Electrification efforts of the US transportation sector are strong and growing. More than 800,000 fully electric vehicles (EVs) were sold in the country in 2022, which is nearly 60% of all vehicles sold and double the year before. In comparison to recent years, EV sales in 2022 affirm that policy efforts to encourage EV deployment are taking root and consumer appetite for electrified transportation is growing. Behind this and the segment’s continued success are several key threshold issues relevant to certain market participants affected by EV penetration.
Commercially successful siting of chargers
Continued emphasis and aggressive pursuit of public EV charging station development was a big issue in 2022 and will remain so in 2023 and beyond. Absent a robust network of fast public charging opportunities, consumer range anxiety will persist, which will necessarily hamper EV sales to certain market segments (namely, those that need transport for long distances or live in underserved areas).
Various policy incentives are slowly facilitating increased public charging station development. State zero-emission requirements, already adopted in California and New York, will help encourage increased charging station development by providing certainty to developers and potential developers that a robust charging market will exist. The Department of Transportation’s approval of state-development National Electric Vehicle Infrastructure (NEVI) Formula Program implementation plans was a key trigger for public charging station development. Such approval permits the disbursement of US$5bn in federal grant funds, enacted through the NEVI programme within the 2021 Bipartisan Infrastructure Law (BiL), for the sole purpose of developing public charging stations. Although implementation of state plans is moving slowly, increased development through NEVI funding is anticipated in 2023 as states make more information available about funding application opportunities and eligibility criteria.
In addition to the development itself, continued focus on commercially successful development will also be front of mind for charge point operators (CPOs) in 2023. A commercially successful development opportunity requires a circumstance whereby the CPO can have an advantageous revenue stream as well as minimise risk exposure arising from the siting and operation of the stations themselves. This raises two issues: the best way to monetise charging infrastructure and the best type of contractual protections in infrastructure licensing or site host agreements. With respect to the former, innovation in utility rate design and demand charge application is likely to remain a relevant point of discussion or an obstacle in 2023.
Battery component and critical mineral supply sourcing and recycling
Questions surrounding the supply chain of critical minerals and battery components have been percolating in the EV sector for several years. The BiL’s manufacturing, processing, and recycling funding opportunities further highlighted those issues. However, the Inflation Reduction Act’s (IRA’s) EV tax credit revisions and, in particular, Internal Revenue Code (Code) Section 30D’s requirement that critical minerals and battery components be domestically sourced (or sourced from certain other nations in some instances) brought these issues to the forefront of nearly all discussions relating to EV development. It should be no surprise then that a critical issue in the EV sector in 2023 will concern the adequacy of battery component and critical mineral supply chains to facilitate production of EVs that are eligible for IRA-approved tax credits. In addition, recycling and second-use opportunities will likely be an equally relevant issue in 2023.
Questions relating to these issues are broad in scope. For example, the availability of funding opportunities for battery and mineral refining, processing, and manufacturing requires a close analysis of qualification criteria for such funding as well as an appreciation for the conditions that may be imposed on funding recipients. In addition, market participants are still waiting for the IRS and Treasury’s issuance of guidance—now expected in March—that will officially explain how the IRS and Treasury will apply Section 30D critical mineral and battery component thresholds for purposes of determining whether an EV is eligible for tax credits.
EV infrastructure and interconnected utility data protection and cyber security
An issue that has received little attention in prior years concerns the extent to which EVs and EV infrastructure may be used as an entry point for hackers or bad actors to disrupt the US electric grid. This concern was highlighted briefly following attacks on US power physical assets in the second half of 2022. And, although the Department of Transportation has developed uniform standards for EV charging infrastructure in response to NEVI’s mandate, those standards are likely viewed as insufficient for purposes of this issue. Notably, those standards are only legally binding on assets that are developed with NEVI funding, which renders the standards inapplicable to any fully privately funded charging infrastructure projects.
As such, a key issue in 2023 is whether undeveloped cyber security and data protection standards and requirements applicable to EV infrastructure may create vulnerabilities for the safety of consumer data and opportunities for hackers to exploit as an entry point into US electric grid disruption attempts. EV sector participants should carefully monitor any developments relating to the regulation of data privacy or cyber security imposed on CPOs or the regulation of the same imposed on interconnected utilities or EV manufacturers. This raises key questions about where jurisdictional authority may exist to impose such regulatory oversight or standards as well as the practical consideration of doing so.
Vehicle-to-grid implications
Although not as immediately evident as the previous three items, vehicle-to-grid (V2G) development and the issues and opportunities that development raises are no longer hypothetical in nature. Bidirectional charging enables EV customers or fleet owners to utilize V2G capabilities, which can facilitate market access. In particular, EV customers or fleet owners can utilise bidirectional chargers and V2G capability to harness their EV batteries for transport in times of need and for energy storage and discharge in times when transportation is not necessary or when market dynamics create monetization opportunities for the stored energy. This opportunity is especially promising for fleet owners because fleet energy, in the aggregate, could provide substantial opportunities for capturing previously unavailable revenue opportunities.
Of course, this opportunity raises legal and regulatory issues applicable to the individuals or entities participating in V2G structures. V2G may trigger the need for energy services management functions between the EV operator and either its owner or the CPO. In addition, EV and EV fleet owners must be mindful of market access rules and market participation requirements, whether it be retail or wholesale energy markets. Those different markets can and do have different regulatory requirements and implications, which must be considered and understood prior to participation.
EV tax credit eligibility and access
Previous reference was made to the IRA and the critical mineral and battery component requirements embedded therein for tax credit eligibility. Under the IRA, Congress significantly revised the tax credit incentive mechanism of the Code that relates to EVs. Prior to the IRA, the Code provided purchasers of new EVs with a tax credit of up to US$7,500 so long as the manufacturer of the EV purchased had not triggered a 200,000-unit sales cap, at which point the tax credit was no longer available.
V2G development and the issues and opportunities that development raises are no longer hypothetical in nature
The IRA overhauled the Code in several important respects. The IRA expanded tax credits to “clean vehicles,” which encompasses both qualified plug-in electric drive motor vehicles and fuel cell vehicles—thereby affirming the Administration’s commitment to both EV and hydrogen technology deployment in US markets. The IRA removed the previously mentioned sales cap and reformulated eligibility provisions so that tax credit eligibility turns on the purchased vehicle’s MSRP recommendation, the purchaser’s adjusted gross income, final assembly locations, and critical mineral and battery component sourcing and manufacturing. The IRA also added a new credit for previously owned clean vehicles and a new credit for qualified commercial clean vehicles.
The implementation of many of the IRA’s revisions was left opaque in the statutory text. For that reason, in preparation for several of those new revisions taking effect in 2023, the IRS issued numerous documents at the end of 2022 that were intended to provide some clarity and guidance to market participants about tax credit eligibility. Notwithstanding these revisions, questions remain, and manufacturers and consumers alike must carefully consider the IRA’s specific provisions and the IRS’s application of those provisions when determining whether certain models will or will not trigger tax credit eligibility.
About the author: Morgan Lewis partner Levi McAllister is head of the firm’s EV Working Group and Energy Commodity Trading and Compliance Working Group
