EU Batteries Need Export Credit Backing
As Europe races to keep up with China and the US on clean technologies, state-backed export credit agencies’ role is expected to grow.
Export credit agencies (ECAs) must step up their support for Europe’s nascent battery-manufacturing industry if the sector is to attract private investment and compete with Asia and the US, according to Dutch bank ING.
Lithium-ion batteries are a core component of electric vehicles (EVs), and their supply is therefore essential to the European Union’s ambitious decarbonisation goals.
The market for EVs, however, is immature, and its supply chain volatile. More could therefore be done by state-backed ECAs and other government agencies to reduce some of the risk for commercial lenders.
“There is always potential for more sovereign or government support,” said Jacomijn Vels, ING’s Global Head of Sustainable Finance, during a media briefing in London on Wednesday. “You cannot ask banks or financial institutions to finance new technology and transition technologies all by themselves.”
ING was one of four banks that contributed to a €4.4 billion (US$4.8 billion) loan underwritten by German, French and Italian ECAs to French EV battery maker Automotive Cells Company (ACC). ACC is a joint venture between carmakers Stellantis and Mercedes, and battery manufacturer Saft – a subsidiary of French oil major TotalEnergies. The group has built one gigafactory in France that will begin production later this year, and plans to add three more in Germany, France and Italy.
“The ACC transaction is a really good example of us supporting a transition with real money, but we really needed the support of the ECAs to make it bankable,” Vels said. “As an industry, it’s good if we can continue to be creative about [financing models], but this one works for this type of structures, and we hope we can use it for other technologies.”
ING has also financed Sweden-based battery manufacturer Northvolt, and France-based Verkor. Meanwhile, other European carmakers, are also moving into the sector. German car giant Volkswagen has created a subsidiary battery manufacturer, PowerCo, and plans to invest €2 billion in a gigafactory at its traditional engine manufacturing plant in Salzgitter, Germany.
Global competition
European carmakers have some of the most ambitious EV production goals in the world, but are constrained by limited availability of lithium-ion batteries.
China dominates the EV supply chain, from the refining of battery metals to EV manufacturing itself. Eighty-five per cent of battery cells are currently produced in the country, according to the International Energy Agency.
Concerns over China’s dominance in this space and over other clean technologies was one of the key motivations underpinning the US’ Inflation Reduction Act (IRA), which is due to provide hundreds of billions of dollars in subsidies to clean technologies – including EVs and batteries. It has also prompted the US to announce this month that it would impose 100% import tariffs on EVs imported from China.
Europe has responded to the IRA with the Net Zero Industries Act (NZIA), which passed the final legislative hurdle this week. The NZIA offers clean technology manufacturers a raft of incentives including simplified permitting, auctions and public procurement, programmes to boost workforce skills, and has created a platform to coordinate action across the bloc.
Tim van Pelt, Global Lead of Batteries and Charging and Sustainable Value Chains at ING, said he was “hopeful” the NZIA would boost the competitiveness of EU battery manufacturing.
ECAs transform for green era
ECAs traditionally offer a so-called ‘tied cover’ to institutions lending to export industries, which gives them protection against default, reducing lending risk. But the strategic need to support domestic manufacturing of clean technologies has prompted ECAs to expand into “untied” or “strategic” cover – which isn’t linked to export, van Pelt said.
“They [ECAs] really reinvented themselves in the context of the energy transition, and saw there was a role to play,” he told ESG Investor.
China has come to dominate many clean technologies, thanks in part to its ability to produce at a lower cost than higher-wage economies in Europe and North America. However, this advantage has been slowly receding as factories become increasingly automated, van Pelt said.
Building near carmaking hubs could help to reduce transport costs, too. Other than for re-industrialisation and industrial sovereignty purposes, building regional production capabilities also makes “physical”, given how heavy batteries tend to be.
“Shipping from Asia to Europe to integrate [batteries] into the production chain of original equipment manufacturers is simply not economic – which was factored into Asian players coming to Europe,” van Pelt said.
“The other very important point in the European context is the carbon footprint. ACC, Verkor and Northvolt are all using fossil-free power, which compared to a typical player in Asia with fossil-fuel dominated power, reduces the carbon footprint quite substantially,” he said.
The post EU Batteries Need Export Credit Backing appeared first on ESG Investor.