New loans and grants in the Inflation Reduction Act aim to accelerate the electrification of the transportation system. This article explores how effective the funding may be in supporting clean vehicle manufacturers and electrifying the sector.
The Inflation Reduction Act (IRA) includes two programs that support the domestic production of medium- and heavy-duty electric vehicles (MHD EVs): the expansion of the Advanced Technology Vehicles Manufacturing Loan Program, which funds up to an additional $3 billion in loans to build new manufacturing facilities for clean vehicles, and the Domestic Manufacturing Conversion Grants for Electrified Vehicles Program, which provides $2 billion for grants to retool existing auto manufacturing facilities for clean vehicle production. However, questions remain about how effective these programs will be in supporting MHD EV manufacturers.
In this blog post, we explore the possible implications of these programs for manufacturers of MHD EVs, the dynamics of price and demand related to MHD EVs, and government spending on MHD EVs. We further highlight some uncertainties surrounding transportation electrification that may make these programs less effective or more expensive than we might otherwise expect.
Manufacturing Medium- and Heavy-Duty Electric Vehicles
A significant barrier for new MHD EV manufacturers is the high start-up cost. Long lead times between technology development and payment can combine with the start-up costs to make it difficult for new manufacturers to maintain a steady cash flow. The newly available loan program addresses these challenges by providing access to debt capital that’s priced at US Treasury rates with flexible or custom financing for manufacturing MHD EVs or their components. By providing easy access to capital, the loan program can reduce barriers to entry and, hence, encourage competition.
In addition, transitioning to MHD EV manufacturing can be quite challenging for legacy diesel MHD vehicle manufacturers, because assembling MHD EVs differs substantially from the assembly of MHD diesel vehicles and may need to evolve constantly to accommodate developments in battery technology. As a result, retooling the existing diesel MHD vehicle facilities for MHD EV production requires hiring new experts, installing new equipment, and obtaining additional permits. Overall, these costs may add up to millions of dollars. General Motors, for example, plans to invest $491 million to revamp its assembly plant in Marion, Indiana, to support the production of EVs.
The newly available conversion grants can cover up to 50 percent of the retooling costs and help ensure that the existing MHD diesel vehicle manufacturing plants remain operational as converted MHD EV manufacturing plants, rather than shutting down altogether.
Prices and Demand
Given the nascence of the MHD EV market, the current low levels of demand create another major challenge for manufacturers in terms of economies of scale. Uncertainty about the volume of vehicles that automakers will need to produce over the coming years can increase the cost of the materials, as manufacturers may need to pay higher prices for smaller orders of parts and materials. Boosting demand for these vehicles will be crucial in resolving this barrier to efficient planning and production.
In the first blog post of this series, we cite the high purchase price as an important factor that explains the current low demand for MHD EVs. Conversion grants and loans through the IRA can address high purchase prices to some extent because the provisions can enhance the ability of manufacturers to produce MHD EVs (which ultimately can lead to lower manufacturing costs) and encourage competition (which can reduce market power).
The loans and conversion grants, combined with purchase incentives for fleets, can help increase the demand for MHD EVs, which can bring down the manufacturing costs even further through economies of scale. However, as we detail in our previous blog post, the ability of these programs to reduce the price of MHD EVs also hinges on the price of critical minerals, a key determinant of battery costs. The demand for MHD vehicles will affect the demand for critical minerals; the US government has provided some funding through the IRA and the Infrastructure Investment and Jobs Act to ensure that supply matches the increased demand and avoid any negative fallout with the prices of critical minerals.
The level of demand for MHD EVs also depends on several other factors that feed into the total cost of ownership. As an example, consider the cost of fueling trucks. A 2021 survey of motor carriers and owner-operators by the American Transportation Research Institute found that trucking companies spend, on average, $0.40 per mile to fuel the trucks in their fleet; this cost can add up substantially over the lifetime of the vehicles. Thus, a fleet’s decision to purchase EVs is likely to depend on the relative cost of EV charging compared to fueling diesel vehicles—transitioning to EVs may not make economic sense for the fleets if fueling diesel trucks is cheaper.
The US Energy Information Administration forecasts that diesel prices will drop by 26 percent from 2022 levels, due to limited growth in global demand and increased production. Unfortunately, such a drop can reduce the cost of owning diesel trucks and discourage the adoption of MHD EVs. Moreover, additional diesel production through new drilling projects, such as the recently approved $8-billion project to drill for oil in National Petroleum Reserve in Alaska, could exacerbate these trends.
Successful electrification of the transportation sector will depend on the ability of policies to keep the price of diesel fuel high relative to the price of charging EVs. For diesel prices to remain at their current levels while the demand for diesel declines, the supply must decline to the same degree as the decreased demand. A report by Forbes claims that the decline in supply will match the decline in demand if oil production decreases by a third compared to current production in less than ten years.
A shift away from oil production thus can motivate a shift toward EVs, which will be crucial for electrifying the transportation sector and can help accelerate the energy transition more broadly. To that end, some large oil and gas companies have been diversifying their energy operations to include renewables and other low-carbon technologies.
As another example, consider the standards for heavy-duty engines and vehicles put forward by the US Environmental Protection Agency. These standards potentially increase the manufacturing cost of diesel trucks by requiring the vehicles to incorporate emissions reduction technology, whereas the standards would not increase the cost of producing MHD EVs, which have zero tailpipe emissions. The relative difference in the manufacturing cost can reduce the total cost of ownership of MHD EVs compared to diesel trucks. In December 2022, the Environmental Protection Agency finalized the strictest emissions standards yet on commercial MHD engines. Recently, the US House of Representatives voted to overturn these rules, but President Joe Biden may veto that attempt. The stringency of the final rule likely will affect the demand for MHD EVs in the coming years.
The total amount of government spending on the grant and loan programs depends on the extent to which manufacturers apply for and receive available funds. This volume of applications in turn will depend on how easy it is for manufacturers to participate in these programs. For example, note that the Advanced Technology Vehicles Manufacturing Loan Program has existed for light-duty EVs since 2007; however, the funds hardly have been touched for over a decade. A report by the United States Government Accountability Office reveals that most applicants find the application process lengthy and burdensome, with the costs of participating outweighing the benefits to companies. Whether the loan program in the IRA will have a lower burden of participation is yet to be determined. Participation in the loan program also will depend on whether these loans compete with private-sector loans.
In addition, government spending on the loan program for EVs will depend on how many manufacturers pay off their loans. Two of the five previous beneficiaries—Fisker and Vehicle Production Group—defaulted on their loans in the light-duty loan program.
Given the inherent uncertainties in developing new technologies, some risk is necessary to advance the MHD EV sector. However, the effectiveness and total cost of the loan program for MHD EVs will depend on the ability of the Loan Programs Office to carefully measure the technological progress of manufacturers, in addition to monitoring the loan portfolios for potential default risks.
The case of Nikola Corporation provides a cautionary tale in the MHD EV sector. This all-electric truck manufacturing company launched in 2014. During its launch, many all-electric auto manufacturers were going public through special-purpose acquisition companies. Nikola acquired over $500 million in investments using fake videos (such as one in which a truck was rolled down a hill rather than driven down) and false claims of having a functioning heavy-duty EV. The founder was convicted of fraud in 2022. This example highlights the need to evaluate and reward technological progress effectively.
Electrifying trucks and buses is an important step toward reducing the environmental impacts of the transportation sector. On the way toward that goal, however, challenges associated with MHD EV manufacturing can result in high production costs and prices, which in turn can prolong low levels of demand. The grant and loan programs in the IRA could address these concerns by enhancing the ability of manufacturers to produce MHD EVs and encouraging competition. However, the extent to which these programs increase the demand for MHD EVs depends on whether the supply of critical minerals matches the increased demand for these rare materials, the evolution of factors such as diesel prices, and the emissions standards placed on vehicles.
The grant and loan programs introduced in the IRA to support EV manufacturing demonstrate a commitment by the government to manage these trends and accelerate the electrification of the transportation sector. But ultimately, the extent to which IRA funding will facilitate domestic MHD EV manufacturing—and at what cost—remains to be seen.
Special Series: Electrifying Large Vehicles
This special blog series examines the incentives in the Inflation Reduction Act of 2022 that encourage the electrification of medium- and heavy-duty vehicles, whether through tax credits for commercial electric vehicles, charging stations, domestic manufacturing, or electricity infrastructure. To see the specifics, read other articles in the series: