Bridging Europe’s electric vehicle finance gap

18/11/2020

Ambitious plans for battery factories and charging points require not only innovative technology but also pioneering finance.

The shift to electric vehicles in Europe is set to be exponential. By 2030, it’s thought that one in three car sales in Europe could be electric vehicles, according to the most conservative estimates. But for that huge shift to happen, Europe needs factories to make batteries and a network of several million vehicle charging points. Building out that manufacturing capacity and the charging infrastructure will require many billions of euros, financed by both governments and the private sector. 

While it’s widely accepted that the electric vehicle revolution depends upon technological innovation in car manufacturing, what’s less appreciated is the innovation required in financing. The banks and investment funds providing finance must acquaint themselves with the technology and economics of an industry that is only now maturing if they are to become comfortable with the risks they are taking.

“ Only banks equipped with teams of experts, including in-house engineers, can achieve this kind of result because a significant amount of funding is required and we are talking about innovative technology and new markets. It is really about how a bank is able to adapt and be a first mover in a new field. ”

Christophe Hadjal
Head of Advisory & Business Development – Natural Resources, Mining, Metals & Industries at Societe Generale CIB

Europe must develop its own battery industry and charging network fast if it is to meet stringent new rules limiting CO2 emissions currently being phased in. Car makers plan to increase electric vehicle production to meet the EU target of lowering their fleets’ average emissions to 95g of CO2 per kilometre by 2021. If they do not, they risk fines.  

The European Battery Alliance, a public-private initiative, has targeted as many as 25 battery giga factories to be built by 2025. Turning to the charging network, it is estimated that 3 million public charge points will be needed in the EU by 2030, up from around 185,000 in 2019, according to the European Federation for Transport and Environment. 

This build-out across Europe’s electric vehicle value chain will support local jobs, as the majority of battery manufacturing capacity today is in South Korea and China. While Asian industrial groups dominate the battery industry, the size of the European market supports the emergence of European champions. Having local champions will also reduce the lifetime carbon footprint of electric vehicles, as the batteries will be made locally rather than shipped across the globe.

Building a low-carbon solution for mobility will require not only a large market but also technological and industrial leadership, combined with secure access to critical raw materials. The latter is a key ingredient to build a sustainable and low-carbon value chain.

Calling for financial leadership

As the electric vehicle industry is yet to reach critical mass, however, existing financing tools and structures must be adapted to an immature market, with risks carefully mitigated. Achieving this takes technical knowledge in battery production, expertise in financing tools and a commitment to the low-carbon future. Societe Generale is at the forefront of the new financings, providing expertise as well as its balance sheet. 

In May 2019, the bank designed the first financing for a charging point operator, raising a general-purpose loan of up to €150 million for Allego, the operator of Europe’s fourth-largest charging network, to fund its development and geographic expansion. As structuring bank, underwriter and mandated lead arranger, Societe Generale’s technical expertise helped to make potential lenders comfortable with the risk/reward proposition, while the bank took half of the underwriting risk.
 

“ We greatly appreciated the pioneering role of Societe Generale on the Allego financing, with the technical expertise and out-of-the-box thinking needed to understand the business model of a growth company in a nascent sector, design an appropriate financing structure and convince other lenders to join the transaction. This has paved the way for the industrial success that we are currently experiencing. ”

Julien Touati
Partner at Meridiam

“ We spent a lot of time in the market, talking to potential lenders. It is hard at this early stage in the market’s development. A lot of banks and funds want to have an energy transition deal but are reluctant when it comes to taking a new risk in a new sector. It is fair to say that we had more responses from investment funds than banks. ”

Laurent Chabot
Co-Head France Infrastructure Finance at Societe Generale CIB

Just over a year later, in July 2020, the bank played a leading role in the first ever project financing of a battery giga factory, this time for the Swedish battery manufacturer Northvolt, which is expected to quickly become one of Europe’s new champions in this field. The USD 1.6 billion project financing is for the world’s greenest battery factory, set to enter production in 2021 using power from northern Sweden’s renewable energy generating base.

Acting as technical bank, as well as mandated lead arranger, Societe Generale’s knowledge was instrumental in the success of the deal. The close of the transaction happened just as the bank reorganised its internal team to support the emerging electric vehicle sector, renaming its metals and mining team as mining, metals and industries.
 

“ We have been delighted to work with Societe Generale, as we share the same vision that the development of emerging green industries will be essential in the global fight against climate change. In their role of technical bank, Societe Generale’s skills and approach when it comes to financing innovative and sustainable technology was a key factor of success for this landmark transaction. ”

Carl-Erik Lagercrantz
Chairman of Northvolt

In a further illustration of its commitment, Societe Generale acted as a lender in a bilateral facility for SK Battery Manufacturing in May 2020. The Korean company is building a battery plant in Hungary.

Saving jobs, cutting emissions

Given Europe’s pressing need to build out its battery value chain, these transactions are undoubtedly the first of many. As other transactions follow, the broader lending market is likely to replicate many of the features of these transactions, freeing up the critical private sector financing that is needed for Europe to build its battery value chain.
 

“ For me this is comparable to optic fibre six years ago. No one was doing it. We were one of the first to do it. Now it is core infrastructure. But initially it was a question of who was going to do it? These deals are the first of a kind in this sector. So, it is really about how a bank is able to adapt and be a first mover in a new field. ”

Laurent Chabot
Co-Head France Infrastructure Finance at Societe Generale CIB

The result? Europe is one step closer to its ambitious goal of replacing internal combustion engines with electric vehicles, both saving European jobs and cutting carbon emissions.

Christophe Hadjal Head of Advisory & Business Development - Natural Resources, Metals & Mining Societe Generale
Laurent Chabot Managing Director, Co-Head France Infrastructure Finance Societe Generale Corporate and Investment Banking