To reach net zero by 2050, all cars sold from 2035 must be electric vehicles (EVs). That is the prediction by the International Energy Agency (IEA). This requires more than 70 million batteries a year for consumer EVs alone. This means demand for batteries will grow exponentially in the coming years.
To meet this demand, more gigafactories will need to be built at scale and speed, so that from 2025 they can produce 3,000 gigawatt hours per year of new battery capacity. By contrast: the current annual global manufacturing capacity is approximately 500 gigawatt hours.
Demand means opportunity
Where there is demand, there is opportunity. Governments, corporates, original equipment manufacturers (OEMs), car manufacturers and investors all show growing interest in investing in battery manufacturing capacity. However, among those parties is an emerging realization that the development and optimization of these facilities is not straightforward.
This article considers some of the commercial, political and legal issues that need to be faced in order to successfully develop and finance these highly bespoke manufacturing facilities.
The current gigafactory market
The development of gigafactories is a critical piece of the energy transition puzzle. It is driven by:
1. Desires to decarbonize and achieve net-zero targets
2. Maintain independence and control over the electrification of the automotive and renewable energy industry;
3. Capture some of the very meaningful environmental, social and commercial benefits associated with the battery industry.
Presently, China produces approximately 80% of all lithium-ion battery cells. Consequently, most gigafactories are currently located, or being built, in China.
Drivers for the global battery arms race
To keep up with china, The United Kingdom (UK), European Union (EU) and United States (US) all want to acquire market share quickly. The reasons for this global battery arms race are manifold, but they can be distilled into three drivers:
Whoever manages to attract battery manufacturers to their country will also win the battle to maintain and grow a wider car-manufacturing industry.
The war in Ukraine has further increased the need to ensure domestic energy security. This also applies to the dependency on China for the future of the battery industry and net-zero targets.
Gigafactories are essential to move away from the ICE towards a more sustainable future. To maintain and grow domestic EV manufacturing capability, countries will drive market behavior from within by being able to offer a localized and cost-effective alternative to the ICE.
Key issues and opportunities
1. Construction and optimization
The sheer size of any gigafactory would make it a considerable construction undertaking.
Producing battery cells is an energy intensive process. Manufacturing capacity of this scale requires a significant amount of stable and reliable power.
A gigafactory will have a unique footprint.
It is important to recognize beforehand that there is no single formula for the development of a lithium-ion battery.
5. Sales strategy for the battery
Up until now, lots of battery manufacturers have been producing a somewhat generic ‘off the-shelf’ battery for the automotive industry.
It is essential to establish robust offtake arrangements with an automaker or OEM.
7. Wider integration risk
Growing battery capacity does not necessarily equate to EV-ready supply.
8. Technology risk
From a technological perspective, the EV battery market is fast evolving. Therefore, manufacturing capacity needs to be capable to adapt to meet likely future advances.
Co-locating the gigafactory with other segments of the EV manufacturing chain opens up the possibility to recycle and recover battery materials that can be put straight back into the manufacturing process.
10. Regulatory risk
The battery sector is undergoing massive regulatory change. The current landscape is dynamic.
The impact of such regulatory changes will be broad and largely positive for the gigafactory sector in Europe and North America. However, the common feature of all this change is a growing focus on the entirety of the EV supply chain. Understanding and managing the wider supply chain will be one of the critical factors in the development of any successful gigafactory.
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