Financing the Energy Transition – The Gigafactory Build-out

Battery producers are faced with an increasingly stringent legal framework on sustainable and responsible supply chains as a result of the growing body of regulation on supply chain transparency and active risk mitigation in supply chains (including in relation to critical minerals). This includes the French Vigilance Law⁵ (which was passed in 2017), the German Supply Chain Act⁶ (which entered into force in January 2023) and the European Commission's current proposal for a directive on corporate sustainability due diligence (which is expected to be agreed and adopted by the EU by the end of 2023).

The EU Batteries Regulation (which entered into force in August 2023 and is being implemented in phases until 2027) is of direct relevance to gigafactory projects and their end customers, in particular the requirements for:

Key considerations

2.1 Funding

The construction of gigafactories entails significant costs and so usually necessitates a mixture of funding sources, including:

• Government grants, subsidies and financial incentives: governments are offering a range of grants, subsidies, preferential loans, guarantees and other financial incentives to encourage domestic gigafactory projects. Examples include the EU's Innovation Fund (which has provided grant funding to a number of European gigafactory projects) and the Important Projects of Common European Interests (IPCEI) scheme which supports innovative projects, the UK's Automotive Transformation Fund (which offers grant funding to projects that support the UK EV supply chain) and France's Garantie des Projets Stratégiques regime (which can provide a guarantee for up to 80% of a project's debt through Bpifrance - this was recently used in the financing of Verkor's innovation centre in Grenoble and is being considered for Verkor's gigafactory in Dunkirk).
• Multilateral and policy bank support: the European Investment Bank (EIB) and export credit agencies such as UK Export Finance (UKEF) and Bpifrance are able to offer a broad range of financial support for projects. This includes loans, guarantees and direct equity investments. For example, the EIB has made loans to several European gigafactory projects in recent years (including Northvolt's gigafactory in Sweden, Umicore's battery materials plant in Poland and Verkor and AESC's gigafactories in France) and in 2022 Euler Hermes, Korea Trade Insurance Corporation and the Export-Import Bank of Korea provided a combination of insurance, guarantees and loans to SK On's project in Hungary.
• Commercial banks and private capital: gigafactories lend themselves to senior secured project financing by commercial banks, pension funds and also mezzanine finance by institutional private capital. Given the capital-intensive nature of gigafactories, large amounts of debt are required and the support of multilateral and policy banks (see above) can be key to 'crowd in' commercial lenders. Northvolt, for example, has successfully raised bank debt from commercial lenders across Europe, supported by coverage from institutions including Bpifrance and Euler Hermes.
• Equity: equity is required upfront before any debt facilities are made available. As highlighted above in section 1.1, under a JV structure, it is paramount to secure a solid partnership with an anchor OEM to attract quality equity investors. Contingent equity support may also be required for cost overruns and completion guarantees on project financings (see section 2.3).

2.2 Supply and Offtake 

Gigafactories are exposed to a cost / revenue squeeze if input price fluctuations are not matched by the end battery product price. Equally, given that battery costs account for a significant proportion of the price of an EV, raw material price spikes can make a whole EV model production line uneconomic. This plays out in several ways on both the supply and offtake side.

• Supply: recognising the strategic importance of a stable and secure critical mineral supply chain, automotive OEMs are increasingly securing access to critical battery minerals by contracting large volumes through long-term offtake agreements, with such volumes subsequently allocated to their nominated gigafactories. Equally, gigafactory projects are also conscious of supply chain risk and seek to source the required battery metals directly from producers, as well as trading companies. In any scenario, managing market price fluctuation is a key concern for the viability of the economic model of gigafactory projects. There are a number of different approaches to managing and controlling input commodity costs, including full pass-through, long-term discounts (retaining exposure to price fluctuations but with a discount) and cap-and-floor pricing structures (limiting the impact of price fluctuations in both directions).
• Offtake: project financing requires steady revenue flows, which imposes one or several bankable offtake contract(s) with a creditworthy offtaker(s) for a period of time that allows debt repayment. This may not align with the needs of OEMs, who may have shorter time horizons (e.g., in line with the life of a production line). Parties will therefore need to pay close attention to the allocation of risks in the offtake agreement, including the ability to sell to third parties on the market. OEMs will pay particular attention to the sizing of any long-term take or pay arrangements and termination compensation in various scenarios.

2.3 Construction

The nature of gigafactories rarely allows construction/commissioning to be fronted by a single entity (such as an EPC contractor). Instead, the construction of a gigafactory will be undertaken through a variety of different contracts, which increases complexity and the risk of completion delays/underperformance. The division of the project into separate packages inevitably focuses attention, in particular for financiers, on sponsor cost overrun and completion support, because there is no single contractor solely responsible for timely delivery or performance of the project, or outturn cost. The inability to pass through the full losses to the EPC contractor in turn means that there is increased focus on strong project management and the need for sufficient buffers in the project schedule.

In addition, given the amounts at stake and the limited recourse against the battery maker and, in turn, the various contractors/suppliers, anchor OEMs may have no choice but to bear a share of the construction/commissioning risk.

2.4 Intellectual property and technology

Developing gigafactories involves numerous proprietary innovations and processes in the context of rapidly evolving technology which is essential to prove at scale and adapt overtime. Gigafactory developers rely on a wide range of external suppliers and partners, which require compliance with third party patents and licences. For example, it may be that the IP in respect of the casing of a battery module belongs to the OEM (rather than the battery manufacturer); this needs to be carefully assessed if the gigafactory developer is also selling complete batteries to third party customers. Therefore, a robust IP strategy, backed by clear contractual arrangements, to promote innovation and protect the interests of all stakeholders is key to develop a successful gigafactory project.

2.5 Site

There are a number of site-specific factors required to be considered in the selection of the geographic site for a gigafactory. Key considerations include:

• Power: recent geopolitical events and the resulting energy price crisis have highlighted the volatility of the energy market and can threaten the viability of gigafactory projects. In addition, securing renewable sources of power is also essential in light of an increased focus on the carbon intensity of products. To mitigate the risks associated with energy price volatility and sourcing renewable energy, gigafactories can look to co-locate with renewable energy production (such as the Northvolt Ett gigafactory in Sweden, which is powered 100% by hydropower and wind power) or enter into corporate power purchase agreements with renewable producers (such as FREYR's long-term renewable power purchase agreement with Statkraft for the supply of power to its gigafactory project in Norway).
• Water: water security is a key factor that gigafactory operators should address early on in the process to avoid water access being a limiting factor for the project (as has impacted the Tesla factory in Germany), and therefore is a key focus in the choice of the site location (including proximity to groundwaters reservoirs or wastewater treatment facilities, allowing water recycling).
• Transport links: given the size and weight of batteries and corresponding transport costs and environmental impact, efficient transport links and proximity to the offtake EV manufacturing plants (e.g. Verkor's gigafactory in Dunkirk, France which will supply batteries to Renault to be used in its EVs manufactured in nearby Dieppe) will play an important role in the selection of a site, as well as offtake strategy.
• Proximity to suppliers: locating a gigafactory near to suppliers (such as critical mineral mines and refineries and battery component manufacturers) is another important consideration. An example of where this has been an important factor in site selection is GigaVaasa in Finland, which is located in proximity to Keliber, Terrafame, Finnish Minerals, BASF and Nornickel's refineries, as well as automotive, maritime and industrial equipment providers.
• Skilled local workforce: given the scale of and technical requirements needed to operate gigafactories, a location which will attract an appropriately skilled workforce is also a key factor in site selection. Flexibility around workforce is also a key element to factor in, given the need for OEMs to sometimes adjust their volume forecasts to accommodate their production schedules. In particular, the correlation between fixed labour costs and any take-or-pay obligations will be of particular interest.

If there are any points in this article you would like to discuss, please feel free to get in touch with any of the key contacts below.

For more information on financing the energy transition and other related insights, see our energy transition and net zero hub here, which includes all of the previous articles in our "Financing the Energy Transition" series.

1. European Commission "Green Deal: EU agrees new law on more sustainable and circular batteries to support EU's energy transition and competitive industry" 9 December 2022.
2. Department for Business & Trade "UK Battery Strategy" 26 November 2023.
   https://assets.publishing.service.gov.uk/media/6560b0920c7ec8001195be01/uk-battery-strategy.pdf
3. International Energy Agency "Global EV Outlook 2023" April 2023.
4. International Energy Agency "Critical Minerals Market Review 2023" July 2023. Data reflects the International Energy Agency's Announced Pledges Scenario.
5. Loi n° 2017-399 du 27 mars 2017 relative au devoir de vigilance des sociétés mères et des entreprises donneuses d'ordre.
6. Gesetz über die unternehmerischen Sorgfaltspflichten zur Vermeidung von Menschenrechtsverletzungen in Lieferketten (Lieferkettensorgfaltspflichtengesetz - LkSG).