Introduction
The international system is in the midst of a large-scale energy and technological transition to shift away from fossil fuels and move towards carbon neutrality. The electric battery industry is on the rise with major actors like Japan (major producer of electric vehicles) and China (with a battery cell production in 2017 of twenty-two times that of Europe) clearly displaying their ambitions. In this global race for green industrial leadership, how does the European Union (EU) seek to play its card right?
Answering this question requires acknowledging two premises regarding EU characteristics that shape and condition its role in the future energy transition. On the one hand, the EU is first and foremost an economic power as the strength of its voice in international politics resides in its “material existence”, being the “largest advanced industrialized market in the world”. The energy transition is, therefore, an outstanding opportunity for the EU to foster long-term growth and create millions of jobs on the Old Continent.
On the other hand, as Acemoglu & Robinson have demonstrated in Why Nations Fail?, prosperity and economic growth are associated with specific political and economic institutions that enable innovation, which inevitably triggers a process of creative destruction. Creative destruction, according to Schumpeter, is the process that replaces the old with the new. It is intrinsic to economic growth and technological change. For example, the ongoing transition will likely replace fossil-fueled transportation systems and their associated technologies with decarbonized alternatives. New green technologies will render several economic sectors obsolete, which makes a proactive European transition all the more vital. As emphasized by Andrew McDowell, the European Investment Bank (EIB) vice-president in charge of energy, “as the green energy transition accelerates, creating a European [electric] battery industry is vital to protect Europe’s competitive position in the world economy”.
So, if innovation is key to long-term green growth, what is the EU’s strategy? Following Marianna Mazzucato, this article argues that the EU aims at fostering innovation by setting a mission to the EU and a direction to its internal market by being both a market-creator and market-shaper. This requires public funding to alleviate the inherent risks and uncertainties associated with innovations and new markets – that the private sectors can thereafter help develop further. To do so, the EU uses the European Investment Bank (EIB) as a tool to direct lending and investments towards certain innovative, risky, and uncertain parts of the green economy, namely the emerging market of electric batteries.
Mission Economy
As explained by Mazzucato, “some of the greatest innovations of our time have come from the need to solve problems”. Addressing climate change is one of those grand challenges with no “silver bullet solution” to it. Accordingly, a mission is a clear target, an achievable step to address a grand challenge. In this sense, mission-driven financial institutions, such as the EIB, seek to provide financing to projects related to grand challenges as opposed to “directionless” mandates aiming at ill-defined objectives such as competitiveness or economic growth. For the EU, the grand challenge is achieving carbon neutrality by 2050 as advanced in 2018 by the European Commission and recently confirmed in 2019 by the European Parliament.
Subsequently, the EIB has identified five societal challenges, or missions, over the next decades towards which it will direct its investments. Among those is the mission of climate change adaptation which notably requires to develop decarbonized electric mobility in the EU. In 2019, the EIB committed to raise its lending for climate action and environmental sustainability purposes to at least 50% by 2025. In addition, it is seeking to mobilize around a trillion euros from private and public actors for climate effort. Developing a competitive European battery industry is therefore in complete accordance with the mission of the EIB. As noted by Maroš Šefčovič, the vice-president of the European Commission, “Our goal is to see European champions take the lead in the global arena. Batteries is a key strategic sector for the future of mobility and decarbonization of our economy”. This was complemented by EIB President Werner who added that the EIB’s role in delivering EU’s missions “stands out as beacons of hope in challenging times”.
Patient Capital
In “The Green Entrepreneurial State”, Mariana Mazzucato argues that countries leading green transformations worldwide are those where the State plays an active role, notably via their development banks. Indeed, in the innovation game, risks, uncertainties, and potentially high costs can deter private investments. As such, given the large amount of financial resources at the disposal of investment banks, their financing ought to be patient – accepting the large uncertainties and long timeframe linked to the uptake of green innovation– and take on the responsibility of directing the economy towards certain development trajectories.
The European electric battery industry is one of those emerging sectors of the economy which requires high investments while being subject to tremendous uncertainties. As Maroš Šefčovič highlighted, shifting the EU’s mobility from fossil-fueled to a decarbonized and electric one would require ten to twenty gigafactories of one GWh or more each, at a cost of one billion each. The potential battery market value is estimated to reach 250 billion euros per year by 2025. While attractive, high costs and fierce international competition could rebut private actors to actively engage in this sector without the support of European structures to shape this new market and assist them.
To palliate this, the EU greatly relies on the EIB. As a recent report suggests, the EIB, including the European Investment Fund (EIF), is one of the main European providers of long-term finance and risk-sharing investments in addressing climate change. Concerning the electric battery industry, the EIB, via the European Fund for Strategic Investments (EFSI), has sought to deliver 315 billion euros in private investments to support the automotive industry in building battery production facilities since 2015. In a similar vein, it has agreed in 2019 to fund battery research and manufacturing in several countries, including France and Germany, amounting to 3.2 billion euros. The pace accelerated in 2020 as the EIB funded battery-related projects for a total of one billion euros.
In a word, the long-term commitment of the EIB to financially support the emerging European battery industry attempts to alleviate the risks inherent to innovation and uncertainties surrounding new markets. However, one might still wonder how the EIB concretely finances these various projects.
Risk-sharing and Public-Private Partnerships
The investments agreed on by the EIB in the European electric battery industry are based on three key principles: (i) investing along the whole value chain, from basic components to electric car production facilities, and (ii) investing in different geographical locations, (iii) and risk sharing, by sharing investment risks with private actors. The following empirical evidence supports this claim.
In the upstream part of the value chain, the EIB agreed on a 100 million euros loan with Valmet, a Finish company developing and supplying technologies and automation notably for the energy industries, to support the latter’s R&D in enhancing raw material efficiency as well as using more renewable raw materials.
Similarly, the EIB has signed a 125 million euros loan with Umicore, a Belgian global material technology and recycling group, in June 2020 to partially finance a production facility of cathode materials in Poland. The loan covers half of the project costs. Cathode materials are essential to the industry as they are key components for lithium-ion battery cells used in electric vehicles. It aims at creating around 350 jobs, and Umicore plans to partner will the local engineering school. As emphasized by Teresa Czerwińska, the new vice-president of the EIB, “We [the EIB] play an active role in creating the right ecosystem”.
Now turning to the production of lithium-ion batteries, the EIB signed a 350 million euros loan agreement “to support the financing of Europe’s first home-grown gigafactory for lithium-ion battery cells, Northvolt Ett, in Sweden”. The EIB previously supported the creation of demonstration lines named Northvolt Labs in 2019, which paved the way for the current construction of the gigafactory. This move was vital for the European electric battery ecosystem as Northvolt industrial partners and customers included European industrial and energy leaders, such as BMW Group, Siemens, Vattenfall, Vestas, ABB, and Volkswagen Group.
Andrew McDowell, one of the EIB vice-president, summarized the EIB’s involvement when he stated that “the EIB has stepped up its support for the battery value chain in order to help build Europe’s strategic autonomy”, adding that it was “a textbook example of how our [the EIB] financial and technical due diligence can help crowd in private investors to visionary projects”. Paralleling McDowell’s comments, Peter Carlsson, the co-founder and CEO of Northvolt, emphasized the role of the EIB in these terms: “The EIB has played a key role in making this project possible from the beginning […] Europe needs to build its own supply chain for large-scale battery manufacturing and the EIB is a true cornerstone of that process”. A similar process was repeated in Poland, where the EIB signed a 480 million euros loan with LG Chem Wroclaw to construct another gigafactory for lithium-ion battery production.
Downstream the value chain, the EIB finally decided to help European electric vehicles manufacturers. An example is the recent financing for 800 million euros to Fiat Chrysler Automobiles (FCA) N.V. for production plants in southern Italy. More specifically, the EIB agreed to finance innovative lines of hybrid motor vehicles in Pomigliano, Campania, for 485 million euros. As explained by the EIB, “this is flanked by research, development, and innovation for electrification, connectivity, and self-driving technologies mainly conducted at FCA’s laboratories in Turin”. Again, the EIB decided to cover only a part of the investment, with up to 75% of the total value of the investment project over a four-year period (2020-2023). Moreover, before summer 2020, a 300 million euros operation conducted by the EIB sought to finance plug-in hybrid electric vehicle production lines in Melfi, Basilicata, and Mirafiori (Piedmont).
Conclusion
This article has demonstrated that the EU’s strategy to become a global leader in the electric battery industry relies notably on the use of the European Investment Banks as a tool to promote innovation and develop infrastructures on the Old Continent. Its investments are embedded within the mission of climate change adaptation. Furthermore, it seeks to provide long-term patient capital to alleviate the inherent risks of innovation and high infrastructural costs related to the emerging European electric battery industry. Last, the investments are based on public-private partnerships, relying on three principles: (i) investing along the whole value chain, (ii) sharing risks with the private sector, (iii) investing in different European geographical locations.
Only time will tell us how effective the EU’s strategy really is. In the meanwhile, the EU must hold steady to its strategy. It must because it is right. It must because it is might.
By Maxime Sommerfeld Antoniou
Maxime is a student at KCL and a part of the KTT Energy and Environment Policy Center.
Photo by Rodolfo Clix from Pexels
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