Published March 15, 2023 | 4 min read
Key Points
- According to a Statista estimate, the global demand for batteries is expected to increase from 185 GWh in 2020 to over 2,000 GWh by 2030.[1]
- However, there are significant challenges associated with bringing a Gigafactory online, which raise concerns about whether the supply deficit can be met.
- These projects need large scale pension, sovereign wealth and infrastructure funds, but the technology risk and lack of clear revenue paths doesn’t align with their traditional investment strategies.
- Some firms are beginning to join the dots, with partnerships and new strategic approaches to get their gigafactories online.
The term gigafactory conjures up a sense of grandeur and strategic importance in a world where everyone is focused on the pathway to net-zero. The demand requirements for batteries, both from the EV sector and for storage as renewable production ramps up, are well understood. According to a Statista estimate, the global demand for batteries is expected to increase from 185 GWh in 2020 to over 2,000 GWh by 2030.[1]
This enormous scale-up means that even if all the planned future capacity is brought online, there will still remain a material supply deficit. The idea of a gigafactory – a facility that can produce batteries on a large scale – would appear to be the answer. But there are significant challenges associated with bringing a gigafactory online, which raise concerns about whether the supply deficit can be met.
Early successes
Northvolt is the clear leader in this space and the first independent battery manufacturer to be successful. A well established multi-billion dollar pension fund was one of the leading investors in Northvolt. A key rationale for investing was driven by the company’s extensive expertise and clear pathway to revenue.
The three key attractions driving the decision to invest were:
- Access to cheap power, which is essential due to the need to charge and recharging the batteries before being sold.
- Relevant expertise, following Northvolt’s hire of +300 scientists from Asia with the necessary skills to perfect the manufacturing process and the ability to shift between battery chemistries as the market develops.
- Derisked access to government funding and firm offtake contracts from Volkswagen and BMW, as well as a clear pathway to revenue and proven technology.
Challenges for Gigafactory construction
Northvolt has been an early example of success, but those trying to follow in their footsteps are encountering a number of challenges, particularly in today’s macroeconomic climate. Firstly, there are construction challenges around rising raw material costs and demand for supporting services that are affecting all major infrastructure projects.
There’s also rapidly growing competition for the critical minerals needed to manufacture batteries. Mineral mines are concentrated geographically, often in countries with difficult political situations, and current manufacture is mostly based in China.
Finally, gigafactories require specialist manufacturing equipment for cell production, and with so many countries and companies prioritizing battery production, there’s significant strain on the limited supply base.
What investors need to see
These challenges have caused investor hesitation when it comes to companies in the space. FREYR, for example, has access to cheap power, similar to Northvolt. But the time taken to secure firm offtake agreements with automakers has forced them to change strategy and focus on stationary storage batteries instead.
Britishvolt has become the cautionary tale of the industry. The company managed to secure the best site in the UK but have not been able to raise the necessary capital to fund their +US$5bn CAPEX plan to bring 38GWh of capacity online. The startup fell into administration in January 2023 in what appears to be a chicken and egg situation – investors are waiting for carmaker contracts before funding, and carmakers are waiting for funding before signing contracts.
Part of the challenge in funding gigafactories is the magnitude of the funding. In order to raise capital of that quantum, companies need to be targeting large pension, infra and sovereign wealth funds which can invest sums like US$100m, rather than the US$10m-level they could expect from venture capitalists or growth-oriented funds. However, those larger investors are not familiar with investing in opportunities which still carry technology risk, are not fully funded and do not come with firm offtake contracts.
Material amounts of capital are being invested into EV charging networks and battery technology companies, but raising capital to fund a Gigafactory remains challenging. However, without producing batteries at scale, the investments in other subsectors will not generate returns.
New strategies for success
Verkor, the French battery manufacturer, have adopted a potentially winning strategy. With Renault as a 20% shareholder on the register and an expected near-term commitment for offtake, as well as European Investment Bank (EIB) funding, they have a mix of ingredients for success. The company also seems to have right-sized their first Gigafactory, with a Euro1.6bn funding requirement for 16GWh of capacity.
On the other side of the equation, Renault have also recently secured an agreement for the future supply of nickel sulphate from Terrafame, a company operating one of the world’s largest production lines for EV battery chemicals in Finland. This not only helps secure future supply, but also meets Europe’s coming regulations on Rules of Origin.
Although the company has secured some future batteries from Northvolt, Volkswagen is also taking matters into their own hands with the establishment of PowerCo to drive their EV battery value chain. Not only will PowerCo help manufacture the batteries required for Volkswagen’s EV strategy, it will also be responsible for sourcing the necessary battery metals and recycling capabilities. Volkswagen’s intention is to establish a fully self-sufficient end-to-end battery chain.
It’s likely not necessary for every OEM to aim for self-sufficiency. If all automakers adopted followed in Volkswagen’s footsteps, the typical OEM business model would change significantly, exposing existing investors to risks outside of the traditional industrials model.
However, closer partnerships are needed to encourage investment. To establish completely independent gigafactories, battery makers need to show they have a clear path to revenues and returns.
Like Verkor and Renault, many may see cross-investment, mergers and acquisitions as a route to building stronger business models.
[1] https://www.statista.com/statistics/1103218/global-battery-demand-forecast/#:~:text=O'Dea%2C%20Jan%205%2C,the%20demand%20is%20relatively%20low.
