EU invests 1 billion euros to increase domestic supply of battery components

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The US Inflation Reduction Act, unless repealed or revoked, will provide tens of billions of dollars in manufacturing credits to companies that make lithium-ion batteries using materials and components sourced from the US or from countries that America chooses considers worthy. This week, the European Union announced that companies that source fewer cathodes, anodes and active materials for their battery production from China will receive grants totaling 1 billion euros. Call it IRA Lite. Accordingly Bloomberg, All new patents resulting from the awarded projects must be registered in the EU member states.

In two other initiatives announced on December 3, 2024, the EU said it was also interested in financing net-zero technologies and hydrogen projects from domestic producers. The move is in line with a broader policy priority to keep manufacturing in Europe as the region undergoes an unprecedented economic transformation to curb greenhouse gas emissions by 2050. “All three calls include new resilience criteria to boost European industry,” said Teresa Ribera, head of the commission's new executive vice president in charge of the clean transition. “The battery call and hydrogen bank auction will also include specific resilience criteria to protect Europe from dependence on a single supplier.”

In a 1.2 billion euro auction aimed at boosting hydrogen production, winning projects must limit sourcing of electrolyzer stacks from China to no more than 25% of total capacity, according to guidelines published earlier this year . Selection criteria under a €2.4 billion call to fund net-zero technologies include determining whether a project can reduce the sourcing of critical raw materials or components from China, Malaysia, Thailand and Vietnam – countries that China often avoids tariffs as transport channels. This initiative is central to the EU strategy to build a resilient clean energy supply chain and ensures the region's climate goals are met without sacrificing industrial independence. The EU mandate that all new patents from funded projects be registered in member states is seen as a way for the EU to retain critical intellectual property.

The path to domestic battery production in Europe

Chinese electric vehicle makers like BYD have become a source of concern for European and American automakers in recent years, but the country's strong presence in the electric vehicle market goes beyond its own car models. Many of the electric vehicle components in European and American cars come from Chinese sources. China has long dominated global supply chains for electric vehicle batteries and renewable energy components, raising concerns among European policymakers about economic and strategic vulnerabilities. By tying grants to local procurement and innovation, the EU hopes to not only reduce risks but also create a competitive green tech sector, it says Autoblog.

However, challenges remain. Procurement restrictions could increase production costs and slow the adoption of green technologies, potentially putting Europe at a short-term disadvantage. EU leaders argue that the long-term benefits of a self-sufficient industrial base outweigh the initial hurdles. That may be true, but it comes too late to help Northvolt, a Swedish company that actually tried to make batteries in Europe using materials and components from Europe but recently went bankrupt.

Northvolt goes bankrupt

Three months ago, Northvolt completed a major review of its business model after BMW pulled out of a €2 billion deal because it was unable to produce the batteries needed for BMW electric cars. The goal of the strategic review was to focus resources on becoming a leader in sustainable large cell manufacturing. This would include the expansion of the first phase of the Northvolt Ett gigafactory in Sweden, while also continuing to use the company's research and development facility – Northvolt Labs – in Västerås, Sweden. This was seen as an essential requirement for Northvolt to maintain its position as the leading cell manufacturer in the Western world.

Peter Carlsson, co-founder of Northvoit, said: “With the strategic review now underway, we need to take some tough measures to secure the fundamentals of Northvolt's business, improve our financial stability and strengthen our operational performance.” Even if the “While conditions are currently challenging, there is no doubt that the global transition to electrification – and the long-term prospects for cell manufacturers, including Northvolt – are strong.” But apparently not that strong. In retrospect, all that happy chatter was little more than a whistle past the cemetery. Three months later, the wheels came off the Northvolt car, leaving nothing but wreckage behind.

Michael Barnard wrote a week ago that Northvolt was wrong in its calculations. It was assumed that there would currently be a major shortage of batteries as no one would be able to meet the demand. Instead, China has expanded five times more than Northvolt predicted. “Misunderstanding China is a major failure of the West right now, and until they get China right, they will continue to fail,” he said. “Partly because they predicted a massive shortage, the batteries they could produce were too expensive for the market. “They assumed that battery prices would remain high – a fundamental mistake common in the West – and therefore did not work tirelessly to reduce the production costs of their units.” Michael added that Northvolt spent $15 billion on one battery factory that CATL or BYD could build for $1.5 billion in China or $3 billion in virtually any Western country they chose.

Northvolt also failed miserably at simplifying its mission, Barnard wrote. Both prismatic and cylindrical cells were produced. Grid storage units as well as commercial and industrial storage units were manufactured. It was about battery recycling. It was upstream of lithium refining. Basic research and development was carried out. These were joint ventures with Volvo and Volkswagen. It's not about doing a few things very well and efficiently. As a result, Northvolt did nothing well or efficiently. The company should have said, “LFP batteries are going to be huge. We’ll just make them as efficiently and cost-effectively as possible.”

Not long ago, Zeng Yuqun, the CEO of CATL, said: “They have a wrong design… they have a wrong process… and they have the wrong equipment. How can they scale?” Since they had no focus, they weren't able to recognize things that were obvious to a very experienced leader in the battery industry. In contrast, Chinese companies tend to do one thing exceptionally well and rely on other world-class companies to do other things exceptionally well. “The business ecosystem in China is amazing,” Barnard said.

The snack bar

This ambitious investment plan suggests that the EU's green transition will not come at the expense of domestic markets. By pushing for restrictions on procurement, the European Commission has indicated that it is prepared to delay the introduction of greener technologies in the name of protecting its economic interests. This will calm the fears of some but infuriate others. All in all, the amounts of money pledged appear to be far too small to make a significant difference in the short term while the continent deals with the wreckage left by the Northvolt implosion. It will take a while for Europe's transition to a green economy to recover from this.