EU lawmakers are reacting to events elsewhere to strengthen the domestic battery sector
EYES ON THE PRIZE
Europe wants to secure its share of a battery sector expected to be worth $250 billion annually by 2030
PROTECTIONIST TENDENCIES
The United States’ recent policy package is the latest in a line of increasingly protectionist moves from major economies linked to the energy transition
KEY QUOTE
National targets and carmaker strategies may differ in timeline and scope but all require one thing in common: batteries
In many countries around the world, vehicles actually emit the biggest share of greenhouse gas emissions than any other sector. Therefore, without effective policies in place, climate targets will simply not be achieved. In Europe, the transport sector accounts for around a quarter of emissions, most of which comes from road transport. Transport, as a whole, is also the only sector where emission numbers are still going up rather than down. The EU has set targets and regulations that aim to phase out the sale of new petrol and diesel cars by 2035. Emission-busting benchmarks for heavier vehicles are also in the mix. An electric vehicle boom is expected and, to some extent, is already happening. According to the European Commission’s transport plans for this decade, the EU executive wants to see 50 million electric vehicles on the roads by 2030 and for nearly all vehicles to be zero-emission by mid-century. Carmakers have taken note of both the road ahead and the one already travelled. Failure to meet targets comes with the risk of heavy fines and manufacturers have already announced their own e-mobility ambitions. The change of direction is starting to pay off. In the EU, records continue to be set: November 2022’s battery-electric car sales increased 31% year-on-year and the overall battery-electric market share topped 17%. The year’s overall figures are still being crunched. As for the EU’s neighbours, more than a third of new car sales in the UK were battery electric in December, very nearly achieving parity with petrol. Norway, where nearly 80% of all 2022 sales were battery-powered vehicles, continues to lead the way. National targets and carmaker strategies may differ in timeline and scope but all require one thing in common: batteries. According to EU estimates, an additional 1.5 terawatt-hours (TWh) of battery capacity will be needed by 2030 to meet vehicle demand alone; no easy task. The Fraunhofer Institute for Systems and Innovation, a German research centre, estimated that annual battery production capacity in Europe would top 124 gigawatt-hours (GWh) by the end of 2022, 500 GWh by 2025 and the magic 1.5 TWh mark by 2030. While much of the world’s production capacity is located elsewhere, manufacturers are being lured to European shores by appealing regulations and the attractive business case that is developing as a result. But a number of factors may yet derail the continent’s aspirations.
SPARKING DEMAND
Europe wants a piece of a battery market that the electric vehicle industry estimates will be worth more than $250 billion annually by 2030. Currently dominated by producers in China, Japan and Korea, there is a lot of catching up to do. The first stones were laid in 2017, when the European Commission launched the EU Battery Alliance (EBA), a scheme aimed at bringing together firms that operate along the entire supply chain, from mining and refining of crucial materials to assembly and shipping of batteries. Initially touted as an “Airbus for batteries”, the alliance has since morphed into more of an industry forum than a multinational conglomerate of a scale comparable to Europe’s top aircraft builder. Ismail Ertug, a German member of the European Parliament, says that the Battery Alliance is a success story, pointing to the number of gigafactories that have been set up and are in the pipeline. Seven such facilities were up and running by the end of 2022. 
“The pandemic caused delays and yet the EBA is still ahead of its plans and is set to meet 69% and 89% of its increasing demand for batteries by 2025 and 2030, respectively,” Ertug adds. The alliance has guided priorities while another EU policy known as the Important Projects of Common European Interest (IPCEI) programme has allowed governments to team up with one another and pump extra cash into gigafactories and refineries. By signing up for goals that benefit the bloc as a whole, rather than pursue just national interests, governments can benefit from relaxed state aid limits. Similar IPCEIs have launched or are planned for semiconductors, hydrogen and solar panels. Philipp Lausberg, an analyst at the European Policy Centre, a non-profit organisation, says that the projects have succeeded in setting a strategic focus in European industry and that large public investments tend to trigger private investment. “However, the IPCEI tool as it stands has favoured large countries and large companies over smaller ones, distorting competition in the EU and running counter to the spirit of the Single Market,” Lausberg adds. This has not stopped the European Commission over the past three years from approving more than €6 billion in state aid requests under two separate battery schemes, involving 12 countries. More investments are likely in the coming years as well.
QUALITY OVER QUANTITY
Europe’s lawmakers know that its industries cannot compete with its Southeast Asian rivals in terms of scale or volume. BloombergNEF, an energy finance research group, estimates that China’s production capacity will be three times that of the rest of the world combined by 2025. Instead, the EU is going after quality rather than sheer quantity. In 2022, the bloc agreed on a new regulation to govern how batteries should be manufactured with a view to creating a gold standard for power packs. Under the new rules, manufacturers will have to perform advanced levels of due diligence to ensure that any batteries sold in Europe do not come from supply chains that abuse human rights or environmental standards. Batteries will also have to adhere to a maximum carbon footprint by 2027 and key raw materials used in their production such as nickel and lithium will have to hit recycling targets by 2031. Ismail Ertug, who contributed to the European Parliament’s efforts to fine-tune the regulation, insists these extra requirements will not dissuade the industry, as investments are already being made. “The Battery Regulation will play a key role in creating a favourable environment for the battery industry to thrive,” Ertug says, adding that the update to the existing rules — originally written in 2006 — was “well-timed, even overdue”.
ALLIANCE SUCCESS
The EU’s European Battery Alliance was established in 2017 to support a domestic battery industry
BATTERY PASSPORTS
Included in the proposals is the idea of a so-called “battery passport”, which will be required for all electric vehicle batteries. It will be a digital record that includes information about the specific battery model, its intended use and other pertinent information needed to service and replace it. Passport advocates hope that it will help bring down the price of repairs and maintenance, help service providers retrain from combustion engines to electric powertrains and boost recycling efforts, which will be streamlined by such a harmonised approach. Julia Poliscanova, from NGO Transport & Environment, points out that the new rules could also influence manufacturers beyond the EU’s regulatory reach. “Its battery passport concept is a global blueprint, and other major markets such as the US, South Korea and others should adopt similar measures as soon as possible to benefit from economies of scale,” Poliscanova says. Mark Mistry of the Nickel Institute, an industry body, notes the high interest in Europe’s batteries regulation from markets outside the EU. “We are certain that the new regulation will also impact actors in the EV battery value chain outside the EU,” he says. However, Mistry adds that some of the most important parts of the regulation—methodologies for calculating recycled content targets and carbon footprints—will actually be worked out in the coming years as part of follow-up legislation. Specific battery rules will fuel demand. “[But the biggest regulatory driver towards electric cars are European vehicle CO2 standards,” says Poliscanova. She adds that the certainty provided by the standards offers carmakers certainty about the direction of travel. Despite complaints from the Italian government and parts of Germany’s coalition government, it is unlikely that freshly-agreed CO2 reduction targets will be rolled back, only adding further to the certainty.
UNCERTAIN FUTURE
The EU’s introduction of the carbon border adjustment mechanism (CBAM), an anti-climate-dumping tool that will slap tariffs on imports that do not meet certain sustainability criteria, could also dictate the fortune of batteries. Under a deal struck at the end of 2022, products like steel, iron, cement, aluminium and fertilisers will be hit with charges. Some extra details still need to be worked out, such as the inclusion of certain chemical precursors, which could affect battery production. If crucial ingredients like nickel, cobalt, lithium or manganese are targeted by CBAM—either in its initial phase or at a later time when there is more political will to tax imports—firms would either have to build those costs into their business plans or consider relocating their production sites outside of the EU’s regulatory reach. A new Critical Raw Materials Act is due to be published by the Commission in March and talks with countries like Australia, Canada, Chile and Kazakhstan are either already paying off or promise to yield results soon. The Commission has announced the creation of a ‘Critical Raw Materials Club’ that will bring together trading partners and will aim to set standards and channel investments to mutually-beneficial projects. Mark Camilleri, president of the Canada-EU Trade and Investment Association, says that Canada has its own grand ambitions to be a battery behemoth but that it should not be viewed just as a competitor, given the potential for cooperation between the two sides. “Canada has a role to play in supporting the development of the EU’s critical materials supply chain not just in supply, but also other areas of cooperation like developing ESG standards, sharing R&D and know-how, and encouraging investment,” Camilleri says. 
NEW TECHNOLOGIES
CBAM’s impact might also be the trigger for increased domestic mining and refining, recently bolstered by Sweden revealing its discovery of the biggest rare-earths deposit—as well as more investments in recycling. In addition to finding different ways to build existing battery designs, firms might also be persuaded to invest in more research and innovation to develop the next generation of power packs that use smaller amounts of problematic materials like cobalt. This is where the Nickel Institute’s Mistry warns that the Battery Regulation may be missing a trick by focusing too narrowly on existing technology. “It is a bit disappointing to see that the regulation only focuses on a few battery technologies when since the regulation was proposed a couple of years ago, other technologies have already been introduced,” Mistry insists. “This could potentially put some technologies at a disadvantage as they have more regulatory requirements to comply with than the newer ones,” he adds.
POLICIES VS POLITICS
If rules and regulations are one side of the coin, politics on a grander international scale is on the other. Both are set to play a substantial role in dictating how effective Europe’s battery push will ultimately be. The United States government’s Inflation Reduction Act (IRA) unlocks hundreds of billions of dollars in subsidies for industries and consumers to go green. Although still in its early days, the IRA has already stoked controversy in Europe due mainly to the lucrative purchase subsidies offered to American motorists to trade in their internal combustion engine vehicle for an all-electric, “Made in America”’ equivalent. Afraid that carmakers would move their production lines to the US in order to qualify for the perks, Brussels leaders cried foul and accused President Joe Biden’s administration of not playing fair. Washington’s lawmakers have since made tweaks to the IRA, clarifying that EU-based companies can qualify for company lease contracts. However, Brussels maintains that the policy is still discriminatory.
AMERICAN ADVANTAGE
President Biden’s IRA legislation incentivises significant EV battery production capacity in the US
IRA IMPACT
The impact on the battery industry could also be substantial. President Biden has said the IRA will channel, “Historic investments for EV battery manufacturing here at home”. According to the US Department of Energy, nearly 1 TWh of battery-making capacity is planned to be online in North America by 2030—enough to power more than ten million vehicles. The IRA’s impact on foreign investment is already paying off in other sectors. In January, South Korean firm Hanwha announced that it would inject $2.5 billion into solar panel manufacturing in the US state of Georgia. If President Biden’s subsidies spark similar battery-making investments, it would put a serious dent in Europe’s aspirations to punch above its weight on the global market. Especially given that the industry had already warned that if Europe does not get its act together, businesses may shift elsewhere. “If we don’t succeed in quickly lowering energy prices in Germany and Europe, then investments in energy-intensive production, or for new battery cell factories, in Germany and across the EU will no longer be feasible,” Thomas Schäfer, of german automaker VW, said in November 2022.
PROTECTIONIST RESPONSE
The energy price situation has somewhat improved since then, thanks to a mix of inflation-busting policies that are finally starting to work and mild weather, but it shows how delicate Europe’s business case can be when pressure is exerted. In order to keep industries sweet, the European Commission is drawing up plans to allow governments to pump more money into energy transition technologies and ward off the advances of foreign suitors. However, the EU’s tendency to move much more slowly than its global rivals is likely to play a role. Plans for an IRA-mimicking “sovereignty fund” will not appear before summer 2023, by which time Biden’s policy will be firing on all cylinders. “Europe is ready to pick up the pace significantly to ramp up the production of climate-relevant technologies,” EU industry commissioner Thierry Breton insisted during the launch of a new “Clean Tech Europe” platform in November 2023. 
HEAVY-WEIGHT ADVANTAGE
France and Germany are in favour of extra measures to help industry; however, disagreement between the 27 EU countries about how to fund them will be a factor. The Commission published its Green Deal Industrial Strategy on February 1st and more details about a “Clean Tech Act”, particularly in regards to funding, will be revealed in the coming months. A short-term policy tweak would be a loosening of the EU’s state aid rulebook, which already assesses subsidy requests with a lenient eye thanks to derogations put in place by the Covid-19 pandemic and Russia’s illegal invasion of Ukraine. According to a letter sent to finance ministers by EU competition boss Margrethe Vestager, the plan is to relax the rules so that governments can invest more in renewable energy and match subsidies granted by foreign countries. Governments had until the end of January to provide their feedback on what should be eligible under the looser rules, as well as the plan for “anti-relocation investment aid”.
ECONOMIC FRAGMENTATION
The European Policy Centre’s Philipp Lausberg says there is room for more flexibility in the rules but also insists that this is not the most effective way to boost Europe’s industrial prospects and could lead to “less efficient outcomes”. “Some countries have larger financial resources than others. By relaxing state aid rules further, their advantage with respect to fiscally weaker countries will increase,” says Lausberg, which is also a point acknowledged by Vestager in her letter. “If rich states like Germany spend more on their industry than say Italy or Greece, this will further increase economic fragmentation in the EU,” he adds. Indeed, under the current generation of emergency rules, nearly 80% of all aid was granted by France and Germany. Smaller countries are already showing the strain of having to go along with industrial policies favoured by big-spending neighbours with deeper pockets. Loopholes that have helped the minnows swim with the sharks have also been closed. European capitals will also have to keep an eye on how a new deal on minimum corporate tax rates affects business. At the end of 2022, the EU agreed to implement the Organisation for Economic Co-operation and Development’s 15% rate.
HUNGARIAN INCENTIVES
Hungary, a hub for battery-making investment, has succeeded in attracting big players like Korea’s W-SCOPE and China’s CATL with a competitive 9% rate, which will have to be ratcheted up. Both companies have already committed to building gigafactories in the Central European country that will create 10,000 jobs, one of which would be the biggest in Europe when it comes online. Prime Minister Viktor Orban initially fought back against the OECD deal, labelling it a “job-killing tax hike”. He later dropped his veto as part of a wider political game currently being played with Brussels about access to EU funding.
TEXTSam Morgan