How can Europe’s transition to electric vehicles mobilise capital?
Europe’s car industry is in a race to switch from combustion engine to electric propulsion, but it must scale up quickly or face losing ground to competitors from Asia and the United States.
The size of the challenge is huge: nothing short of rebuilding the car industry’s value chains, as well as the infrastructure of charging stations and supporting electricity grid. All at a time when the coronavirus outbreak means capital could be in short supply.
After the EU’s recent declaration of a “climate emergency”, the political will appears to be sufficient to make the transition. Yet financing it requires many billions of euros of public and private capital. And, from the perspective of private capital the risks of financing such early-stage and complex projects are not always justified by the rewards.
Is enough capital available? Julien Touati, Corporate Development Director of Meridiam, the specialist infrastructure asset manager, says that raising finance for the electric vehicle (EV) revolution is harder in Europe than elsewhere.
« We are a bit lacking in investors that are able to take this systemic perspective in Europe, that is my gut feeling today, » he explains, speaking at Societe Generale’s Sustainable & Positive Impact Finance conference in Paris on 12 November, 2019. “You can find that capital in China, with mainly state-backed investors. You can find that in the US, because these are people with a venture mind-set.”
But Carl-Erik Lagercrantz, Chairman of Northvolt, the continent’s leading electric battery start-up, is more optimistic:
I think that after we build more capacity, we will see more financial capital coming in, and have more the type of risk relationship that the capital is used to looking at.
He adds that the forward-looking banks who lend to the industry today will benefit most in the longer term.
Race against time
Northvolt’s capital expenditure shows what is needed to develop battery manufacturing alone. “We are investing about €2 billion to build multiple factories in Sweden and Germany specifically for the German car industry. And the industry needs eight times the capacity we are building right now,” says Lagercrantz.
Car makers are racing to develop EVs in order to reduce the average emissions across their fleets and comply with new EU emissions targets. Under the rules, car makers must lower their fleets’ average emissions to 95g of CO2 per kilometre by 2021, or risk fines. Should they be fined, they will also suffer the associated stigma.
They must move quickly to avoid losing out to Chinese manufacturers, which make more than half of today’s EVs, as well as others. According to EIT InnoEnergy, the potential value of just the battery value chain in Europe – mining, refining, cell manufacturing, battery packs and recycling – could be €250 billion by 2025. That prospect has spurred EU policymakers and businesses into action, seeking to ensure that they secure a slice of the action, as well as the jobs and skills.
Infrastructure build out
Beyond the EVs themselves, the charging infrastructure and supporting electricity grid must be built and financed across an entire continent. It’s a chicken and egg situation. What comes first? The EVs that will pay to charge up, so justifying private finance. Or the charging stations that will encourage people to buy the EVs.
If you want chargers to be profitable over the long term, and I am thinking of a 20-year horizon, you need to have the electric vehicles.
“If you install the chargers and nobody comes to use them it may be sustainable but it won’t work from the financial point of view. So, how will cars become electric? Let us be very clear: the real contribution must come from the public sector. In this respect, the European Union has been exemplary by setting CO2 emissions standards per km which have in practice triggered the big shift of car markets to electromobility." says Touati.
Is it possible to multiply Europe’s infrastructure network fast enough, perhaps by 20 times in 10 years? It’s feasible, believes Mr Touati. But he adds that everything depends on the public sector putting the right incentives in place, not just for the companies installing charging stations but for the whole industry and car users.
After a slow start, Europe’s EV transition is now well under way. Over the past two to three years, governments, EU institutions, leading car makers and private sector investors have joined forces to drive it forward. Despite the scale of the challenge, there is huge ambition across public and private sectors to make the transition from combustion engines to EVs, and this will continue despite the pandemic. Northvolt’s Lagercrantz believes that after the challenges of raising the initial finance everything depends on the industry reaching sufficient scale.
"Batteries and other components must be produced at a large scale, so it is a cost game, and when that inflection point happens there is no turning back,” he says. “That will happen over time. To put a year on it I would say 2025-2030. But we are beginning a long transition.”