Those chasing rewards from renewables such as lithium aren’t quite sure what to make of the latest US legislation called The Inflation Reduction Act of 2022 – other than to know it will be a game-changer in the global space and especially in Australia, which is one of the countries best placed to play a major part in what will be a massive spending campaign by the US.
So what is it exactly?
A $US485 billion (about $A690 billion) spending package aiming to bring down American healthcare costs, cut carbon emissions, and boost economic and climate resilience.
It is due to be voted on by the US House of Representatives Friday night, Australian time after being approved by the Senate last Sunday.
Ratings group, Moody’s says the bill “will likely help keep supply-constraint-driven inflation in check over the medium term by bringing about productivity-enhancing investments.”
“Such investment can improve inflationary dynamics by buoying demand and employment growth, while also lowering supply costs through efficiency gains. However, this will take several years and the legislation is unlikely to directly lower current inflation rates.
“The US Federal Reserve’s monetary policy framework remains central to managing economy wide inflation trends, and we expect the central bank to remain on track with aggressive, front-load rate hikes to help tamp down inflation rates through 2023.”
Moody’s and other point out that this bill has to be seen as being complementary to, the already enacted $US280 billion CHIPS Act (passed in July) which will boost US government assistance for technologies such as computer chips and materials.
The CHIPS and Science Bill will help finance American ambitions to lead the world in industries of the future, from quantum computing and artificial intelligence to vaccines for cancer and cures for HIV, COVID etc, as well as new computer chips, semiconductors and emerging technologies.
The legislation has already seen US semiconductor companies begin announcing billions in new investments across the country.
So these two bills and their $US765 billion (nearly $A1.1 trillion) in funds, spending and other measures should be viewed as one large fund that will power the US transition to a less carbonised future, stimulate massive investments in a wide range of existing and newer technologies, and in ideas still being dreamed of by scientists and entrepreneurs.
“Together, these two pieces of legislation will likely amplify each other’s impact on productivity, innovation and growth, and support the transition to a low-carbon economy. In terms of credit effects across sectors, we expect the new bill to have far-reaching credit implications, especially for companies at high risk related to carbon transition, and for pharmaceutical companies and health insurers,” Moody’s pointed out.
But they will also change the ground for renewable metals and material companies, making the US a destination for new investment, but also a source for new investment for companies in Australia.
This will be on top of the US government money flowing to Australian companies like Lynas, the rare earths miner and producer and Syrah Resources, the emerging graphite miner and processor.
Moody’s wrote this week: “The Inflation Reduction Act will potentially boost energy security and innovation in clean technology, while the CHIPS Act could enhance industrial efficiencies by promoting high-tech R&D and basic research in artificial intelligence, quantum computing and other new technologies.
“Combined with the $1 trillion Infrastructure Investment and Jobs Act enacted last November, which included significant investments in clean-energy technologies, these bills will likely unlock additional private-and public-sector investment, boost domestic manufacturing, enhance US competitiveness and benefit a range of sectors,” Moody’s pointed out.
That’s the macro view for the US economy as a whole so what about investments and investors – there will be money to be made and lost in coming years.
Reuters summed that up with these opening paragraphs to a story on the possible impact on investment markets:
“For the first time, investors seeking to pour cash into U.S. clean energy projects can count on at least a decade of generous federal subsidies, offering them long-sought confidence in the staying power of the world’s third biggest renewables market.
“Tax credits for wind and solar projects have underpinned explosive growth in U.S. installations over the last decade. But they have often had short time horizons, leaving project developers scrambling to meet looming deadlines and spooking risk-averse investors.
“The long-term tax credit commitments for wind and solar, wrapped up in a $430 billion bill passed by the U.S. Senate on Sunday, were joined by new credits for energy storage, biogas and hydrogen. Developers of wind and solar projects will also be able to get more support if they use U.S.-made equipment or build their projects in poorer areas.
“This is going to be a golden period of 10 years, at least,” said Keith Martin, an attorney with Norton Rose Fulbright who works on financing renewable energy projects. “That is a long horizon for people to plan and really get this transition to clean energy into high gear.”
Renewable energy investment hit $US215 billion in the United States in 2021, according to the International Energy Agency, which put America was behind China and Europe.
The top US power utility trade group said the bill would help speed up plans by many members to eliminate carbon emissions from their systems by 2050 because it creates subsidies for technologies beyond just wind and solar, which have intermittent supply.
“The expansion of those credits truly gives us more tools that we can use, not only to execute the plan, but we believe we will be able to accelerate it,” Warner Baxter, chair of the Edison Electric Institute, said in an interview with Reuters.
For instance Edward Lees, co-head of the environmental strategies group at BNP Paribas Asset Management, said he expected hydrogen would be “much more attractive,” with a tax credit of up to $3 a kilogram.
Reuters said that to date, “Most renewable projects have been bankrolled by investors who take a stake in developments in exchange for the associated tax breaks, so-called tax-equity financing.”
“Going forward, developers will be able to sell certain credits without entering these “cumbersome, high-friction partnerships,” said Ted Brandt, chief executive of investment bank Marathon Capital.
“That opens up the market and will go a long way towards alleviating the supply-demand imbalances we’ve had for years,” he told Reuters.”
According to Tom Buttgenbach, CEO of American solar developer 8minute Solar Energy, “Before this bill, we were looking at one- and two-year extensions on the tax credit while trying to finance projects that take three to five years to build. For the first time, this gives the industry and investors certainty for what the financing environment will look through 2034.”
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Investors, analysts, media and others are still working out just what will benefit from these bills.
The Inflation reduction Act contains $US369 billion in investment to help US companies, communities and governments to transition to low-carbon energy.
Consumers will get rebates on electric vehicles, energy-efficient household appliances, and solar panels.
Federal loans will support manufacturers of solar panels and large batteries.
Farmers who adopt practices that remove carbon from the atmosphere will get financial support and the fossil fuel industry won $US20 billion in subsidies and new land for offshore drilling (to help power the transition to a less carbon intensive future).
The Build Back Better Act concentrates on the lithium-ion battery to EV supply chain with tax incentives and efforts to drive localisation.
So far as lithium is concerned (a prime Australian concern), the inflation reduction act includes an extension of the $US7,500 tax credit relief for new electric vehicles beyond the current 200,000 vehicle cap.
But it stipulates they have to be built with North America or trade agreement critical minerals, including lithium, cobalt, graphite, nickel and manganese (That is a big opening for Australian companies already supplying these materials to the likes of Tesla and Ford or producing copper etc in the US).
The bill says not less than two-fifths (40%) of the critical minerals used in electric vehicle batteries should be extracted and processed locally in the US or with a free trade agreement (FTA) partner, or recycled in North America. It includes provisions to ramp up this requirement to 80% in 2026.
“To be eligible, batteries have to contain a level of critical minerals extracted or processed in any country the US has a free trade agreement with or recycled in North America,” it says.
There are three free trade partners with the minerals – Australia, Chile and Canada.
Indonesia and Argentina are excluded – the latter because of the dominance Chinese companies now have in the country’s nickel sector, the latter because the country has always been regarded as being anti-American.
Again, Australian companies are well-placed here and the act should actually spur investment here in the green metals sector.
Besides Australia, Lynas, Syrah, Rio Tinto will or have mines or processing facilities in the US. BHP and Rio have a huge mine in Utah and both have the Escondida mine in Chile, while BHP has other mines in that country as well.
But Rio’s lithium ambitions in Argentina will take a hit from these new rules.
The bill also includes a 10% Advanced Manufacturing production tax credit across the breadth of the lithium-ion supply chain, which would help ease the cost burdens facing battery manufacturers and automakers.
This 10% tax credit begins with the production of critical minerals and extends midstream for cathode and anode materials. An investment tax credit is also included for the energy storage and production tax credit for battery cell manufacturing with a cost of $35 a kilowatt-hour.
President Joe Biden earlier this year invoked the Defense Production Act (DPA) to step up US production of minerals for electric vehicle and storage batteries and lower the nation’s reliance on foreign supply. Lynas and Syrrah’s loans are cases in point.
Separately, the US Department of Energy (DOE) has dedicated $US3.16 billion of funding as part of the Bipartisan Infrastructure Law to develop the country’s battery supply chain.
The funding will be allocated across the supply chain, with the bulk of it being made available to mid-stream processing to cathode, anode and battery cell production.
Benchmark Mineral Intelligence points out that given China’s domination of lithium, nickel, cobalt and other key green metal supplies, weaning the US off Chinese (and Russian) sourced materials, as called for in the Act, will take longer than the Biden administration thinks.
Benchmark says that as a first step, the $US7,500 EV subsidy has to be extended until at least 2028 or 2030 to allow more time to build mines in the US and in countries like Australia and Chile and processing plants to replace the Chinese and Russian-sourced materials.
