EV Acceleration: The IRA's Value Chain Strategy with BCG

Nathan Niese:

Resiliency lesson 101 is that you win with a combination of localization and diversification. We have to give credit to China's industries and policymakers for building such durable advantages. So, one challenge that the IRA creates is that the world needs China's expertise more than ever and instead of giving the stiff arm to China, would we have been better placed to have an open invitation to allow Chinese companies to access North America markets on the condition of technology transfers to therefore allow us to go further faster on our decarbonization agendas while still strengthening our domestic economy.

Michael Torrance:

Welcome to Sustainability Leaders. I'm Michael Torrance, chief sustainability officer with BMO Financial Group. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment, business practices, and our world.

Katie Shuter:

The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries.

Welcome back to another episode of Sustainability Leaders. I'm Katie Shuter, a climate change and sustainability analyst with the BMO Climate Institute. I'm very excited to be wrapping up our three part series on EVs in today's episode, where we'll focus on the implications of the inflation reduction act on the EV transition and the importance of building out robust supply chains. I'm joined by Nathan Niese, a partner and associate director with BCG and is BCG's global lead for electric vehicles.

So, to get us off, Nathan, thank you for being here. Could you tell our listeners about your role at BCG and what sort of work that you engage in?

Nathan Niese:

Yeah. Thanks Katie. We've got a hot topic to discuss today. I'm really looking forward to the discussion. Briefly on myself, I have the privilege of leading BCG's electric vehicle and energy storage topics globally for the company. And, BCG, or Boston Consulting Group, is a global consulting firm working across industries and sectors to advise clients on their most strategic business challenges. The energy transition and adoption of electric vehicles and other energy storage machines are areas where we're particularly active. We partner with corporates across the value chain as well as governments and institutions on knotty questions in these sectors such as how to enter and win as a new cell manufacturer or battery recycler. Are there attractive financial returns to be had in battery equipment manufacturing? How to manage a supply chain where secure access to materials is becoming particularly critical.

And, it's really that last question that's risen to number one on the minds of battery-based businesses and electric vehicle manufacturers over the past year. I'm also honored to be leading BCG's organizing role in Li-Bridge this year and it's through that alliance that we've been tasked with outlining the needs, challenges and recommendations to build a robust battery supply chain in the U.S. and with its partners.

Katie Shuter:

And, speaking of robust supply chains, a part of the reason why we had the opportunity to chat was this really amazing deck that we read from BCG outlining the implications of the inflation reduction act for the energy sector, including policies that would improve the economics of low carbon technologies, EVs and EV infrastructure. So, again, for our listeners, could you just give everyone a breakdown of what the IRA set out to do and how it has impacted the future of the EV transition in your view?

Nathan Niese:

Long term, the IRA is a significant, significant uplift for EV adoption in the U.S. and for building a more secure domestic battery supply chain. Full stop. I'd say there is still much to be clarified in the IRA's implementation roles before all the intricacies are truly understood. But, let's just kind of take a step back, unpack the pieces of the IRA with respect to electric vehicles and batteries first.

There's nearly $480 billion in new climate and energy spending approved in the last 12 months in the U.S. You have $370 billion or so in the IRA plus then 110 billion in climate and energy infrastructure spending as part of last year's infrastructure investment and jobs act. Of that total, nearly $40 billion of spending is earmarked for transportation and the lion's share of that is for on road passenger and commercial vehicles and EV charging. [inaudible 00:04:39] To keep description simple, I'll continue to use the word EV, but all of this discussion also applies to hydrogen-based vehicles as well.

And so, there's really a three part answer as to the purpose of the EV and battery portions of the IRA. One, it seeks to drive adoption of zero emission vehicles in line with the administration's stated goals for electric vehicles to make up 50% of all new vehicles sold in the U.S. by 2030. Second, it seeks to spur domestic production and manufacturing for EVs, batteries and battery materials here in the U.S. or in North America. And, third, it seeks to provide a stable decade-long policy signal for businesses in which to make long term investment decisions.

So, that's kind of a long windup before even saying what's included in the IRA, of which there's many pieces. The first is there's a point of sale incentive for EV buyers. The second is that there are production tax credits for battery supply chains on the order of $35 per kilowatt hour for cell manufacturers. And, then the third kind of major part of what's included is there are investment tax credits for green field and brown field manufacturing projects as well as for the installation and procurement of equipment for EV charging stations.

Where it really gets interesting is in the qualifying requirements. There are income level limits for buyers. There's an MSRP limit for cars, SUVs and trucks. There's domestic content requirements that ramp up year over year. There's knockout criteria if any part of the battery is sourced from what's called a foreign entity of concern, of which China and Russia notably fall on that list. And so, it's... With all that [inaudible 00:06:33] qualifying criteria that as the first hours and days of reviewing that text by industry was really an emotional roller coaster for battery, EV sectors and for customers.

Regardless of kind of where we shake out on that spectrum, the strategic implications for businesses are just massive. It accelerates production plans. It's forcing a complete rethink of supply chain partnerships and the attractiveness of participating in certain profit pools. There's a whole host of considerations on what to do about pricing and more.

Katie Shuter:

So, the Climate Institute recently... We published a report on EVs and we picked up on findings around this idea of carbon parity, that the production of EVs is more carbon intensive than gas powered vehicles and one way to, quote, solve that is through cleaner grids. And, for our listeners, this is often referred to as carbon parity in this space. It's the break even point in time when EVs become cleaner than a gas powered car. So, on a cleaner grid, it's about a year and on a dirtier grid, it's upwards of five years. So, I was wondering what sort of provisions in the IRA you think are advancing a cleaner grid in the U.S. And, given how clean Canada's grid is, do we have anything to learn from this?

Nathan Niese:

Great question. I spoke about the $40 billion in transportation-related spending, but there's something that is six times larger in terms of carbon-free energy focused on the grid, which is renewables, nuclear, electricity and other items. And so, kind of playing that, those incentives through or the impact of the tax credits, you're lowering the levelized cost of energy on a dollar per megawatt hour basis for solar, for wind, for storage and nuclear, by up to 60% in some cases, which is just a massive spur to greening the grid faster than we would have otherwise done. And, that's where Canada's ahead, especially in certain provinces.

Katie Shuter:

It's also an interesting point because it's cheaper for customers to charge their EV on a cleaner grid because electricity rates on a cleaner grid tend to be lower on average.

Nathan Niese:

Well, we're in a world in which volatility of energy prices, especially out of Europe, is going to be a major, major question, and so, clean energy being lower cost and hopefully having a greater level of stability in terms of what it means for the grid will be just incredibly important to providing a good experience for those that transition to EVs to not feel that they're being caught with surprises when they're going to the equivalent of... We always say at the pump, but in this case, it's at the charging station or in their homes when they plug in.

Katie Shuter:

Yes. Exactly. So, to your point earlier about strategic implications... So, the IRA... Something that I really liked about the IRA and that the Climate Institute really liked about the IRA was that there needs to be a strategic approach to net zero from that competitive value chain perspective. And, I heard this from somebody a few weeks ago and it really stuck with me, that we have, at least in Canada and maybe the U.S., we have a lot of ingredients on the table, so we have an EV strategy or a hydrogen strategy, but those ingredients don't necessarily add up to a whole meal. So, I think your work at Li-Bridge really resonates with this thinking. So, could you speak to that work and the importance of building out those robust supply chains for the transition?

Nathan Niese:

Your analogy really resonates with me, Katie. Not everyone likes to use the words industrial policy, but that's really what we now have with the IRA and we need it to work as one cohesive policy that looks and tastes like a complete meal. There's lots of work to still be done versus resting on the laurels of what the IRA has done and I firmly believe it will be alliances such as Li-Bridge that can deliver where U.S. industry and government has fallen short previously. Li-Bridge was consciously established to bring together companies from mining through to EV and stationary storage production and it's over that, the past year, that that alliance has developed recommendations that are really focusing on addressing the gaps holding the U.S. or North America back from global competitiveness.

So, an uncompetitive U.S. battery industry or North American battery industry puts the whole region's decarbonization agenda in peril. The wait time to access a pilot line to test or validate and qualify new battery materials can stretch up to over a year in North America, whereas China and Europe have a robust pilot line network with wait times less than a month. Battery recycling could be so much more cost effective if the standards were harmonized across jurisdictions. And, the list goes on and the to-do list is not entirely unique to the U.S. and so now it's about translating those ideas to action and with speed. The enthusiasm from industry as a part of Li-Bridge to band together to effect real change was just infectious.

Katie Shuter:

That's really exciting and I completely agree. Earlier, I know that we're excited about what's to come, but that there is still this sentiment that there is lots of work to be done, particularly in Canada, I think. So, this leads me to my next question, which is, given the content requirements in the IRA, at least... I think it was at least 50% of EV materials and components must be sourced from North America or from a U.S. trading partner. So, there will be obviously a lot of motivation for Canada to develop a robust EV and critical minerals value chain. So, with that, do you think Canada is in a good position to capitalize on this opportunity or is there a lot more work to be done?

Nathan Niese:

It's no coincidence that as it relates to battery materials and global advantage and trade, that some of our foremost experts within BCG actually reside in Canada. I mean, Canada is a major, major part of the next chapter of EVs and batteries. But, Canada can't rest on its laurels, I'd say for a handful of reasons. The first is customer demand for EVs. EV adoption actually needs to really jump. On the raw materials side, more Canadian deposits can be assessed and developed. On the R and D side, I mean, production and technology innovations will need to be found. There's that stretch from mineral extraction to recycling to continue to lower battery costs and improve business cases.

The fourth one is investors. I expect the phones of Canadian battery players and potential EV manufacturers, that their phones have been ringing off the hook since the IRA has passed due to Canada's favored status as a free trade agreement country. And, then lastly, the government. Canada may need to match the production tax credits offered by the U.S. because I expect those players who announced battery material and cell manufacturing plants, that they would plan to site in Canada pre-IRA, they might be re-evaluating their decisions to select Canada over the U.S.

So, in summary, I'd say now is the moment for Canada to take big moves to be a more central player in the EV and the battery ecosystem.

Katie Shuter:

So, you mentioned earlier China and Russia and I hear about this quite often. So, in Canada, there's mounting concern that Canada's critical mineral sector has an over-reliance on China and Russia and there isn't enough of a focus on expanding domestic infrastructure and supply. And, one of my colleagues had a really great example of how this problem escalates and it was when she worked in South Africa. So, one of the barriers to scaling... It's called South Africa's Renewable Independent Power Producer Program. One of the barriers to scaling that program was that the country didn't develop a manufacturing sector to supply all the renewable energy projects that were being developed. So, while the program was still successful, it wasn't as successful as it could have been because they needed to rely so heavily on imported parts from China and that made them really vulnerable to supply and pricing issues. And, there were obviously governance issues too, but those issues are less comparable to North America. And so, failing to create a manufacturing sector to supply a low carbon transition is definitely an issue for us.

So, with that example in mind, what's your view on the implications of this over-reliance on China and Russia, just for the EV value chain and also for Canada's economy more broadly?

Nathan Niese:

Resiliency lesson 101 is that you win with a combination of localization and diversification. I think there's little reason to believe that geopolitics related to China and/or Russia are going to get simpler in the months or years ahead and we're seeing that decoupling of clean technology supply chains from China in particular is no overnight task.

We have to give credit to China's industries and policymakers for building such durable advantages. So, one challenge that the IRA creates is that the world needs China's expertise more than ever and instead of giving the stiff arm to China, would we have been better placed to have an open invitation to allow Chinese companies to access North America markets on the condition of technology transfers to therefore allow us to go further faster on our decarbonization agendas while still strengthening our domestic economy. [inaudible 00:16:02] essentially a reverse play to what China did over the last few decades to build its domestic auto industry. It's water under the bridge now but it's an interesting thought exercise in terms of the role of China.

Katie Shuter:

Turning to... Back to Li-Bridge. So, you've mentioned in previous conversations before this podcast that Li-Bridge was producing a report with several recommendations to build out EV infrastructure. So, could you just elaborate on what some of those recommendations are?

Nathan Niese:

Yeah, and I think they tie back to the last question quite well in terms of what are the specific recommendations that are needed to start to decouple from China, Russia and have a more localized, robust supply chain. The report's going to come out here at the end of the year, so don't want to provide all the answers, but I think that the five major themes are, one, improve investment attractiveness to actually catalyze new capacity investments in North America. The second piece of that stool is to support product and business model innovation to allow companies to accelerate paths to commercialization here.

The third is all around securing access to materials, both ones that are in the ground and within the region as well as through preferred partnerships overseas to reduce the risk of supply chain disruptions. The fourth item and often under looked is investing in people and supporting infrastructure to enable the North America battery industry to actually have its growth. And, then our fifth one is to meet several of those prior points, a U.S. only or a North America public-private alliance such as Li-Bridge needs to be in place for years to come because so many of those solutions that are required actually sit at the intersection of the public side, so government involvement, plus then industry being at the table and helping drive forward change.

Katie Shuter:

You've mentioned a couple of times this idea of investing in people. I think you had mentioned it earlier. Do you mind expanding on that point, if you can?

Nathan Niese:

Every step of the supply chain, from mining to those anodes, cathodes, to cell manufacturing to EV manufacturing, we need tens and hundreds of thousands of jobs for that industry. We need completely different curricula and series of training programs that allow people to know how to thrive when they're coming to their jobs every day. And, we need a pipeline that continues to allow us to have competitive leadership going forward in terms of companies that are innovating and choosing to innovate here versus to do it somewhere overseas.

Katie Shuter:

In a recent Climate Institute report, we did explore this need to upskill and retrain front line sales staff at least in auto dealerships is where we focused. I think it was the maintenance requirements alone of EVs require computing and software knowledge and it's really needed for the auto dealerships to keep their businesses competitive since so many OEMs are moving toward online direct sales. And, this is just one business out of the whole auto servicing industry, so it's really poignant that upskilling and retraining is going to be needed across the board. Just such a small component of the auto dealerships and it's going to impact their margins so much. I can't imagine what it'll be like if you spread that example across the entire auto economy. So, it's a great point.

Nathan Niese:

I love your point because just to take that one step further, I spoke kind of primarily about manufacturing jobs, but further downstream if you think about maintenance of EV chargers, of first responders and fire rescue if there happens to be a safety issue related to batteries on the road. Even transporters of batteries over... Because, they're considered in some localities hazardous materials, and so how to do that safely for logistics companies. There's just so many different parts of our economy that are being touched with... As you participate in EVs and batteries, a lot of new learnings are going to be required.

Katie Shuter:

Exactly. So, the Inflation Reduction Act consists of what commentators are calling all carrots, no sticks. But, in other ways, the IRA will actually strengthen regulations like the Environmental Protection Agency or the EPA, which is a rulemaking body that carries a lot of sticks. So, in your view, what are the catalysts to accelerate the EV transition? Will it be mostly incentives like folks are suggesting? Or, do we still need some sticks?

Nathan Niese:

And, I'll say it's not entirely fair to say that the IRA is only carrots. Those qualifying criteria for incentives do bear some degree of burden, given U.S. industry is behind on its production learning curve, which results in higher landed costs. Nevertheless, if we're successful in our mission, I believe the U.S. would see the cost benefit trade off of these IRA dollars as a winning proposition 100 times over. The alternative, a do-nothing scenario, would have had the North America battery industry go the way of semiconductors or solar panels. That is, essential products that get manufactured overseas and are imported on a massive scale.

The recently passed $50 billion CHIPS Act shows just how expensive it is to reshore an industry after it has matured. And so, of that $40 billion for transportation in the IRA and the infrastructure bills, you can put a large portion of that price tag at the feet of prior sessions of Congress and administrations for their delay and uncertainty in acting. But, to your point, I mean, the U.S. EPA or rule-making bodies of individual states and provinces are also critical to set a steadily increasing floor that is in line with our climate goals.

Katie Shuter:

So, on the topic of the EPA, what sort of other domino or secondary effects do you think the Inflation Reduction Act will have on existing laws, policies or incentives that are currently affecting the EV transition?

Nathan Niese:

Faster EV adoption and the domestic build-out of supply chains are very good things, but they are going to bring their next set of challenges that we must deal with in turn. The grid is aging and it's ill prepared and it's going to prove to a long pole in the tent with respect to increasing the availability of public and private charging and/or to bring some of those new production facilities online. We're bringing to bear a whole new manufacturing sector that's going to invite careful review to ensure that those facilities that are producing clean technologies are not locking in processes and footprints that themselves are emission intensive.

And so, the EPA will be a critical partner in ensuring also that the fossil fuel based facilities that are closed are properly decommissioned. It's like we're seeing the fingerprints of a future EPA agenda all over this IRA. And so, I'd say it's a common theme throughout our discussion here that there's lots of work ahead for the EPA as well. Much of it is known, but we should also expect a few surprises as well, both within what the EPA does, in terms of what companies continue to do, and hopefully continue to have strong support from our political leaders in chasing after our climate objectives.

Katie Shuter:

When do you think...? In your opinion, when do you think we will start seeing the impacts of the IRA? And, I ask that because I recently read that building processing plants for a lot of critical minerals that are mentioned in the IRA can take upwards of four or five years and you know these things won't happen overnight. So, what do you think the IRA will do for 2030 net zero targets or for the 2030 to 2035 EV mandates that are placed in a lot of states in the U.S. and in Canada?

Nathan Niese:

Yeah. Great question. As much as we would love to have it have instant impact, it's likely to be rather muted for 2023 through 2025 other than it gets that drumbeat really going. And, it's because of your point. Just the amount of steel and concrete that needs to be put in the ground to build the new facilities here to really spur lower costs and more localized manufacturing is going to take time. A cell manufacturing plant could be on the average of three years. Those battery material plants, as you outlined, four to five years. And, it's those upstream raw material projects, at least in the U.S. are averaging eight, 10 or even more than that in terms of the amount of time it takes to develop.

So, we're really talking about many of the impacts for the IRA being felt in the later half of this decade and beyond. Without the IRA, BCG's forecasts suggested that the U.S. would not have been able to meet the Biden administration's 50% electric vehicle goal and therefore be out of lockstep with its stated climate objectives. With the IRA, it's almost exactly in line when you kind of think about the adoption curve and the costs that that is now not just feasible but actually quite likely.

Katie Shuter:

I'm curious to know. Out of everything, in your opinion, what was the IRA missing when it came to the EV transition and the value chain writ large? And, put in another way, what are some of the limiting factors that slow the impact of the IRA that it could have that maybe we wouldn't think about at first glance? So, I was thinking about this because, for example, on the renewable energy side, there's a lot of incentives in the IRA for the construction of, say, wind turbines, which is really great but that doesn't really factor in all the complications that come with the land requirements of building wind turbines or as I mentioned, those critical minerals, building those processing plants. So, are there similar issues that you see with what's set out in the IRA, at least for EVs?

Nathan Niese:

Permitting is the number one on the list, I have to believe. How we find opportunities to streamline permitting. I'll be very clear because on speaking on behalf of industry, they're not looking to cut corners here but to continue to do so in a way that allows us to engage with communities, to be thoughtful about environmental impact and to minimize that environmental impact while also allowing these projects to begin and to actually then start producing is going to be the limiting factor in much of what our goals would be to have that robust domestic supply chain here in North America versus have it continue to get developed elsewhere.

Katie Shuter:

So, that's it for today's episode. Thank you so much Nathan for joining. You've brought some really great perspectives and insights that are so crucial to our understanding of the future of the EV transition and this just sounds like such an exciting time for both the U.S. and Canada. So, I'm looking forward to what comes next. So, thank you.

Nathan Niese:

Yeah. Thank you, Katie. It really is exciting times.

Michael Torrance:

Thanks for listening to Sustainability Leaders. This podcast is presented by BMO Financial Group. To access all the resources we discussed in today's episode and to see our other podcasts, visit us at bmo.com/sustainabiltyleaders. You can listen and subscribe free to our show on Apple Podcasts or your favorite podcast provider and we'll greatly appreciate a rating and review and any feedback that you might have. Our show and resources are produced with support from BMO's marketing team and Puddle Creative. Until next time, I'm Michael Torrance. Have a great week.

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