Time to fix Europe’s competitiveness problem

He was told of the damage being done to Europe’s fledgling battery plans by billions of dollars in tax credits for plants being awarded under the US Inflation Reduction Act (IRA) — unveiled in August 2022 and which took effect on January 1 — plus similar support schemes in Canada, Japan and South Korea and Europe’s continued “unbroken dependencies” on Asia.

In a December 15 statement the Alliance, which was launched by Šefcovic in October 2017 to create an innovative, sustainable and globally competitive battery value chain in the EU, warned: “The upcoming weeks will be decisive for decision makers to act and prevent the outflow of investment from Europe.”

A make-or-break summit deciding Europe’s battery future looks set to be held by early spring Energy Storage Journal has learned. At issue is whether the continent can compete globally — and quickly enough — with its rivals.

This follows a warning that at least €100 billion ($106 billion) is needed to avert a potential investments meltdown for gigafactory plans, as the US and Asia is luring developers away with more lucrative deals and incentives.

Industry leaders and trade bodies issued a damning report in December effectively accusing EU leaders of not doing enough to successfully steer policies aimed at creating a home-grown battery manufacturing industry.

The European Battery Alliance report cited a litany of failings, including how permit procedures for battery and raw materials projects in the EU and individual member states lacked “speed and clarity, compared with that of other global economies… contributing to additional risks and delays in investment and project execution”.

The Alliance, whose 800-strong membership includes companies involved in the battery supply chain, revealed talks had been held earlier in December, with EU Commission vicepresident and batteries czar Maroš Šefcovic.

Energy Storage Journal understands a follow-up summit will be held in March, although the European Commission declined to comment as this issue went to press.

Meanwhile Commission executive vice-president Margrethe Verstager, who has responsibility for competition issues, wrote to all EU member states on January 16 to get their views on whether state-aid rules should be loosened further to allow governments to support companies that may be affected by the IRA.

Any relaxation of the rules would be in addition to the ‘temporary crisis framework’ adopted by the Commission last March, which was drawn up to support national economies in the wake of energy price hikes caused by Russia’s invasion of Ukraine.

A spokesperson for Verstager told Energy Storage Journal that member states had already used that “flexibility” to generate a total of more than €672 billion of funding so far, adding: “In the current context, however, more may be needed.”

Market fragmentation risk

The spokesperson did not refer explicitly to the IRA, but she said Verstager’s consultation would consider further simplification of EU state aid rules, possible new measures to accelerate the green transition and the need to “balance support for production in certain types of sectors strategic for the green transition with the possible risk of fragmentation of the single market”.

Industry insiders say Europe’s political leaders know they have to act fast. Independent analysis says the US is already outpacing the EU in the batteries investment race.

Meanwhile gigafactories being built in emerging markets such as India and Malaysia will have a combined battery production capacity of 104GWh by 2030.

Verstager’s letter to member states is, in part, a response to proposals discussed in the Alliance’s December round of talks with Šefcovic, which included calls for emergency measures to unlock more than €100 billon ($108 billion) of investments and speed up projects through 2023-2024.

The Commission was also urged to make the entire battery manufacturing chain, including raw materials through to recycling, a priority for cash awards under a planned new EU sovereignty fund.

If state-aid rules are loosened further, battery industry leaders say this could get cash quickly pumped into battery-related projects, together with the fast-tracking of planning applications and permits for battery-related projects.

An energy task force is also expected to be set up to ensure spiralling energy costs for industry in the wake of the Russia-Ukraine war are brought to a “competitive level” across the EU in the next two years.

The Alliance also urged EU chiefs to find ways to combine European measures with US incentives laws and create a “level playing field, where battery manufacturers producing in Europe compete on equal terms, independent of higher subsidies or lower sustainability standards in Asia and the US”.

WTO challenge

It is not clear if, when or how quickly the proposals might be adopted and the US is not expected to drastically dilute its renewed domestic support for battery manufacturing to help Europe overcome its own difficulties — Chinese and other Asian battery makers less so.

However, the nuclear option understood to be under consideration is to challenge US financial support for its battery production and related supply chain industries at the World Trade Organization (WTO).

This could be coupled with a review of existing EU trade rules, including duties for EV components and EVs from third countries with different regulatory requirements and incentive schemes.

Thierry Breton, the Commission’s internal market chief, discussed technological sovereignty and European industrial policy with French prime minister Elisabeth Borne on December 19, when he said there was no time to lose in formulating a response to the IRA.

The spectre of taking the US to the WTO, risking a full-blown trade war, does appear to be a real prospect. France’s economy and finance minister Bruno Le Maire and Germany’s vice-chancellor and economic affairs minister, Robert Habeck, said in a joint statement after talks on November 22 that they would “closely coordinate a European approach to challenges such as the IRA… to prevent downside effects of protectionist measures by third countries and ensure that WTO rules are respected by all”.

However, it remains to be seen just how EU leaders will agree on a coordinated response to pressures from Asia and the US. Swedish EU affairs minister Jessika Roswall, whose country took over the presidency of the EU for six months as of January 1, has been widely quoted as telling a conference in Stockholm just days later that “a subsidy race is not the answer” in tackling US competition.

US policy ‘game-changer’ Tensions between the EU and US are a far cry from the harmonious tones of less than two years ago, when in June

2021 Commission president Ursula von der Leyen and US president Joe Biden established the US-EU Trade and Technology Council with a commitment to renew and reinvigorate the transatlantic partnership and deepen cooperation.

Biden said during a visit to the White House last December by his French counterpart, Emmanuel Macron, he was confident “we can work out some of the differences that exist” over the IRA.

At the end of that month, in an attempt to reduce tensions, the US Treasury Department indicated in a white paper that some imported cars would qualify for EV tax credits under the IRA. However, the move has not cooled EU tempers.

A senior official in one of the European industry bodies that is closely involved in Brussels talks aimed at coordinating Europe’s response, said on condition of anonymity that it was “beyond doubt” that the IRA had been a “game-changer” in terms of its potential to draw more investments and battery manufacturing projects away from Europe to the US.

The problem for Europe is that there is still no clear plan of action by way of response, he said.

The official warned that there was a real risk, however small, that if part of

Brussels’ response is to refer the issue of US incentives and subsidies to the WTO, this could trigger a trade war that could further undermine recent EU-US efforts to forge closer economic ties.

Such a move would also undoubtedly see the US question its pledge to cooperate with the EU in shoring up energy supplies disrupted by Russia’s invasion of Ukraine.

“Some may argue that IRA-like tax incentives run the risk of creating boom and bust cycles for technology adoption, much as we have seen in the renewable industry in Europe over the last decade,” the official said.

‘No silver bullet’ However, he warned that if Europe were to launch a copycat economic strike to expand incentives and subsidies, especially for the energy storage sector, that in itself would not be a “silver bullet that is going to make the European Union the leader in this field”.

“If incentives are deployed, they must be coupled with other ambitious initiatives,” he said. Indeed, incentives can only work if energy storage “already has a market-based path toward technology adoption” — but Europe still appears to be floundering.

He cited the example of US states such as California, where clear investment strategies have been put in place to actively encourage development of battery energy storage projects.

Industry initiatives in the state include the development of pilot programmes announced last May by utility Pacific Gas and Electric, working with auto giants such as General Motors and Ford, to test how bidirectional EVs and chargers can provide power to the grid.

Europe needs a “better energy market design, so that battery energy storage potential can be deployed in multiple sectors, such as microgrids for residential areas and supporting utilities at grid level”, the official said.

A spokesperson for the European Association for Storage of Energy (EASE) told Energy Storage Journal much still needed to be done beyond EV applications.

“While the Batteries Regulation focused extensively on EV batteries, which is to be expected as the market is huge, it is important to avoid focusing on that type of application alone.

“Energy storage uptake is extremely relevant and it’s a market where the

EU can lead — we are talking about 200GW of storage needs in 2030 in Europe alone.”

In its review of energy policy developments for 2022, EASE said the Batteries Regulation draft approved by the European Parliament failed to reflect “the diversity of the battery ecosystem and could add regulatory complexity in an already extremely regulated segment, such as battery safety, recycling and reuse”.

The stark warnings of failings in EU policies to date have overshadowed the unveiling of what was supposed to be one of the jewels in its green energy policy crown, when it was announced on December 9 that a provisional deal had been agreed that would pave the way to introducing the long-awaited battery laws.

Now even that seems to be a hollow achievement. It immediately became clear that the new regulations still require secondary legislation to be passed between 2024 and 2028 before they can become fully operational — further highlighting, if it were needed, the glacial pace of decision-making in the EU at a time when the battery industry is crying out for urgent attention.

China has kicked off 2023 by extending government subsidies for purchases of EVs for the rest of the year — with a warning that it suspects that US tax credits could be in breach of WTO trade rules.

Tax exemptions on EV purchases had been set to expire at the end of 2022, but new energy vehicles bought up to December 31 of 2023 are now also exempt from vehicle purchase tax, the finance ministry and other government bodies confirmed.

Despite Beijing’s own attempt to boost EV sales, the government said it was reviewing US polices aimed at favouring domestic EV battery investment.

Chinese commerce ministry spokesperson Shu Jueting claimed on September 22 that granting tax credits for EVs in the US on the condition of final assembly in North America discriminated against other similar imported products and could violate WTO rules.

Meanwhile, data from the China Automotive Battery Innovation Alliance, published by state news agency Xinhua on January 14, said the country’s battery manufacturing capacity for new energy vehicle batteries totalled 294.6GWh in 2022, which the organization claimed was a year-on-year increase of 91%.

The installed capacity of batteries in December 2022 alone increased 38% year-on-year to hit 36.1GWh.

The China Association of Automobile Manufacturers said China sold nearly seven million new energy vehicles in 2022 — a year-on-year increase of 93%.