With the vigorous development of the electric vehicle and energy storage system industry, the development of the domestic lithium battery industry in Europe has attracted the attention of the world. Driven by landmark policies such as the Net Zero Industry Act, the EU has embarked on a transformative journey towards a more sustainable future. At the center of this shift is the fast-growing lithium battery industry. Not only is it critical to the rollout of electric vehicles (EVs), but it also plays a key role in energy storage systems, making the use of renewable energy sources such as solar and wind more efficient and reliable. The strategic focus on lithium batteries reflects their intrinsic potential as a key to Europe's quest for energy independence and sustainable development. This shift is also an opportunity for the industrial revitalization and transformation that Europe has been waiting for, and it is also necessary for Europe to move away from unstable fossil fuel supplies in recent years and aspire to energy independence, especially in the wake of the Russia-Ukraine conflict.
Ambitious targets create additional challenges for the global battery industry
The European Union has formulated a number of plans in the field of industrial promotion and application of lithium batteries, and is gradually implementing relevant legislation. The most important of these is the new EU battery regulation adopted by the European Commission in August this year, which will enter into force on February 18, 2024. This important regulation is valid for both domestic and foreign battery manufacturers who wish to sell their products on the EU market. It introduces strict battery sustainability rules, focusing on the entire life cycle of batteries from production to reuse and recycling, ensuring a circular economy. In this regulation, the EU emphasizes that the collection, reuse and recycling rate of batteries must be higher than a certain level within Europe, with a focus on minimizing ecological impact while promoting technological progress. The regulation sets recycling targets for different types of batteries in the European Union. The recycling rate of lithium batteries should reach 65% from 2025 and increase to 70% from 2030. Specific material recoveries of lithium, cobalt, copper, nickel and lead in batteries will also be introduced. There are also requirements for the proportion of recycled materials used in new products.
From 18 February 2027, the regulation requires a separate electronic battery passport for each industrial battery (over 2 kWh), electric vehicle battery, and LMT battery (e.g. e-bike battery). Electronic records should include general information about the battery (geographic location of the battery manufacturer and battery manufacturing facility) as well as other information such as carbon footprint, responsible sourcing, recycling content, etc. The regulation increases transparency in supply chains and value chains for all stakeholders, aims to establish circular markets and encourage sustainable practices in the EU. They are particularly important in the context of the continuous development of the lithium battery industry. SMM believes that European countries such as the United Kingdom will adopt this regulation due to the needs of the EU market. The new battery regulations are likely to push up the cost of producing lithium batteries, which will affect the competitiveness of not only EU lithium battery producers, but also automakers.
The European battery industry is promising, but there are also uncertainties
In 2022, European lithium battery production was around 70GWh, a relatively small figure compared to other countries such as China (545.9GWh).
Driven by policy and market factors, the European lithium battery industry is in a stage of rapid development. A large amount of new capacity is expected to come online by 2030, and the chart below shows the forecast of lithium battery production capacity in Europe in the next few years.
There is no doubt that some battery factories will succeed in strengthening the European industry. Northvolt Ett is one such example. As Europe's first homegrown lithium-ion battery factory, the plant has started commercial production in 2022 and has launched expansion plans. This is a milestone step as a successful example of capital investment in the local lithium battery industry. Most of the projects, as well as other successful new and expansion projects, have received policy support, subsidies or interest-free loans from the EU and local governments.
Due to various obstacles, several gigafactory projects are at risk of being postponed or even cancelled. According to SMM's analysis, about 27% of the planned capacity is at high risk or will even be cancelled. In addition to those factors that often contribute to the lack of better prospects for projects, the Inflation Reduction Act (IRA) in the United States has also had a large impact on some projects in Europe. The bill provides an uncapped subsidy for U.S.-based producers and producers who use more than a certain percentage of North American raw materials, which is stronger than similar incentives in Europe. As a result, investments in the lithium battery industry, which are planned or even prepared in the European part, may be transferred to the United States.
Like most other countries, Europe currently relies on Chinese lithium batteries and raw materials to meet the needs of the consumer market and related local industries. At present, more than three-quarters of the world's finished lithium batteries are produced in China. China's share of other raw materials such as graphite is also as high as 74% (2022). Large-scale production capacity brings strong cost competitiveness, and as a result, prices in China are the lowest among the reasonable low prices of lithium batteries in all regional markets. This low price and existing capacity advantage creates significant competition for Europe's growing industries.