On the Inflation Reduction Act, new EU Battery Regulation, and Energy Security

Picture credit: DALL-E “Caspar David Friedrich, Wanderer Above a Sea of Electric Vehicles”

Introduction

Twin sets of regulation are making their way through Europe and the US governing the use of lithium-ion batteries: the EU Battery Regulation and the Inflation Reduction Act. The second, third, and fourth order consequences they have will change the EV battery recycling and second life industries profoundly.

As the respective texts are finalised, it is becoming apparent we need a digital platform for the end-of-life battery value chain. A platform with specific and credible information on used lithium-ion batteries. Information that will allow several fundamental distinctions to be made – either for those looking to acquire second life or recycled supply.

Cling Systems is that platform.

In this blog, we will outline how we will contribute to circular energy flows by consolidating a fragmented market. A must have for the regulations taking root in North America and Europe to actually succeed. Energy security, a phrase taking on an entirely different meaning with Russia’s invasion of Ukraine and tensions in the Taiwan Strait, is also intimately tied to the growing importance of resilient circular supply chains.

New EU Battery Regulation

Existing geopolitical tensions already are making these chains complicated and competitive for operators in the EU – whether for spodumene, nickel laterite, black mass, or wire harnesses. There is a stark contrast between the context of the delivery of then European Commissioner for Energy Maros Šefčovič’s speech in March 2021, vs today. Šefčovič heralded Europe “as moving fast towards its open strategic autonomy”. This autonomy is still some way off – with a highly interlinked EV battery production chain across upstream, midstream to downstream.

There is a dependency on Asia for large parts of the critical materials for EV batteries – often repeated by seasoned industry observers like Steve LeVine. That same speech given by Šefčovič, however, pointed to the need for “the local sustainable sourcing and processing of raw materials… as well as local production of key components.”

Fast forward to 2022 and the EU Regulation has several points that could make or break efforts of circularity in this industry. Bax & Company in a recent report highlighted many of these, including:

  • Battery sourcing – “Performing a proper due diligence analysis will be especially hard for economic operators that are not as vertically integrated.”
  • Waste classification – “The repurposing/remanufacturing operators have to first prove that the waste battery is no longer waste, by presenting upon request by authorities: evidence of SoH evaluation, documentation of sale or transfer of ownership and evidence of appropriate safety measures taken.”
  • Second life – “More open access to battery data means big changes for many EV OEMs, which will have to rethink their business models based on their own repurposing capacity or single partnerships.”

In combination, the points above demonstrate a need for a different approach to battery collection and subsequent transactions. Efforts on collection, that in the spirit of Šefčovic’s comments, could be done within the EU.

How does Cling Systems solve this?

By aggregating the batteries from car dismantlers, repair workshops and other collectors, working with only vetted players and certified re-x companies that comply with relevant standards.

This allows for a foundation where other actors engaging with the battery through its subsequent lifecycle will have ample incentives. Through trading, Cling strives to create those incentives. The foundation we provide means that whole battery systems will be tracked and exchanged, eventually reducing some of the dominance held by countries that are deemed to be economic competitors or systemic rivals in the EU interpretation. A factor particularly relevant within the European Commission’s broader aims of increasingsustainability and competitiveness of battery value chains.”

We are a hedge for those based in the EU looking for greater energy security, for buyers wanting consolidated and appropriate supply, and sellers needing a good return.

Inflation Reduction Act (IRA)

Eligibility for EV tax credits and related criteria in the IRA have been covered at length. To highlight a few salient points, we will focus on the opportunities for recyclers and the wider battery supply chain. These are the requirements for critical mineral and battery component content per vehicle to achieve up to $7,500 USD in credits. These requirements ultimately benefit the end consumer and are split into two tranches.

For the first $3,750 credit, a percentage of the value of applicable critical minerals contained in the EV batteries must be extracted or processed in the US, or in a country with which the US has a free trade agreement, or must have been recycled in North America.

The percentages increase from 40% before 2024, to 80% post 2026. Critical minerals listed by the IRA include cobalt, aluminum, lithium, nickel, and graphite.

For the next $3,750 credit, a percentage of the value of the battery components in an EV must be manufactured or assembled in North America. The percentages increase from 50% before 2024, to 100% after 2028. Post 2023, the IRA also includes the stipulation that any components used in EV batteries must not have been “extracted, processed, or recycled by a foreign entity of concern,” feasibly including China.

Post 2024, the requirements tighten even further to rule out any critical minerals used in the EV which are extracted, processed, or recycled by a “foreign entity of concern” which could again feasibly include China.

These deadlines will force recycling further up the industry’s list of priorities.

As the Act does its own form of intercalation, bouncing and ricocheting around the industry various strategies and lobbying efforts will no doubt emerge. Chinese OEMs may resort to aggressive pricing as a remedy for the ratcheting standards. Either way, one potential outcome could be the need to buy used EV batteries (or feedstock) in substantial amounts before the deadlines kick in.

Supply is already tight, underpinned by DIY enthusiasts, and being kept on the roads by the extended durability of the EV batteries. The flows will start to emerge, however, in the short to medium term and the industry will be in a position where it can capture the most commercial and economic value.

How can Cling Systems help?

By gathering a diverse supply. Batteries at the end of their first life are still highly valuable. Throughout their lifetime they disperse and are sold to the highest bidder – with limited traceability or clarity on the end destination.

The need to build an entirely new North American supply chain from scratch is a massive undertaking. One that can be eased by mapping and directing flows of existing batteries, the chemistries they have, and their specifications.

Cling Systems stands by to assist those looking to consolidate their supply and navigate the profound X order consequences we mentioned at the start of this blog.

Next steps

For more information, any sales enquiries, and an overview of our growing map please:

Special thanks to Jaan Juurikas of EV Universe for his contributions and suggestions.

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