Battery factories are hot stuff. Swedish Northvolt could be the largest European IPO in years if taken public in the new year, and it also made for strong headlines when Macquarie Asset Management announced an investment in French Verkor in September. This deal was made alongside Meridiam and others and named ‘exemplary’ by the French president, Emmanuel Macron.
In total, 10 investors provided €850 million of Series C funding and the fresh provisions of capital will back the construction of a battery giga factory in Dunkirk.
Macquarie and Meridiam’s involvement at this stage of development means the boundaries of infrastructure now extend perhaps a little further than before. Notably, EQT’s investing in Verkor is through its EQT Ventures arm.
The Renault Group, Crédit Agricole Assurances and the French SWF, BPI France, also invested. Other than equity, subsidies worth €650 million were provided as well as €600 million in debt support from the European Investment Bank.
Infrastructure Investor asked Macquarie’s Chris Archer, co-head EMEA, at MAM Green Investments, to explain the rationale behind the investment and how it fits into an infrastructure space, and the answer to the latter was easy: The investment was through the still open Energy Transition Solutions Fund targeting $2 billion – and not necessarily infra.
“We don’t specifically classify everything in the clean transportation space as infrastructure; they fall into our wider energy transition strategy. But LPs are accessing these types of opportunities from both infrastructure mandates and private equity mandates,” says Archer.
On the Meridiam side, however, there is less ambiguity as the investment is through its 2021 vintage and value-add $2.3 billion Sustainable Infrastructure Europe IV fund.
EV battery production supported by macro trend
As for the rationale behind the deal, Macquarie’s looked to the macro trend supporting it and in particular the ban on the sale of new combustible engines from 2035, according to Archer: “The supply of batteries is a critical limiting factor for the speed at which we can transition to electric vehicles. The amount of battery production capacity required by 2035 to phase-out combustible engines in Europe is something like one terawatt hour annually.”
In 2022, Europe had 69GWh of production capacity with forecasts suggesting around 238GWh of capacity in 2025 and 413GWh in 2027, according to a January 2023 analysis by Dutch EVMarketsReports. This is the promising market that Verkor will be part of and Macquarie wants a slice of.
“Some of the reasons we are so excited, as an investor in the energy transition, are the strong growth prospects and the amount of capital that needs to get deployed,” says Archer. “Another exciting thing about the energy transition, which is similar in many ways to infrastructure, is the degree to which governments are incentivising businesses in this space to make this shift.”
Indeed, the US Inflation Reduction Act and the detrimental effect it could have on European production of batteries has put the onus on Europe to protect domestic production and ensure that the region’s car manufacturers will have ready access to batteries. Europe currently has more than 50 so-called giga-factories, each producing more than 1GWh of capacity a year. Verkor already has a mega-factory, and the new Dunkirk-located 16 GWh/year facility – enough for 300,000 cars – should be ready in 2025 with an extension to 50GWh of capacity planned for 2030.
“European manufacturers make engines and drivetrains maybe better than the rest of the world, and the engine is such a critical part of the vehicle and a key barrier to entry. When you switch to EVs, all that is lost as the battery becomes one of the most important things. And so protecting the jobs that already exist requires building up battery manufacturing capabilities. Consequentially, there is a huge amount of state support for battery manufacturing in Europe,” says Archer.
The support was not only financial, explains Archer. “The French have done very well in terms of not only providing subsidy but also building a wider ecosystem to attract battery manufacturing. For the coming giga factory, the site was identified by the Port of Dunkirk and the local department as being a potential battery manufacturing site, and they then progressed an interconnection on that site and environmental permitting ahead of leasing it to a potential giga-factory tenant. This gave the business a head-start.”
Securing a cashflow from EV battery production
On top of the local support, there is one crucial, infrastructure-like element added to the deal: long-term contracts.
“It used to be that vehicle manufacturers viewed their suppliers as interchangeable sellers of commoditised products and hence contracted year-to-year and squeezed them on price. That dynamic has shifted as manufacturers are concerned about being able to access batteries. So, there is now longer-term contracting of battery manufacturing capacity,” says Archer.
In the case of the coming Verkor giga-factory, the off-taker will be Renault, which is not only investing in the production but also heavily relying on receiving the product. “The Renault contract is longer than we’ve seen in other comparable giga-factory projects, both in Europe and the US. And it covers a majority of the production of the new plant, which is still less than the total volume of batteries of this type that Renault will require,” says Archer.
From an ESG point of view, the production of batteries must be as green as possible. And while the fight over just what colour to designate nuclear energy may continue, nuclear power is most definitely very low-carbon and in plentiful supply in France, providing a key feature for future production, according to Archer: “Subsidies for new vehicles are going to be linked back to the carbon footprint of an electric vehicle, so being able to manufacture batteries with low carbon electricity is really important.”
As for the batteries themselves, the initial sourcing of the raw materials will come from a Chinese business, XTC. Some of the input materials will be from battery recycling, according to Archer, who hopes to see European lower-carbon lithium production come online along the way.
While battery factories won’t perhaps be seen as a core play for a good while yet, a structure is developing as befits their role as necessary infrastructure for the energy transition.