2023

Gigafactory Report

Policy Support

05 | Policy Backdrop Impacting Gigafactory Pipeline

Introduction

The global Gigafactory pipeline benefits significantly from an enabling policy environment, especially one that has clear and upfront subsidies. Presently North America (US primarily) and Europe are in focus for the rapid growth of battery manufacturing pipeline. The US federal policy support made a marked difference in the policy landscape for upcoming

capacities. The motivation is to incentivize diversification in global battery manufacturing base, away from China as much as feasible. European clean energy and decarbonization goals constitute an important demand-driving factor in battery production investment. It is the visibility in funding that can make the difference in securing private investments.

US

The $370 billion Inflation Reduction Act (IRA) is the most important and landmark legislation to promote clean energy investments in the US. It is notable for the incentives for local manufacturing. The tax credits offered for locally sourced and produced electric vehicles constitute the major draw for investors. For most part, the regulation has effectively tipped

the balance, with the clear tax credit offer of $3,750 for those electric vehicles meeting either battery or critical mineral sourcing norms. For meeting both, the tax credit is worth $7,500 per vehicle. In this regard, manufacturers are assured of tax credits on the production side.

Minimum Local Sourcing Requirement for US Electric Vehicle Tax Credits

The US IRA’s Section 13502, “Advanced Manufacturing Production Credit,” comprises tax credits for the domestically manufacturedbatterycellsandmodules.Ataxcredit,equivalent to 10% of production cost, is available for the enterprise using the applicable critical minerals including aluminum, antimony, barite, beryllium, cerium, caesium, chromium, cobalt,

dysprosium, europium, fluorspar, gadolinium, germanium, graphite, indium, lithium, manganese, neodymium, nickel, niobium, tellurium, tin, tungsten, vanadium, yttrium and others. The same tax credit is available for active electrode materials used in production. For battery and its components however, the tax credit follows a slab on per kWh basis.

Production Tax Credits for Battery Manufacturing

The battery production credits/incentives impact the balance significantly. Thus, for instance, a 30GWh battery cell manufacturing capacity stands to gain about $1.05 billion in potential production credit, based on the criteria. For plants configured for battery modules without cells, the incentive is proportionately a bigger sum. This is the context in which some of the major Gigafactory projects are apparently skewed for US-based locations – Northvolt was reported to have been actively considering US (instead of a European location) for its next planned capacity, in part due to the potential $8 billion worth of subsidies involved.

There are other federal initiatives running concurrently to promote investments in the battery ecosystem. The funding or other support measures (such as capacity building measures, etc.) are extended through allocations under different schemes. One such measure was the $2.8 billion worth of funding extended in October 2022 under the Bipartisan Infrastructure Law (BIL) for battery and its component manufacturing. The funding was directed at 20 companies for their projects across 12 US states. The Bipartisan Infrastructure Law budgeted over $7 billion towards domestic manufacturing in critical minerals and batteries. Around the

same time as BIL’s funding for battery projects, the US federal government announced the launch of American Battery Materials Initiative – aimed at taking a holistic approach at the policy measures for sustainable supply in critical minerals in sustainable energy.

State-level support is complementing the federal side to attract manufacturing investments. The upcoming capacities, based on US Department of Energy’s report (as of November 2022) indicate a clustering across what is also christened as the Battery Belt. The US states of Georgia, Kentucky and Michigan could play a dominant role. Others in the fray include Kansas, North Carolina, and Tennessee. To make the most of the opportunity, state-level authorities are actively offering incentives to competitively secure the projects. It makes for a radical change in the industrial growth outlook when prospective investors factor-in the state support together with that of federal policy.

US States Policy Support for Battery Manufacturing Investments (illustrative)

Canada

Lately, the Canadian policymakers have been engaged in realigning the industrial framework and incentive structure to attract the global investments. The long-term goals of net- zero and rationalization of carbon emissions across sectors led to emphasis on transport electrification. A richly endowed mineral resource base and a highly evolved industrial infrastructure in mineral processing and refining places it favourably against other countries. However, the US federal policy’s IRA forced the Canadians to offer a competitive proposition for future battery manufacturers.

As of April 2023, the government announced the Budget 2023, proposing a 30% investment tax credit for clean energy technology manufacturing activities. Among other eligible areas, this includes battery and its related component production/investment. The tax credit is meant to cover the cost of machinery and equipment used in the production process across the supply chain. The legislation also covers the battery production investments directed at energy storage systems. Th tax credit adds to the previously offered 15% tax credit offered in the clean energy investments (Budget 2022). The Budget also put forth Canada Infrastructure Bank’s $20 billion allocation for clean energy and clean-growth infrastructure projects, the latter being assumed to include battery and related projects.

The investment tax credit could cost the exchequer C$4.5 billion over a five-year period starting 2023-24, and an additional C$6.6 billion during the period between 2028- 29 and 2034-35. The credit will be valid for property that is acquired and becomes available for use starting January 2024, and will be in effect till 2034. A phaseout of this package will start in 2032.

The budgeted incentive for manufacturing complements the government’s Critical Minerals Strategy that was released in December 2022. The strategy document identified six critical minerals as priority for the required impetus in supply chain. These are Lithium, Graphite, Nickel, Copper, and rare earth elements. At a policy level, the strategy/plan outlined the objectives in facilitating investments through expeditious approvals, streamlined processes for financing, promoting research and development, etc. The Budget 2022 had a C$4 billion allocation in this regard to push the ongoing project proposals.

In November 2022, the government proposed a 2% tax on corporate stock buybacks to incentivize reinvestment of profits in the business. The tax is expected to be in force starting January 2024. Around the same time, the Canadian government could also activate the previously planned Canada Growth Fund with a $15 billion capitalization aimed at helping investors and entrepreneurs mitigate risks related to new technologies and infrastructure.

Europe

The European policy support for battery and related component manufacturing has been driven by the region’s decarbonization and climate mitigation objectives. The underlying growth and demand for clean energy and transport electrification prompted measures at facilitating institutional funding for private investments. Beyond this, the policy/ funding support has been through the various budgeted schemes or policies.

Some of the major investment areas are classified under the ‘Important Projects of Common European Interest’ (IPCEI), based on which the relevant resources are streamlined across the region to help the commercial viability. The IPCEI-based projects in 2019 and 2021, involving both member states and private enterprises, contributed €8.2 billion and €11.9 billion respectively in investment flow to the battery value chain. Another category of funding is routed through the Under Horizon Europe – a €95.5 billion budget fund for 2021- 2027 to help promote research and innovation projects in climate change and sustainability-related areas. The fund has allocated €925 million towards the battery-related projects so far. Separately, the European Investment Bank has been driving the funding for major battery projects. This includes the funding extended to Sweden’s Northvolt Gigafactory in July 2020.

There is an additional funding channel available for sustainability projects through the Invest EU Fund, supported by European Union’s guarantees. The duration is for 2021- 2027. The budget guarantee is worth €26.2 billion, and the fund aims to mobilize over $372 billion (including public and

private investments). Battery supply chain projects are part of the qualified investment proposals that secure funding under this category, as exemplified in some of the recent instances.

The funding available through schemes is still apparently falling short for the region, as it competes for attractive projects seeking the best incentives (led presently by US federal policy of IRA). Some steps are underway to close the gap. Importantly, the policymakers are aiming at a coherent regional framework for the prospective investment projects in the renewable and energy transition realm. In March 2023, the European Commission presented a proposal for regulation – the Net Zero Industry Act (NZIA), targeting domestic production of at least 40% of the technology/systems needed to achieve climate and energy goals by 2030.

Among other measures, NZIA will enable investment conditions through simplified/rapid permitting, facilitate market access of the technologies, and promote research and development through initiatives such as regulatory sandboxes. Battery technologies are among the listed strategic technologies in focus for NZIA. The regulation will be deliberated and agreed upon by the European Parliament and the Council of European Union before official adoption and enactment. It is seen as a somewhat positive step in the direction of offering a competitive option for Europe to secure the critical manufacturing investments. The individual members states of the region are meanwhile exploring means to incentivize. France, for instance recently succeeded in securing investment commitments for Gigafactory projects through a package of tax breaks and grant offers.

EU’s Approved Member States’ Aid for Battery Manufacturing Investment

Other Countries/Regions

The policy interest in battery manufacturing is high in many other countries, as evident in recent measures announced. At the other extreme though is China, where the conventional state-led industrial policy since 2000s ensured a dominant position of domestic enterprises – four of the top 10 global battery producers are in China. The country continues to attract investments in this space – Tesla’s Shanghai Gigafactory for instance received government aid to enable a commercially viable development process. Other countries are not in the same footing and are instead seeking to make use of the emerging opportunity in battery-led electrification and energy storage segments.

A handful of countries globally have announced concrete measures to attract the typical Gigafactory-scale of battery manufacturing. Quite of a few of them are endowed by the critical resource base – for instance, Australia’s mineral resource is an important differentiator. Indonesia, with its nickel reserves comes closer though there has not been a firm announcement on battery manufacturing subsidy. The urge to diversify supply chains beyond the China-centric structure has brought to the fore multiple locations in contention. As subsidy-based competition for projects is unsustainable for majority of countries, many seek options in participating through any part of the global battery supply chain.