The UK can become a global player in electric vehicle (EV) batteries if billions of pounds are invested now to build a battery supply chain, finds a report from the Green Finance Institute’s Coalition for the Decarbonisation of Road Transport (CDRT).
It highlights the opportunity to invest in the burgeoning global demand for EV batteries, which will underpin the future of road transport. But it also warns that there is a narrow window to seize this opportunity and significant barriers to investment must be overcome.
The global car industry is now in rapid transition because meeting global climate targets relies on phasing out internal combustion engine (ICE) vehicles. In the UK, where road transport accounts for around a quarter of UK greenhouse gas emissions, the sale of new ICE vehicles will end from 2030 and the shift to EVs is a key priority in the government’s Ten Point Plan for a Green Industrial Revolution. The value of the transition from ICE to EV powertrains could benefit the UK economy by upwards of £24 billion by 2025, according to the government-funded Advanced Propulsion Centre (APC).
The UK currently produces around two gigawatt hours (GWh) of battery capacity a year but will need to ramp up to over 90GWh a year by 2030 to maintain a car industry at its current size, according to the APC. Investment is urgently needed to increase battery production and secure for the UK a major share of the rapidly growing global battery supply chain market, which is forecast to grow from $46 billion in 2021, to projections ranging from $116 to $278 billion by 2030.
Ian Constance, CEO, Advanced Propulsion Centre, said: “The UK battery supply chain presents a real opportunity. Our forecasts show that demand will reach over 90GWh by 2030 but delivering growth on this scale requires a healthy appetite to invest significant capital. To maximise green jobs and economic growth, gigafactories and their supporting supply chains are essential. The right balance of policy and support, as outlined in the CDRT report, is essential to secure investor confidence in the UK EV sector.”
Mike Hawes, Chief Executive, Society of Motor Manufacturers and Traders (SMMT), said: “UK automotive manufacturing and its supply chain has benefitted from decades of significant investment to make it successful. At least £10.8 billion has been committed to EV production since 2011, but as the transition to zero emission motoring gathers pace so too does the need for fresh investment. To ensure the UK remains globally competitive as an EV manufacturer we need urgent backing to help transition our supply chain, bolster retraining and skills programmes and, crucially, increase our domestic battery production capability.”
Powering the Drive to Net Zero concludes that only the private sector can provide finance at the pace and scale needed to enable the transition to cleaner road transport. Yet, at present, organisations across the battery supply chain find it hard to secure the high levels of funding needed to scale up because battery developments are often considered high risk. Banks and institutional investors are cautious about investing in an emerging sector, particularly when future revenues are not certain and offtake agreements to buy batteries have yet to be signed. This means developers have to bridge a funding “valley of death” as they seek to scale up, with challenges around securing investment which matches the risk profile.
The report finds that innovative financial solutions including de-risking mechanisms such as guarantees, along with supportive government policies, are essential to unlock the larger sums of capital needed to build battery supply chains.
It warns that failure to invest now risks seeing other countries capture this opportunity, because investment lead times and construction periods for battery facilities can extend to several years.
Investors stand to benefit from an orderly transition from ICE to EV production as the revenues from one are substituted with revenues from the other. A successful transition will also present opportunities to invest in setting up the infrastructure that will be needed to recycle end-of-life batteries and reduce the need for virgin materials.
Richard Hill, Head of Automotive & Manufacturing, NatWest, a CDRT member, said: “The window of opportunity to secure investment into the UK is closing fast. Announcements about battery production investments and supply contracts are now time critical for the UK, and all stakeholders, including the finance industry, must collaborate at pace if the existing auto sector is to be maintained and new opportunities exploited.”
The CDRT was set up by the Green Finance Institute in January 2021 to unlock the financial barriers to the decarbonisation of road transport and enabling infrastructure and to support the transition to a zero-carbon and climate resilient economy. Now with over 40 members, the coalition brings together experts from across the automotive and financial sectors to co-design innovative financial solutions that will scale up investment in zero emission road transport.
The CDRT report puts forward a series of solutions to overcome barriers that are holding back investment. Financial and automotive sector organisations within the coalition are now working towards piloting and launching these demonstrator projects:
• Public capital could be used to de-risk private investment. The CDRT is exploring several mechanisms that could support a Battery Investment Facility including using public finance to provide cornerstone investments, revenue guarantees and first loss mechanisms. An Offtake Support Mechanism could give investors confidence about future revenues by offering guarantees backed by public money.
• An Investor Showcase could connect businesses seeking investment with investors keen to invest in battery technology, and a Lenders’ Handbook could give investors information about battery technologies currently available and under development.
• A Battery Value Guarantee giving each EV battery a guaranteed end-of-life value could boost EV sales by giving consumers confidence about vehicle depreciation and would support a market for battery re-use and recycling.
• Battery Passports would incentivise sustainable supply chains and protect against greenwashing by recording the origin of each device’s parts. A Sustainable Import Guarantee would provide financial incentives for manufacturers to import sustainably sourced materials.
Lauren Pamma, Programme Director, CDRT, said: “The global EV market is racing to scale up the battery supply chain. This demand means new opportunities for investment in the UK, but only if the barriers to realising these opportunities are removed. Cross-sector collaboration has been critical to identifying the solutions that will de-risk investment, and unlock the capital required to build the battery supply chain that will secure the future of the UK’s automotive industry.”
Only 5% of UK car manufacturing was battery EVs in 2020 but the APC estimates that this could grow to 34% by 2025 and 78% by 2030. Production of ICE vehicles is forecast to fall rapidly from 94% in 2020, to 61% in 2025 and just 5% in 2030 to serve a shrinking export market.
The UK is well positioned to become a global player in the EV battery revolution. It has a strong automotive sector, with over 30 manufacturers building more than 70 models of vehicle, a highly competitive chemicals industry, and it is at the forefront of research and development into new low-carbon engine technologies.
APC research highlights the UK’s potential to compete globally in three key areas which could deliver combined market growth of £24 billion by 2025: batteries (£12bn), power electronics (£10bn) and electric machines (£2bn).