A potential Trump victory in the 2024 US election and his promise to abolish the Inflation Reduction Act (IRA) have South Korean energy firms scribbling out contingency measures to lessen the impact.
The threat of the IRA abolition is prompting companies like LG Electronics to consider selling related incentive rights. The short-term liquidation strategy aims to hedge against potential changes in subsidy policies.
Incentive-rich
According to industry sources cited by ChosunBiz, LG Electronics is contemplating selling the Advanced Manufacturing Production Tax Credit (AMPC) incentive rights provided by the US government to a third party. Under AMPC regulations, a refund of $35 per kWh is offered for battery production, $10 for module stages, and a 10% subsidy for the production cost of processed battery positive or negative materials.
It is estimated that LG Energy Solution (LGES), a joint venture of General Motors (GM) and SK On in the state of Georgia, could receive approximately KRW1.7 trillion (about US$1.27 billion) in AMPC incentives in 2024. It could receive as much as KRW3.3 trillion in 2025.
With its factory in Georgia, SK On is expected to receive KRW840 billion in 2024 and expand to KRW2.7 trillion in 2025. Samsung SDI, operating the Stellantis joint factory from 2025, is projected to receive AMPC incentives of KRW400 billion in 2025, KRW800 billion in 2026, and KRW1.6 trillion in 2027.
Companies have two options for utilizing IRA incentives: directly obtaining subsidies or selling the incentive rights to a third party. For example, a company expecting KRW1 trillion in IRA incentives could sell the rights to a financial institution for KRW950 billion (at a 5% discount).
Some you win, some you lose
Selling the rights allows for early cashing in, even though the total amount received is reduced. The process from settling US battery production and submitting AMPC incentive applications to receiving subsidies typically takes approximately a year.
Considering the upcoming US presidential election in November 2024, the potential impact of a Trump presidency on the electric vehicle and battery industries in South Korea, and the commitment of Joe Biden to IRA as a key policy, companies are taking precautionary measures such as selling AMPC rights to mitigate risks.
In addition to the battery industry, renewable energy companies in fields like solar and wind power that received AMPC incentives are facing similar challenges. First Solar, a US solar company, sold a US$700 million AMPC incentive to financial data service provider Fiserv in December 2023. Industry players are keeping a close eye on Hanwha Solutions, which is anticipating a KRW1 trillion, for its next move.
Insiders in the battery industry emphasize that selling IRA rights is a viable option, considering factors such as economic conditions, interest rates, cash flow, investment execution periods, and future political variables.
