Hybrids Win Big Under IRA

Hybrids Win Big Under IRA

August 17 2022

The surprise feature of the Inflation Reduction Act is that a “QUALIFIED NEW CLEAN VEHICLE" sold in the US can have a battery pack as small as 7KW to qualify for the full $7,500 credit off the purchase price. Hybrids of many vehicle types are already on the market from the big legacy auto companies. They have both a small battery that provides 15 to 30 miles of electric-only range and a smaller than usual gasoline engine for highway driving. These vehicles, even with their gas engines, will soon qualify for the full credit as long as they meet the mineral content and battery assembly provisions of IRA.

Toyota and Honda hybrid sedans already on the market are priced around $25,000 to $30,000 and now will potentially cost $7,500 less with the tax credit. Pure electric vehicles, which usually have batteries that are 60 to 120 KW (ten to 15X larger), also qualify. However, the Tesla Model 3 has an MSRP of over $55,000 and the Model Y is at $66,000, making them far less affordable to middle class Americans. The mainstream press has focused on which pure EV vehicles from Tesla, Ford and others will qualify for the credit, but the big beneficiaries of IRA will be the hybrids. They will not only slaughter Tesla and other pure EVs on price but also displace sales of pure gasoline vehicles, whether sedans, SUVs or pick-ups. A standard Toyota Camry costs $25,000 while a standard Camry hybrid now costs $27,000 (going down to ~$19,500). Many are upset that the IRA promotes gas burning hybrids, but the die is now cast.

Toyota introduced the Prius hybrid about 20 years ago. It had a small (less than 2KW battery pack) to supplement its gas engine. It didn’t plug in, and the gas engine provided the electricity to charge the battery. The technology is effective at achieving very high MPG efficiency; the battery provides the extra horsepower for acceleration that allows for a small fuel sipping four-cylinder engine for steady cruising. Out of the box, the Prius (and the Honda Insight) achieved MPG numbers in the high 40s to low 50s. Many big car and truck lovers make fun of the Prius folks, but the gas guzzlers pay $1,500 a year more for gas. Today, the Prius Prime has an 8KW battery that can be plugged in to charge and can go about 30 miles on its battery alone. The Honda Insight can go 80 miles on its battery alone and the EPA rates both cars at over 50 MPG. There are a slew of other vehicles (large and small) that are offered in the hybrid flavor.

The challenge for all automakers seeking the IRA $7,500 credit for their cars and trucks is meeting its content and manufacturing requirements. The IRA mandates that starting in 2023, 40% of the value of the minerals in the battery (lithium, nickel, manganese, iron, cobalt, etc.) must be sourced from the US or our free trade partners. This includes most of North and South America but doesn’t include China – and China currently dominates battery supply chains. Further, starting in 2023, 50% of the cost of refining and assembly of the materials into actual batteries must be in the US or our free trade countries. These figures ratchet up each year thereafter. Finally, the vehicle must be assembled in North America.

The global auto companies are scrambling to make qualifying batteries. Tesla is the only company manufacturing EV batteries at scale in the US at Giga Nevada and is presently building out further capacity in Austin, TX. It should do well even though some of its cars are presently priced above the limits allowed by IRA. Ford, GM, Hyundai and others have announced plans to build US battery factories, but they are still a few years away.

The IRA’s 150k and 300k income limits for married couples will make low priced hybrids really attractive for most Americans but reduces the number of customers for the high priced, pure EV Teslas, Fords and GM cars and trucks.

With limited qualifying batteries, automakers are incentivized to put them into hybrids. 70 KW of batteries can either be used to make one pure EV and generate one $7,500 tax credit or the 70 KW of batteries can be used to make ten 7KW hybrids to generate ten $7,500 credits. It seems logical that when companies obtain qualifying batteries, most will put them into hybrids.

The IRA will be good for US jobs and the economy, but the knee jerk reaction from some has been that it’s not great for cutting emissions. We need to stop making gas and diesel engines altogether, and this deal will indefinitely perpetuate them. Hybrid SUVs and Pickup Trucks that will have big gas engines will get the credit too. Joe Manchin, the lynchpin for the IRA, is the Senator from West Virginia where Toyota has a large factory. Of all the global auto companies hybrid focused Toyota has been the most opposed to building pure EVs.

This may be a blessing in disguise as we probably don’t have nearly enough lithium, nickel and cobalt to make the full suite of batteries we need to store power for cars and trucks, homes and utility scale storage. For the next five years, using the limited battery supply we do have to build hybrids that burn ~30% less fuel and produce ~30% less emissions isn’t perfect, but it’s good enough for now.

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