TL/DR –
South Korean secondary battery producers LG Energy Solution and SK are looking to sell the rights to subsidies under the US Inflation Reduction Act (IRA) to improve cash flows. The subsidies are linked to the firms’ US sales and manufacturing operations, and the process to receive the subsidies typically takes more than a year. The two companies, which have yet to receive the subsidies from last year, plan to significantly boost capital expenditure this year, but face balance sheet pressures; LG’s operating profit fell by more than half in Q1 2021, while SK has reported losses for ten straight quarters.
Secondary Battery Industry Begins Sale of U.S. Inflation Reduction Act Subsidy Rights
The U.S. secondary battery industry, including LG Energy Solution and SK on, has started selling off rights to receive the U.S. Inflation Reduction Act (IRA) subsidies. Faced with a long subsidy reception process, these firms are opting to trade rights for early cash realization.
Battery industry sources stated that LG Energy Solution transferred a portion of its rights to the U.S. Advanced Manufacturing Production Credit (AMPC) last year, valued at 676.8 billion won (US$495.10 million), and is contemplating selling the remaining part. Meanwhile, SK on, which secured the right to receive 617 billion won in subsidies, is also considering transferring its rights.
Companies manufacturing and selling batteries in the U.S. can receive the IRA AMPC. This program offers options like cash refunds and transferring rights after receiving cash from other taxpayers. In the U.S., a market exists for buying and selling these subsidy rights, with early sales possibly discounted.
Despite discounts, LG Energy Solution and SK on are eager to sell their subsidy rights due to immediate cash shortages. Each firm calculates expected U.S. subsidies after quarterly battery deliveries and includes these in their operating profits. However, actual U.S. government payment isn’t received until the following October, reflecting the previous year’s payment. Both companies are yet to receive the subsidies, which are expected to arrive by year’s end.
LG Energy Solution and SK on have planned considerable capital expenditures this year, with trillions of won being invested in factory expansions. Yet, with LG Energy Solution seeing a 53.5% decrease in operating profit in the first quarter and SK on suffering losses for ten consecutive quarters, securing funds for investments is challenging. SK on is exploring various funding sources, including U.S. Department of Energy policy fund loans, joint investments with Hyundai Motor, and selling U.S. subsidies.
Firms that have been securing funds through borrowing are now considering liquidating subsidies due to shrinking cash reserves and high-interest rates. One industry insider explained, “Borrowing funds currently involves high interest rates, making it more beneficial to secure cash through the sale of subsidy rights, even at a discount.”
LG Energy Solution is under pressure from its North American joint venture partner, General Motors (GM), to share subsidies. After selling the subsidy rights, it’s estimated that LG Energy Solution paid dividends of 197.36 billion won to non-controlling interest GM.
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