126. Interview: The Inflation Reduction Act with BNEF Analysts Tom Rowlands-Rees & Corey Cantor

The Clean Energy Show

The Democratic-backed bill known as the Inflation Reduction Act would represent the largest climate investment in US history. Interview with Tom Rowlands-Rees, Head of Research, North America for Bloomberg New Energy Finance, and Corey Cantor, E.V. Associate with BNEF.

The July Surprise, E.V. incentives, Japanese automakers and the challenges of brining solar manufacturing to The United States.

How this legislation is meaningful for the world.

We will return with our usual episodes in the near future.

***TRANSCRIPT***

James Whittingham: Hello, and welcome to episode 126 of the Clean Energy Show.

I'm James Whittingham

Brian is on assignment.

That's not to say he's drunk and passed out somewhere just means that he's busy right now, and we hope to have him back for a regular episode very soon because there is so much to talk about.

We had a vacation.

We pretaped our last episode.

And what did Joe mansion do? He shocked everyone, totally blowing our minds, and he's supporting some fossil fuels in the process.

But really, this is big legislation that's happened with the inflation reduction act in the states.

It's going to the house on Friday.

We think it's going to pass probably as is or close to as is.

And it means a lot for EV adoption and for the clean energy and just reducing emissions in the United States by up to 40% by 2030.

So finally, the United States is on board with climate change, and it's something that we're going to talk about today with our guests from Bloomberg New Energy Finance.

We're thrilled to have them on board.

We've been talking a lot about Bloomberg and Bloomberg New Energy Finance and the excellent reporting they've been doing.

Tom Rowlands-Rees is Head of Research, North America, for BNEF.

And Cory Cantor is electric vehicles associate with BNEF.

They both spoke to us from New York.

And yes, a July surprise from Joe Manchin.

TV News Clip: Democratic Senators Joe Manchin and Chuck Schumer announcing a deal on a bill that was all but dead.

You almost never see this in Washington.

You never see Washington surprise like it is this morning.

Tom, what happened when you heard that news? What was your reaction to that? I was pretty caught off guard.

Tom Rowlins-Rees: You know, it happened right at the end of July to spend half the office is on vacation.

It was actually Corey's birthday.

Corey really follows the legislative process more closely than anyone at the NES, so he in particular was sort of a birthday surprise in respect.

My first reaction was like, oh, now we have to do a bunch more analysis.

Everyone is out of the office.

But it's only caught me off guard.

Corey, what was your reaction? Yeah, to Tom's point, I was a former Senate staffer, so I follow the stuff way too much, and I guess I just kind of weird at first.

I managed to put a statement out on a deal he had two weeks earlier, indicated on the healthcare front that he wasn't supportive.

And then seeing that he had energy and tax in there in the statement, I was like, wow, this is not just a small deal.

And as Tom said, they meant a lot of more work for everyone.

So we enjoyed the afternoon activities and waited for more news on the bill, but since then, it's quite busy for all the teams here.

So your colleagues who happen to be on vacation right now are laughing? Absolutely.

Tom, personal question.

I had to look at your LinkedIn page.

How does a physics PhD from Oxford specializing in high power laser plasma end up in your job right now? Well, when I first got involved in the clean tech space, it was 2009.

Wind and solar were maybe I wouldn't say they were nascent, but they weren't mature technologies.

And for people doing a job like ours, which is providing market research on clean tech, particularly as it was then, it really was a lot about new technologies.

So my work with lasers and plasma was all about developing new technologies.

And it was useful to have someone who could look critically with a scientific highlight at new technologies as potential investment opportunities or things worthy of policy support.

For some of my first work, I was looking at Led lighting and I did some work on high temperature superconductors.

And then I had to explain to our clients what a heat pump is and how that works.

So my physics background was kind of relevant to all of that.

I was just explaining what a heat pump is to my nephew who works in the HVAC industry.

He didn't know what a heat pump was.

Corey, what's in this act for EVs and is there anything that surprised you? Well, I think the fact that EVs were in the act was surprising given that there had been a lot of, let's say, back and forth with Senator Mansion's office and others who are kind of pushing the related credits.

So if you kind of step back and you look at the US system, we've had a passenger EV credit for about 1213 years now.

There used to be a hybrid credit and slowly over time, the credit was kind of losing that effectiveness.

The way the system works under the previous policy is you had up to $200,000 cumulative EV sales to use up to $7,500.

The new policy makes a major change that but ensures it will be around through 2032.

And then you also have a used electric vehicle or use clean car tax credit.

Everything is kind of being pulled together as clean car so that's your battery, electric vehicles, your plug in hybrid electric vehicles and your fuel cell vehicles kind of together as a cohesive unit.

So you got your new car tax credit, used car commercial vehicle tax credit, and then finally an extension of the charging infrastructure and the alternative refueling tax credit.

In addition, you've got a bunch of grants and loan programs in there too.

So it's a really massive bill.

And I think even when we were kind of talking with folks around what the package might look like, given that there is so much contentiousness around the transport provisions, I think their inclusion was surprising.

But there are a lot of strings attached.

So it's kind of balancing the fact that you thought they might be left out of a package with the fact that what auto makers are going to have to do in order to have consumers be able to use that, especially that passenger vehicle credit are quite stringent.

It's been speculated that people were keeping this hidden because they wanted to pass the Chip bill and the Republicans said they weren't going to pass the Chip bill if they're going to do anything in climate.

Is there any truth to that or is that blown out of proportion? If you're thinking about the auto industry in the US semiconductor chip shortage has been a major problem.

The lack of EV certainty has been a problem and so with these two bills taken together it's a real boost for the domestic US industry.

So.

Even seen Ford statement today from Jim Farley.

Pleased about the chips act.

There's a lot of industrial policy here, which is what's interesting about these two bills.

For a long time the US wasn't doing that type of work.

Not that they weren't helping the automakers such as back during the 2009 period, but really this is a pretty major infusion of capital to aid them and kind of reorienting towards cleaner vehicles.

I understood that two and three vehicle transportation was included until a few days ago.

Is that true? I think earlier iterations of the bill, for example, there was an ebook credit and a House pass legislation that was removed from the final Senate portion.

So it did become, I'd say, more restrictive in the final negotiations.

That being said, these are elements that are growing quickly.

The passenger vehicle space in the US is one that really, I think that kind of bridge in your term, let's say like mid decades.

But yeah, there are definitely compromises made along the way.

The sentence passed version compared to if you looked at the House built back better version that passed last fall is definitely a lot more, I'd say consolidated in terms of not only the kind of credits lost along the way, but also the credits that remain are a lot more, let's say, difficult to access.

John, can you speak to some of the pushback from automakers claiming that the restrictions of where the minerals come from excludes a lot of EVs and it's going to be really tough to meet their demands? Sure, I mean this is consistent with tax credits across the entire bills for other sectors like wind and solar that in order to get the full credit there has to be some evidence of domestic supply chain.

And actually I would say that with the EVs, the provisions that would allow some of the minerals or the metals to be coming from America's free trade partners is perhaps more of a concession than you are seeing in some of the other areas.

It creates, you could say, a problem, an opportunity.

I was asked in an interview the other day and this is not necessarily about EVs, but just generally these domestic requirements, do those mean higher costs for consumers? And the important thing is this isn't shutting the door on stuff being important from abroad, it's trying to give a competitive edge if companies do want to invest in developing domestic supply chains.

So it's pretty challenging, I would say, and I would defer to Corey's opinion on this, but the US has an established auto industry with the exception of Tesla.

It's perhaps a little bit behind other parts of the world for electric vehicles, but there is enough of both in terms of the minerals available through feed trade partners and also some startings of battery manufacturing capacity for it to be a realistic possibility to scale this.

I would say it's more challenging in, say, a sector like Solar, given the demands there with some of these domestic requirements.

Okay, I'm going to stay with EVs for another minute or two.

Corey, 2032, is this rebate going to be necessary? Is it going to be kind of absurd if, say, we need price parity sometime later in the second half of this decade? Is it going to be kind of ridiculous to have $7500 off vehicles at that point? So, James, I want to jump on Tom's point just for a quick second and I'll answer 2032 questions because I think for the sector, all the advantages Tom points out are definitely true in that there's a domestic auto industry here.

There's that kind of relationship with Canada and Mexico.

And I know that Canada must be really happy with how this all turned out because in an earlier version in the House bill there's that union and are really focusing on the kind of made in America aspect of things.

And now Canada and Mexico both get to join the kind of overall party around the bill of seeing some of the benefits from the increased battery manufacturing here.

So, good deal for Canada, even though they just had to essentially, I guess, Bobby, from the outside, as it pertains to 2032, the credit here would go for quite a bit longer than we're seeing some other countries in the kind of leading auto markets.

Tom's country of UK, they actually phased out their EBC this year.

Their EV share of sale was about 20%.

So it makes a lot more sense for them to kind of phase out.

The US last year was only at about 4.7% in the early quarters.

This year it's about above 6%.

And even moving even higher is what I can say.

And we'll have that data published sometime soon.

It's a long way of saying that you don't necessarily need the credit to go 2032.

Price priority, we expect, will be mid to late 20, 25, 26, depending on where these battery costs go.

That being said, we've had a lot of talk about price parity.

Another way to think about the policy is if you want transport emissions to go beyond the kind of 2030 goal and really drive you towards a net zero scenario, then maybe you want to keep that environmental bonus for a longer period of time than just price parity.

And the bill would definitely have more than enough certainty around that moving to your 2032 period, previous sales would likely have already taken off in a big way.

This is speculation I'm asking you to do here, but Canada last year had 50% more adoption of EVs Corey than the United States.

That seems odd because we didn't have much of a rebate nationally until recently.

The cold environment, large spans of geography between places, and that sort of challenge.

What's taking the United States so long? Is it cultural? I think it's been a lot of a model availability problem.

Right.

Tom mentioned before that Tesla has really been leading the way, and other automakers have been a bit slower to pivot.

So one thing that's cool about our jobs at B is we have access to all this great data.

So I can see quarterly and monthly sales of EVs.

I'm really looking for which models are going to be the next ones to not just break maybe 5000 or 10,000 a year, but really 50,000 and so forth.

The Tesla Model Y and three are the only EVs in the US.

That have gone above 100,000 units sales last year.

And so you're starting to see more and more impressive EV models.

The Ford Maki, what I point out, even the cheap wrangler peehead plugin hybrid is doing quite well.

So kind of just that shift, which wasn't really underway until really 2020 in kind of a mass volume type of way.

But I think it's been the limits.

If you look at California, for example, last quarter, they hit about 15% dev share of sales.

And if you add the plugin hybrids in there, they're close to 18%, which is really just about the level of where the UK has been, maybe slightly below because they have more plug in hybrids there.

But you begin to see California looking like a lot of European countries, and if you can kind of get the other US states there, you'll bring that country level average up.

What's the future of plug in hybrid vehicles? It seems like their sales are flat where EVs are taken off, is that correct? In the US it varies kind of between region, and in North America it's been very much 80 20 on a quarterly basis.

So 80% battery electric, 20% plug in hybrids.

In Europe it's been more of a 50 50 split.

One question coming out of this bill is maybe we will see more plug in hybrid electric vehicles with that kind of domestic battery manufacturing requirement, because you could really get about five PS maybe for one vet battery, depending on how much of a battery size you're talking about.

It remains to be seen though, automakers often like BEVs more just because all the battery improvements that are going in are driving down those battery costs and having a plug in hybrid.

You still have that gasoline engine in there.

So you don't have as much of a kind of maintenance benefit as you do from going purely electric.

I'm curious about the Japanese automakers, Corey, because I don't know what's up with them.

I was a loyal Toyota buyer for some time, and now I find I'm going to Chevy, like the brand that I despise.

Yeah, our Japanese people going to fall.

I mean, they lost me as a customer.

I would love to buy a Toyota that was, say, a Prius EV or a Corolla or something affordable, and I can't.

And now I've lost.

Is it too late for them? Are they going to be in trouble? We have this great report that actually, I feel like I'm working on six reports at once.

We have this report that we do every year where we look at kind of easy scores of how different companies are doing across the automotive space.

My mom was an avid Toyota Land Cruiser driver, terrible gas mileage.

So there's definitely the love of the Toyota brand there.

I'd say that there's been a lot of investment in Japanese automakers towards hydrogen for a long time, and we're seeing hydrogen do well in other segments of the kind of clean energy space.

And Tom could talk about in terms of the bill, there's a lot of hydrogen related investments in the Inflation Reduction Act, but as it pertains to passenger cars, I mean, EVs have so far left the barn.

Besides California and South Korea as markets, fuel cell has really struggled.

And so Toyota and other Japanese automakers have tried to pivot to fully electric.

Now, the beyond forex just came out.

They've been having some recall issues and Nissan has delayed the Ariana for quite a bit.

Often with automakers are releasing that kind of first gen, it does take some time to kind of get it right.

Tesla, for example, was trying to get it right back in 20, 14, 20, 15 GM with the bolts.

I drive a 2013 Leaf, and that's how many years now I thought the IRA would come out with guns blazing, but apparently not.

Tom, 60 billion for solar and wind turbine manufacturing.

I mean, can the United States realistically bring manufacturing to the sector with this investment? Good question.

I think that with wind, which has perhaps a supply chain that is a little bit more global, I mean, the global wind market is sort of basically there are two separate universes.

There's China and the rest of the world, and that is 99% or something to that extent of wind turbines built in China are made by Chinese turbine manufacturers, and then pretty much 99% of what is built elsewhere are made by international players.

The components of wind turbines are big and difficult to ship around, and so manufacturing is a lot more distributed.

And so there's already the seeds in the ground or actually maybe more than seeds in the ground.

There's an industry and a supply chain that includes a lot of the US that can become even more US focused with this tax credit.

I'm really curious to see what can be done on solar is challenging.

In particular, the solar supply chain is largely concentrated in Asia and in particular in China, but the majority of cells and modules imported to the US come from Southeast Asia.

However, they are using poly silicon wafers that have come from China.

If you want to cut out well, basically I think it's something like, and I hate to use the 99% again, but 99% of the global wafer capacity is in China.

This is a very concentrated industry globally, and so this might have been more relevant, say, 1015 years ago, not necessarily have no impact, but it's a lot more of an uphill stroke.

Is this the solar manufacturing just because China is not a friendly country and they want sort of geopolitical security of their supply? Or is it more that is just trying to bring back American manufacturing? I think it's a little bit of both, but I would say it's more the latter because there are already tariffs on solar modules coming in from China and that's why, actually, the bulk of modules coming to the US coming from Southeast Asia, whereas other parts of the world, they're coming directly from China.

And so I still like the main tool in which China is an adversary is the tariffs.

I think that these tax credits are genuinely more to do with wanting to develop American jobs.

In a sense, a tariff can be very targeted at an adversarial country, whereas the emphasis to concentrate an industry in the country is not an effective tool if there's a specific country that you're concerned about.

So I think that it is more to do with the development of US jobs.

The time has gone by really fast, guys.

Tom, I want to ask you one more question about the big picture for someone like me in my audience who is concerned about climate change.

Is this meaningful? How meaningful is it? I think it's really meaningful, actually, and I don't think it's meaningful just because it reduces US emissions.

As you can tell from my accent, and as Corey alluded to, I'm from the UK.

I've been covering the US for a couple of years now, and so I have learned about the complicated legislative process and I get a certain amount of sympathy for Joe Biden when he's or any US president that's taking part in climate negotiations.

The example I use to make my point, if you're lindulg, is almost 100 years ago, or actually sort of slightly more, we think about Woodrow Wilson and the League of nations then instead of climate change, the big issue was world peace.

And he had a great vision on how we could fix this and he basically designed this project with his idea the League of nations, he won the Nobel Prize for the idea the American President and then the Senate voted against the US.

Joining the League of nations and the whole project failed.

I think there are two parallels here.

One is the fact that as a US president, you're kind of negotiating with one hand tied behind your back.

You can have intentions and sincerely mean what you're saying, but the truth is you still have to go through a complicated legislative process that has lots of failure points and to actually get stuff passed in a meaningful way.

So that's one point and that's basically what happened to Woodrow Wilson got vetoed by the Senate despite his leadership.

And then the second point, the second parallel is that the whole kind of global climate negotiation push doesn't really hold together unless the US is really on board and whether other parties genuinely believe the US commitments, because the US historically has more emissions than any other country, the world's biggest country, economically speaking, there's no US.

If the US is not credible in climate negotiations, then those climate negotiations are not credible, full stop.

So the fact that we've seen, even if it's not perfect, the US president or the US government has managed to follow through on some of the ambition that has been articulated is pretty significant because it signals to other countries that the US is not just going to always talk a good game and then get bogged down in politics back up.

That is showing that actually the US is capable of taking action and that has a knock on effects for a lot of the negotiations generally.

Such a pleasure talking to you both.

Tom and Corey, I thank you for your time.

I know you're busy.

Congrats to Bloomberg.

You're doing such excellent reporting.

That's just phenomenal.

No one comes close and every day there are things that you're touching upon that no one else is and I thank you for that and I could talk to you for hours if I ever run into you in airport bar or something like that.

Look out here, talk off.

But thanks very much guys.

Thank you for having us, really appreciate it.

Thanks James.

Take care.