Are EVs Nearing Critical Mass?

McKinsey Center for Future Mobility forecasts a sevenfold increase in global production of battery electric vehicles and plug-in hybrid electric vehicles from 2021 to 2030, which will account for more than 55% of new vehicle production by 2030 across China, Europe, and North America.

“Adoption has moved beyond start-ups, with all mainstream [original equipment manufacturers] now focused on electric vehicles (EVs) and with forecasts for EV penetration continuing to accelerate,” explained McKinsey & Company in an August 2022 article discussing the research, adding that more than 500 EV programs are coming to market in 2024 to 2026.

 

A look at the numbers

Analysis by the International Energy Agency (IEA) in their October World Energy Outlook 2022 finds that more than one out of every two cars sold in the United States, European Union, and China could be electric by 2030.

One in two
cars sold could be electric by 2030.
Source: IEA

“This is an extraordinary transformation we are witnessing in the world’s three largest car markets. Worldwide, EVs’ share of the car market could rise to close to 40% from less than 10% last year,” opined Fatih Birol, executive director of IEA in a September 2022 article for CNN Business Perspectives.

Birol believes U.S. EV car sales, which have lagged the strong growth experienced in Europe and China, are set to increase sharply thanks to the Inflation Reduction Act (IRA) of 2022, signed into law this past August. Incentives for EVs in the $737 billion law “boost manufacturing, encourage sales, and expand charging stations and other infrastructure.”

Of the $737 billion, the IRA dedicates $369 billion to the Energy Security and Climate Change program, making it the largest piece of federal legislation ever to address climate change. Research from the REPEAT Project run by Jesse Jenkins’ ZERO-lab at Princeton University finds IRA’s climate investments will lead to a roughly 42% decline in carbon emissions by 2030.

 

The potential challenges

Jenkins, an assistant professor at Princeton University with a joint appointment in the Department of Mechanical and Aerospace Engineering and the Andlinger Center for Energy and Environment, expected IRA to “drive the first sustained period of declining fossil energy consumption in U.S. history.”

42%
The estimated decline in carbon emissions by 2023 from IRA’s climate investments.
Source: The REPEAT Project

Ahead of the unexpected summer passage of IRA, Bank of America Global Research, in a July 2022 research note, asked rhetorically if EV sales in the United States reached a tipping point in the second quarter with a 5.6% market share, adding 33 EV models made at least one sale from April to June 2022.

“Limited availability/long waitlists for coveted models, rising prices, higher fuel costs, and overall recessionary fears will likely continue to weigh on overall U.S. vehicle sales through 2022,” said the research team.

While expecting battery constraints would be a key dynamic delaying the time for EV costs to reach parity with vehicles powered by an internal combustion engine, the bank’s analysts forecast high gasoline prices should drive buyer interest and “translate to medium-term tailwinds for adoption.”

Natural Resources Defense Council found that the average sticker price for a new EV is approximately $19,000 more than that of a new gasoline-powered vehicle. That is a big hurdle for many consumers to overcome. Yet, analysis by researchers at the U.S. Department of Energy’s National Renewable Energy Laboratory and Idaho National Laboratory suggests much of that expense can be recouped on fuel costs. Over a 15-year period, owning an EV could save as much as $14,500 when compared with a gasoline-powered vehicle, according to their research.

A closer analysis is warranted however, with actual savings based on gasoline prices in one’s locality, the quality and abundance of charging stations, and state-incentive programs. Washington offers a low-cost scenario, capturing $14,480 in savings over the 15-year period, although in Alabama the savings over a comparable period are estimated at $2,368. Averaging savings in fuel costs over 15 years is estimated at $8,000.

The analysis was conducted in 2020 based on the 2019 model year, and IRA earmarks joined by the $80 billion Bipartisan Infrastructure Law passed in November 2021 will greatly expand charging stations and credits for buying an EV. IRA includes about $1.7 billion for EV charging, which comes on top of the $7.5 billion earmarked in the Bipartisan Infrastructure Law. Another $12 billion is dedicated for clean vehicles in IRA that adds to the $7.5 billion in electric transit procurement passed in 2021.

IRA also addresses the upfront cost of acquiring an EV, which can be a barrier for adoption for many consumers, by an adjustment in how a tax credit for as much as $7,500 can be used.

“Buyers would be able to use the credit as part of their down payment or as cash-back from the dealer,” explained Jason Lindquist in a RBN Energy LLC article. “The current EV tax credit requires buyers to wait until they file their taxes in the following calendar year to receive the value of the credit.”

IRA also ends the cap on EV credits and extends the credit through 2032. Previously, tax credits were capped after a manufacturer sold 200,000 EVs in the United States, with Toyota recently joining Tesla and General Motors in reaching their caps, which is followed by a gradual winding-down of the credit over two quarters. Nissan and Ford had sold 166,000 and 157,000 EVs in the United States, respectively, through the end of 2021, according to Bank of America.

The August law does place limits on EV credits, which are not available for cars with a manufacturer’s suggested retail price over $55,000, and vans, pickups, and SUVs with a listed price over $80,000.

“A key provision is the extension of tax credits for consumers purchasing electric vehicles ($7,500 for new EVs and $4,000 for used EVs), but new rules mean it may be a while before those credits are actually applicable,” said Anjali Bhatt with the Peterson Institute for International Economics (PIIE).

Bhatt noted for an EV to qualify for a tax credit by 2024, “40% of the critical minerals in its battery must be “extracted or processed” in the U.S. or a country with which the U.S. has a free trade agreement (or greater than 40% recycled in North America).” The requirement increases to 80% by the end of 2026.

“That’s just the requirement for where the batteries should be manufactured or assembled — 50% in North America by 2024 and 100% by 2029,” said Bhatt. “Complicating matters further, the rules simply exclude any critical minerals from or batteries manufactured in ‘foreign entities of concern’ by 2025 and 2024, respectively — essentially barring China from the supply chain.”

Bhatt highlighted the practical problem of cutting China, the world’s third largest producer of lithium and a global leader in lithium-ion battery markets out of the supply chain, and the challenges in tracing the source of the minerals and production. According to the U.S. Department of Energy (DOE), the United States imports more than 80% of its rare earth elements from offshore suppliers.

“Industry experts say all these rules mean that no EVs on the market qualify for the tax credits,” said Bhatt.

Cobalt, copper, lithium, nickel, and rare earth elements are essential minerals in building EVs and batteries, but the production and processing of these minerals are concentrated in a few countries. In September 2022, the DOE announced $156 million in funding for a critical minerals refinery, with the funding sourced from the Bipartisan Infrastructure Law. When built, the refinery would process coal waste and ash, acid mine drainage, and discharged water to extract, separate, produce, and refine rare earth elements and other critical minerals. Obviously, it will take years to construct the refinery, forcing sourcing outside the United States.

According to PIIE, Australia is the largest producer of lithium, followed by Chile, China, and Argentina. For cobalt, the Democratic Republic of the Congo is by far the largest producer with a 69% market share, followed by Russia, Australia, Cuba, and Canada. Chile is the world’s top producer of copper, followed by Peru, China, Congo, and the United States. Indonesia accounts for 39.4% of the global production of nickel, followed by Philippines, Russia, New Caledonia, and Australia. For rare earth elements, China has the world’s largest reserves, double the size of Vietnam’s, which is the second biggest producer. Russia and Brazil are third with similar amounts, with India the fifth largest producer.

PIIE notes the lack of transparency in compiling the list of largest producers obfuscated by the fact companies that are mining and processing these minerals are not necessarily incorporated in the country with the reserves.

“China’s control over the global value chains involving critical minerals and REES extend beyond what is commonly assumed,” stated PIIE in a working paper entitled, “Green Energy Depends on Critical Minerals. Who Controls the Supply Chains?“

Of the top five companies producing rare earth elements, three are incorporated in China — which combined account for 65.3% of global output, and one is in the United States with 15% of global production. Other Chinese companies add another 3.3% of global output capacity.

“Risks related to the geographic distribution of production are of special concern,” said PIIE. “The concentration of production in one or a few counties makes the supply chains relying on these minerals vulnerable not only to market power and logistical risks, but also to geopolitically induced disruptions, especially through trade restrictions.”

Lucian Pugliaresi, president of Energy Policy Research Foundation Inc., in testimony before the House Committee on Energy and Commerce in June 2022 highlighted risks to the EV and battery supply chain exacerbated by Russia’s invasion of Ukraine in February. He testified “the U.S. will require what can only be described as a massive increase in critical minerals and materials to meet the requirements of the energy transition.”

While the IRA along with the Bipartisan Infrastructure Law provide the heft in helping drive the energy transition to EVs, formidable challenges in securing the material for greater adoption and to reach critical mass might very well take longer than current analysis suggest.

“The energy transition is going to take time, likely many decades, and may, in the end, prove more elusive than current expectations,” said Pugliaresi.

 

Expand your knowledge

Read more analysis and commentary by our analysts Brian Milne, Troy Vincent, and Karim Bastati on our Energy Insights page.

About the author
A 25-year veteran of the energy industry, Brian L. Milne serves in multiple roles, including editor and analyst. He has delivered dozens of presentations on various topics related to the energy markets and has been quoted widely in the media, including The Wall Street Journal, Barron’s, USA Today, CNN, and major regional news outlets. Milne has authored numerous articles for international magazines exploring market dynamics and providing forward-thinking commentary and analysis. A graduate of Monmouth University in New Jersey, he has a B.A. in history and an interdisciplinary in political science (magna cum laude).