Big Battery Deal In The IRA That People Are Missing.”) So far this year, the Tesla Model Y has outsold not only every other electric car in the US but every conventional car as well.
The production tax credits apply to many aspects of the EV supply chain, from mining and processing raw materials like lithium to making battery components. In addition to the battery factory near Reno that it jointly operates with Panasonic, Tesla is ramping up production of its own battery factory in Austin, Texas, and broke ground on a lithium refinery in Corpus Christi in early May.
“Tesla will generate more benefit from the IRA than anyone else because they are already making batteries in high volumes,” said Austin Devaney, the chief commercial officer of Piedmont Lithium, which has supply agreements with Tesla and battery maker LG.
In the time since the bill passed in August, competitors have gotten a clearer sense of what Musk will do with the spoils. Kirkhorn told investors earlier this year that executives “want to use these incentives to improve affordability.” In January, Tesla lowered prices across its lineup, and it has regularly tweaked them since then based on ordering trends.
The Section 45X manufacturing tax credit in the IRA is part of an effort to decarbonize the economy by reducing the cost of batteries for both EVs and the nation’s electric grid while also building a robust domestic supply chain that doesn’t depend on China. It provides a $45 per kilowatt-hour production credit for battery packs made in the US, a $35 per kWh production credit for the battery cells, and a $10 per kWh production credit for the battery modules. That translates into tax credits of around $2,700 to $4,500 per vehicle.
The amount of reimbursement also depends on revenue-splitting arrangements between companies, especially in joint ventures like GM’s Ultium arrangement with LG, or Ford’s partnership with SK Innovation.
The production credit begins to phase out in 2030, which is putting pressure on automakers and battery manufacturers to get their battery factories up and running quickly. More battery production means lower costs, more battery subsidies mean lower battery costs. The next several years are expected to be a big cost-cutting race as automakers and their suppliers aim to get a bigger and bigger piece of the electric vehicle sales pie.
Goldman Sachs says the credits baked into the IRA could total $1.2 trillion, which is three times more than the government estimated at the time the IRA was passed. That could lead to political pushback if reactionaries regain control of the US government in the future. “It’s a real risk. People are not giving it 100% likelihood to survive,” said Mark Wakefield, head of the automotive practice at AlixPartners.
All Tesla Model 3 Cars Eligible For Full Federal Tax Credit
There has been much confusion over the regulations from the Treasury Department that implement the federal EV tax credits. When they kicked in on January 1, Treasury delayed publishing the battery sourcing guidance in order to give companies time to meet the requirements.
On April 18, the department began enforcing the critical material sourcing requirement, which led to many vehicle models losing the full tax credits they had been eligible for in the first quarter of the year. Every Tesla Model 3 except the Performance version saw its credit cut in half, but many other automakers — like BMW, Rivian, Volvo, and Hyundai — lost their credits entirely.
Now it appears that all Model 3 cars are eligible for the full $7,500 credit. Tesla CEO Elon Musk has retweeted a screenshot of the Tesla website that displays the tax credits available for each vehicle. The Treasury Department website has not yet been updated to reflect Tesla’s newfound eligibility for the full tax credits. The company offered no explanation for the change.
Leave it to Musk to be out ahead of the government on this change, which makes the effective price of a Tesla Model 3 (as of June 4) $32,740. Local incentives may make that price even lower. If you happen to live in Colorado, for instance, and buy a Model 3 after July 1, you could be eligible for an additional $5000 tax credit, and, if you meet certain income guidelines, another $2500 on top of that. A brand new Model 3 sitting in your driveway in Denver for $25,240? It doesn’t get any better than that.
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