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Powering the energy transition: innovation in financing suports the rise of European battery gigafactories

Published On 08.08.2024

The era of electric mobility is leading to an unprecedented mobilisation of car manufacturers, creating a new ecosystem dedicated to battery production. Beyond its impact on Europe's industrial sovereignty, this transformation requires the implementation of appropriate financial solutions to support its development.

Gigafactories: a key to developing electric vehicles in Europe

While demand for electric vehicles may fluctuate in the short term, the transition to sustainable mobility remains inevitable, dictated by climate and regulatory imperatives. This transition requires massive investment in a European industrial production base with a minimal environmental footprint.

Gigafactories are aimed at the large-scale production of new-generation batteries, which are essential for future European electric motors. They are a key pillar of the energy transition, accelerating the introduction of 100% electric vehicles (EVs) and making their capacities and costs competitive with European ambitions.

Their presence in Europe is the result of several converging factors: political impetus following growing awareness of the urgency of climate change, public support through significant subsidies such as the European Green Deal, a solid European market for automotive suppliers, and technological advances that make EVs competitive with internal combustion vehicles.
Fabien Levaillant, Managing Director of the Low Carbon Transition Group at BNP Paribas

Supporting industries with financing expertise that is specific to the the sector 

The first massive investments in this sector, estimated at more than USD 800 billion by 2030, are primarily related to the development of individual vehicles and are mainly focused on key technologies such as NMC (Nickel, Manganese, Cobalt) and LFP (Lithium Iron Phosphate). They also respond to the ban on the sale of new internal combustion vehicles from 2035.

As an integral part of this transition, banking institutions such as BNP Paribas are supporting manufacturers by developing specific expertise in this rapidly changing sector. In response to these challenges, the experts in the BNP Paribas Low Carbon Transition Group have made in-depth understanding of the sector a key skill, positioning themselves as pioneers in financing the battery and renewable energy value chain.

The key challenge of structuring projects

The main challenge of these large-scale industrial projects is their implementation and financing.The sector is far more capital intensive than other established energy transition sectors, such as renewable energy production, with investments rarely falling below one billion euros per project.

Initiatives in Europe

Northvolt is a pioneer in this area, having launched a gigafactory project in Sweden in 2017, followed by a first multi-billion euro funding round in 2020. Covering the equivalent of fifty football pitches,  Northvolt, advised by BNP Paribas, paves the way as Europe's first large-scale battery production facility. "Faced with large capital requirements, our role is to help companies structure their projects and, in particular, manage the allocation of the risks associated with their development, before presenting them to the market to raise the necessary capital," explains Fabien Levaillant.

Many other initiatives have been launched in recent years, not only in France, Germany and Italy, but also in Spain and Hungary. Strategic partnerships have been formed to speed up the deployment of production capacity, such as the agreement with ACC (Automotive Cells Company), dubbed the "Airbus of batteries", which brings together Stellantis, TotalEnergies and Mercedes-Benz. 

Other examples include the partnership between Northvolt and Volvo, the creation of PowerCo by Volkswagen for the battery value chain, and the partnership between Verkor and Renault in France. In the US, similar projects are being supported by the Inflation Reduction Act (IRA). In the US, supported by the Inflation Reduction Act (IRA), similar projects aimed at strengthening regional value chains for the benefit of local OEMs are also growing rapidly.

Innovation in financing

Large-scale battery production involves a number of risks, not least the establishment of complex production chains involving multiple specialised players, mastery of advanced lithium-ion battery technology to ensure competitiveness with internal combustion engine vehicles, and intensive research and development activities. There is also the need to secure the long-term supply of rare raw materials and develop a recycling chain, which is currently very limited, to create a sustainable ecosystem for the future.

For start-ups raising both equity and debt and lacking a production and revenue track record, cash flow financing remains one of the viable options, requiring good visibility of future contracted revenues. A key element in these recent fundraisings has been the support of car manufacturers committing to take-or-pay contracts, thus ensuring a minimum of visibility on future sales.

Financing these projects requires sophisticated analysis and specialist support. As advisors, we had to go beyond the traditional framework of project finance to create innovative structures tailored to the specific challenges of this sector and attractive to institutional investors, both in terms of equity and debt.
Fabien Levaillant

The necessary support from European institutions

Another crucial factor in the success of the sector's early financing was the support of European public institutions, such as the European Investment Bank and Export Credit Agencies (ECAs). The involvement of these institutions helped to reduce the initial risks and to attract the financial markets to these innovative investment products.

These funding initiatives mark the beginning of the boom in gigafactories in Europe. Beyond their role as large industrial facilities, these plants are creating a whole new ecosystem in Europe, starting with the extraction and refining of the minerals needed for batteries. "Battery Valley" in the Hauts-de-France region is a perfect example of this revival of European industrial basins, where several major battery manufacturers and supply chain players are setting up operations. Fabien Levaillant comments: "This development is a source of real pride for the workers and underlines the strong social impact of these initiatives."

How BNP Paribas supports its clients in innovation

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