As demand for electric vehicles surges, Europe is keen to become less reliant on battery imports from Asia and the US. The development of the European battery manufacturing sector presents opportunities for investors, but barriers remain.
- Startup Northvolt has just produced its first lithium-ion battery cell at its brand-new plant in northern Sweden
- As demand for EVs surges, Europe is keen not to be reliant on battery imports from China and elsewhere
- The sector presents opportunities for investors but regulation and scarcity of raw materials pose challenges
The start of lithium-ion battery production at Northvolt’s large-scale ‘gigafactory’ in Sweden is the latest milestone in Europe’s drive to establish a homegrown battery manufacturing sector to meet an expected surge in demand from electric vehicle (EV) manufacturers.
European governments and vehicle manufacturers are keen not to become reliant on battery imports from China and elsewhere as demand grows, both to ensure security and diversity of supply, and to keep transport costs down for EV components – it’s no coincidence that Tesla produces batteries next door to its car plants.
Substantial financial backing and guaranteed orders from the big European vehicle manufacturers, together with political support, is likely to fuel substantial growth. It’s a high-value industry that will help drive the EV revolution, making it an attractive proposition for institutions seeking impact investments.
The promise that these plants will need to conform with tight EU environmental standards, including the use of low carbon power sources, also adds to the sector’s green credentials – China, the world’s leading battery manufacturer, relies heavily on coal to power what is an energy intensive industry.
But is the future of European battery manufacturing really rosy? The answer seems to be yes, but with some important caveats.
It’s a high-value industry that will help drive the EV revolution, making it an attractive proposition for institutions seeking impact investments.
There is no doubting the size of the opportunity. European EV sales are projected to rise from 1.25 million a year in 2020 to nearly 8 million a year in 2030.
To meet this demand, European battery manufacturing capacity could rise to an annual 1.35 terawatt-hours (TWh) in 2030 and 2.36 TWh in 2040 from only around 70 gigawatt-hours (GWh) – that’s 0.07 TWh – in 2021, according to energy consultancy Wood Mackenzie.
Some of that capacity will be for energy storage systems, such as those used to smooth out intermittent grid supply from renewable energy, but 94% of demand in 2040 is forecast to be for EV batteries.
“We used to talk in terms of 1GWh factories as being huge success stories: the original ‘gigafactories’. Now we’re talking about 10 to 100GWh factories becoming the norm over the next five years. That really speaks to the pace at which the battery manufacturing market has developed,” says Max Reid, a research analyst at Wood Mackenzie.
If the forecasts are right, European-based manufacturers could have a 27% share of a 5 billion GWh global battery market by 2040, surpassing the Americas’ share (11%), but still well below China and other Asian producers (62%).
The early leaders in large-scale battery manufacturing in Europe are mainly South Korean and Chinese firms with a track record in the industry. Samsung SDI and SK Innovation have plants in Hungary and plan expansions, while LG Chem is building one in Poland, and China’s CATL, the world’s largest lithium-ion battery producer, plans to open one in Germany.
Sweden’s Northvolt is the first European company to take on Asian and US rivals in large-scale lithium-ion battery manufacturing, producing its first battery commercially in December.
It has lofty ambitions and plans to raise capacity to 60 GWh in the first phase of its expansion – enough to supply 1m EVs, it says – and to more than double that over the next decade. Power for the energy-hungry plant in northern Sweden comes from the region’s huge hydropower resources.
Northvolt is a start-up, but one currently valued at around $12bn. Last summer, it secured a $2.75 billion private placement co-led by Swedish pension funds AP1, AP2, AP3, AP4 and Canada’s OMERS, alongside existing investors including Goldman Sachs Asset Management and Volkswagen. It says it has $30bn of orders lined up from BMW, Scania, Volkswagen, Volvo and others.
Northvolt is not alone. A wave of other new European-based battery manufacturers is also entering the market.
Norway’s FREYR Battery is another manufacturer taking advantage of Scandinavia’s hydro resources for power. The company is building a 2GWh capacity plant in Norway and plans to boost battery cell manufacturing capacity to more than 80GWh by 2028.
“Northvolt is not alone – a wave of other new European-based battery manufacturers is also entering the market.”
Meanwhile, Britishvolt – no relation to Northvolt – is building a 4GWh lithium-ion battery plant in north-east England with plans to expand to beyond 100GWh if it can secure the funding.
There could be more than 25 large-scale battery manufacturing facilities across Europe by 2030, if announced plans come to fruition.
Not so fast
But there is a reason it can take upwards of five years to build one of these plants. They are highly complex projects which require a plethora of safety measures, and which need to meet tough environmental regulations.
Wood Mackenzie’s Max Reid says inexperienced manufacturers may struggle to meet their ambitious expansion timetables.
“Building a factory is a difficult job and battery production is just not a smooth process. The industry has such stringent requirements compared to many others, particularly in terms of the environment that materials such as lithium can be used,” he says.
It is also not guaranteed that a plant will be able to produce battery cells at close to its nameplate capacity, due to inefficiencies in the manufacturing process.
“We really want to see what the realised production of batteries is versus the announced capacity for these big plants. There are reports of some factories around the world operating at just a fraction of their rated capacity,” Reid says.
Producing batteries in Europe is also likely to be more costly than in China, given the tighter environmental requirements and the greater use of renewables for power rather than cheap coal.
However, production close to the end user has benefits, as there are strict requirements for transportation of cells, which need to be kept at a certain level of charge to remain safe and viable.
European manufacturers may also be viewed more favourably compared to those elsewhere by institutions whose investment decisions increasingly give greater weight to environment, social and governance (ESG) factors.
The proposed introduction of so-called battery passports within the next two years could make it easier for investors to make informed decisions in this regard.
A World Economic Forum-backed initiative, the Global Battery Alliance (GBA) wants to launch these online records of the management of social and environmental risks across an EV battery’s supply chain, from working conditions in mines to energy emissions in manufacturing and improved battery recycling.
In the short-term, having to work within fast-evolving regulatory and financial support frameworks may also act as a brake on the battery industry’s development.
A group of battery industry stakeholders, including Northvolt, published an open letter to EU environment ministers in December, requesting that the implementation of the EU’s Sustainable Battery regulation – legislation with aims similar to the battery passport – should be speeded up.
The European Commission has also put forward proposals for a climate master plan benefiting green industries, including a carbon border tax which would penalise foreign companies importing to the bloc, whose manufacturing processes do not align with EU environmental standards.
But such measures may not survive the consultation process for the plan intact, leaving the industry unclear about the rules it will be operating under from 2022, when the legislation is due to be implemented.
Heavyweight producers are already running into problems with what they regard as excessive red tape. Tesla withdrew its application for €1.1 billion of EU subsidies for its battery plant near Berlin in November, as legal challenges had held up the process to such an extent that it no longer qualified for them.
Raw materials crunch
In the longer term, it will not be the ability to scale up manufacturing capacity that will be the biggest headache for the industry, but the availability of raw materials.
Europe has either no or very limited usable supply of key inputs such as lithium and cobalt and thus will be reliant on securing raw materials – or the components made from them, such as cathodes – from other regions in a highly competitive global market.
Some progress is being made in applying new techniques to aid extraction of lithium where it does exist in Europe, and in recycling chemicals for old equipment, but the continent will remain heavily dependent on imports.
“In the longer term, it will not be the ability to scale up manufacturing capacity that will be the biggest headache for the industry, but the availability of raw materials.”
These shortages are forecast to become particularly acute after 2030, as demand to meet rising battery production rises.
“We see a severe lack of supply of raw materials. It looks like we’re going to have sufficient battery production, but in terms of cathode and component production, and sourcing the raw materials, Europe’s going to be severely lacking,” says Wood Mackenzie’s Reid.
Disruption to supply chains due to the Covid pandemic is giving the world a taster for what might be in store.
Prices for battery-grade lithium are poised to rise sharply due to supply constraints in regions producing lithium salts, such as South America and China, and the ongoing logistical issues caused by the pandemic.