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Sale of Subsidy Rights under IRA

Companies in the domestic secondary battery industry are now selling their rights to receive subsidies under the U.S. Inflation Reduction Act (IRA) to third parties. LG Energy Solution has already sold a portion of its subsidy rights, while SK on is considering a similar move. The rationale behind this strategy is to realize cash early, given the lengthy process of subsidy disbursement.

Transfer of Subsidy Rights

Recent reports indicate that LG Energy Solution transferred a portion of its U.S. Advanced Manufacturing Production Credit (AMPC) rights, valued at 676.8 billion won (US$495.10 million), to other companies. SK on is also contemplating the transfer of its subsidy rights, having obtained a total of 617 billion won in subsidies last year.

Eligibility for Subsidies

Companies producing and selling batteries in the United States are eligible for subsidies under the IRA AMPC. This includes tax credits, cash refunds, and the option to transfer rights. A market exists for the buying and selling of subsidy rights, with discounts available for early sales.

Financial Considerations

LG Energy Solution and SK on are selling subsidy rights due to immediate cash needs. Despite calculated expected subsidies, the actual disbursement by the U.S. government typically occurs in October of the following year. Both companies are anticipating the receipt of funds by the end of the current year.

Capital Expenditures and Investments

LG Energy Solution and SK on have planned significant capital expenditures this year. However, operational challenges have led to cash shortages, prompting the sale of subsidy rights. SK on is exploring various funding options, including policy fund loans and joint investments. LG Energy Solution is adjusting its investment strategy accordingly.

Pressure from Joint Venture Partners

LG Energy Solution is facing pressure from its North American joint venture partner, General Motors (GM), to share subsidies. Ultium Cells LLC, a joint venture between LG Energy Solution and GM, paid dividends to GM, likely funded by the sale of subsidy rights.