Batteries stand at the heart of the energy transition. The competitiveness of cleaner technologies for electricity generation and transportation, which together account for two thirds of global greenhouse gas emissions, hinges on their growing levels of energy density and falling costs.
They provide the energy that electric vehicles (EVs) need to become a viable alternative to internal combustion engines; they also store the back-up energy that smart grids need to accommodate the fluctuating generation of solar and wind energy.
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If the manufacturing of batteries as an industry has moved its first steps in the 2010s – there was barely any capacity in the system in 2010 – Bloomberg estimates that the cumulative lithium-ion battery demand for EV and energy storage applications is set to skyrocket to 9,300GWh in 2030, from 526GWh in 2020.
Dominant Asian producers as well as challenger producers from Europe and the US are triggering multi-billion dollar investment campaigns in major economies to cater to this growing demand, particularly in EVs, turning the battery industry into one of the biggest and fastest-growing forces of global FDI.
While original equipment manufacturers (OEMs) were already upgrading their vehicle offerings to adjust to regulations introducing gradually more stringent fleetwide CO2 emission targets, the Covid-19 pandemic dramatically accelerated the industry’s shift to e-mobility. Governments across the globe introduced net-zero targets and put the energy transition at the heart of post-pandemic recovery plans.
With clearer policy inputs, OEMs have finally embraced the paradigm shift, allocating billions of dollars to electrify their offer and industrial base after years of mixed feelings. The demand for electric vehicle (EV) batteries has grown accordingly and the whole EV value chain now faces a buoyant outlook.
However, while the production of vehicles per se is ubiquitous, the manufacturing of EV batteries is heavily concentrated in the hands of a few companies. More than 85% is currently controlled by of Asian producers from China, South Korean and Japan. That’s a key feature in an industry where batteries account for about 40% of the final value of an electric vehicle. In other words, controlling the battery value chain equals controlling the market.
Policy-makers and OEMs alike are well aware of it. The former, particularly in the West, see in the almost absolute dependence on Asian producers, whose manufacturing base is largely located in China, a major element of weakness in e-mobility value chains, a socio-economic drawback in terms of occupational perspectives, if not even a source of geopolitical tensions. The latter face the risk of plummeting profits margins as they exert little if any leverage over the value chain of the single costlier component of EVs.
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The development of regional, if not local value chains for EV batteries has thus become one of the mantras of e-mobility strategies in major automotive markets, prompting Asian producers to gain a footprint in major automotive markets closer to final customers, while a new generation of battery producers from Europe and North America is trying to catch up.
The first gigafactory investment ever recorded – and from where the term derives – was US-based Tesla and Japan-based Panasonic’s $5bn joint venture in Nevada, US in 2013. On one half of the industrial site, Panasonic produced lithium-ion battery cells, while the other half was dedicated to Tesla’s module and pack assembly.
Despite a few early gigafactories, the acceleration of investment did not start until the latter half of the 2010s. In 2015, battery producers announced FDI projects into the manufacturing of EV batteries for $1.1bn. Six years later, they announced FDI projects for a record $17.1bn (figures include US interstate investment).
Asian producers have been the major force behind this spike in investment. They made up 57% of the total FDI that flowed into the manufacturing of EV batteries between 2015 and 2022 as they chased opportunities in some of the biggest and fastest growing EV markets in the world.
South Korean powerhouses LG and SK announced projects worth $5.1bn in China between 2015 and 2022. China is by far the single largest EV market in the world, and also boasts the most advanced and comprehensive EV batteries ecosystem – in fact, China largely dominates the whole value EV battery value chain, from the processing of battery grade metals such as lithium and cobalt, to the battery components themselves, namely cathodes, anodes and partially separators too.
In the US, South Korean producers chose to locate close to OEMs clients typically located in the rustbelt (Ohio and Michigan) or in automotive clusters in the South (Georgia in particular). They also closed joint venture deals with the likes of Ford and GM for the production of the EV batteries both companies need to realise their fresh e-mobility commitments.
In Europe, they set up shop in Poland and Hungary, turning them into the region’s main hubs for EV battery development. Meanwhile, Chinese CATL, the world’s leader in EV battery production, made multi-billion commitments in Germany, as well as Indonesia.
Playing catch-up
Facing a monumental gap, European producers have been playing catch-up. In recognition of its paltry cell production capabilities, the European Commission launched the European Battery Alliance (EBA) in 2017, bringing together EU governments, industry and the scientific community, in a bid to build up battery technology and production capacity in the EU.
Some first European EV battery producers have made inroads since then. Most notably, Swedish Northvolt has become the hope of European battery ambitions as the company tries to compete with Asian market leaders by exploring innovative battery technologies and a vertically integrated approach to production. The company has one gigafactory up and running in Sweden, and three others in the pipeline – two in Germany and another one in Sweden. The likes of Volkswagen and Volvo have already secured part of the company’s future production through multi-billion dollar deals. French Saft, a subsidiary of TotalEnergies, has also made major progress, particularly in the form of ACC, a joint venture between the company and automakers Stellantis and Mercedes-Benz, which is also leveraging on IPCEI (Important Project of Common of European Interest) on Batteries, a framework aiming to create a complete supply chain in Europe for batteries, which is providing about €6bn of state aid from the member states participating (mainly Germany, France and Italy). Overall, there are 25 battery gigafactories under planning or construction in Europe, according to data by Vitoria-based research centre CIC Energigune.
While there are dozens of projects in the pipeline in both the US and Europe, China will continue to dominate the production of EV batteries in the foreseeable future. The country already counts 125 battery gigafactories and is on track to have 3,733GWh of lithium-ion battery cell capacity by 2031, more than double the total capacity expected in the rest of the world combined, according to data provider Benchmark Mineral Intelligence (BMI).
If e-mobility has been the main catalyst for fast rising investment in gigafactories across the world, renewables further strengthened their business case by creating additional, rapidly growing demand. One of the main drawbacks of the likes of solar and wind power has been the fluctuating nature of their generation curve, which strains electricity networks and can be out-of-sync with demand. The development of energy storage systems – along with smart grids – have been a way to address these shortcomings, and a growing number of wind and solar projects have a battery storage component.
FDI projects in renewable energy with a battery energy storage system component have been rapidly soaring in the past four years. In 2021 alone, foreign investors announced 31 such projects worth a total of $5.6bn, the highest annual level recorded so far. European power utilities of the likes of Enel and EDF, as well as new players in the renewable energy space like Total Energy, again make up for the lion’s share of these projects. Overall, Western European companies originated 60.5% of the FDI investment into pure BESS projects, or renewable energy projects with a BESS component, announced between 2015 and 2022, followed at distance by Asian (21%) and north American (12.4%) firms.
In terms of destinations, investors are expressing a clear preference for developing renewable energy projects with a BESS element in Australia and the US, which together attracted more than half the FDI into such projects between 2015 and 2022. Australia added 600GWh of BESS generation capacity in 2021, thus pushing overall generation capacity beyond 1GWh – utility-scale, front-of-the-metre project made up 75% of it, according to figures from market intelligence specialist SunWiz, which also added that about 8% of all the new PV systems installed in the country in 2021 had a battery component. The country has become a poster child for the potential of BESSs, with its largest power utilities now planning to replace coal power plants with utility-scale BESS, including Origin’s plans to develop a 700MW BESS at the site of the 2.9GW Eraring plant, the biggest coal power plant in the country that is to be decommissioned in 2025. Overall, the country has seen the pipelines of announced BESS projects soar to 26GW at the end of 2021, according to research by Cornwall Insight Australia (CIA) .
In the US, utility-scale BESS generation capacity quadrupled to 10.8 GWh in 2021, according to the latest annual figures from the trade body American Clean Power Association (ACP). California led the country in new utility-scale installations, with power company Vistra bringing online 400MW / 1,600MWh at the Moss Landing Storage Facility, which occupies the site of a former gas-fired power plant.
Beyond Australia and the US, FDI projects with BESS applications were recorded across major renewable energy markets of the likes of Germany, Spain, Chile, South Africa and the UK.
The energy storage market is now expected to grow ninefold through 2031, according to estimates by consultancy Wood Mackenzie, with China and the US leading the way in terms of grid-scale deployments. The company defines energy storage as predominantly (95%) lithium-ion batteries, while 5% covers alternative technologies.
It anticipates the regional volumes of installed capacity in energy storage by 2031 to be as follows: 160GW in the US; 10GW in the rest of Americas; 63GW in Europe; 7GW in the Middle East and Africa; 162GW in China; and 70GW in Asia Pacific excluding China.
Major producers are already refining their offer to meet this growing demand from the energy market. Among others, Northvolt has set aside $200m to establish a dedicated battery energy storage solutions production site in Poland. In 2022, US-based Powin signed a memorandum of understanding with Indian renewable energy company O2 Power to provide battery storage to the Indian market.