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The challenges for European lithium-ion gigafactories and the role ESS demand will play


Lawyers from Herbert Smith Freehills discuss the challenges for the nascent European gigafactory ecosystem in light of heavy competition from the US and China, alongside the role that energy storage system (ESS) demand will play.

Much has been written recently about European gigafactory landscape and how its once-feted potential as a lithium-ion manufacturing powerhouse looks increasingly under threat from China and the US, where generous tax credits for clean energy manufacturing under the Inflation Reduction Act (IRA) have made battery cell production a third cheaper and, some say, “shifted the market”.

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Thomas Herman, of counsel at law firm Herbert Smith Freehills (HSF), is nonetheless bullish on the potential of European gigafactory projects, pointing to various underlying factors, whilst admitting they have substantial challenges ahead.

“Europe is interesting because it has plenty of automotive original equipment manufacturers (OEMs) that can provide long-term bankable offtake agreements for projects, which can help them get financing,” Herman tells

“The European market also benefits from proximity to reliable power sources, good transportation systems, skilled labour pools and strong public backing for these projects, including through various subsidies through funds.”

OEMs driving gigafactory investment

Backing from automotive OEMs is the cornerstone of these projects. Some energy storage systems (ESS) integrators have moved to secure offtake from future gigafactories in Europe – Fluence from Northvolt, Powin from Freyr, and Nidec from Verkor, for example – but these aren’t enough to build a business case.

“Given the capex involved in a gigafactory project, you cannot build a gigafactory based only an offtake from an energy storage company,” says Herman.

“Instead, projects are having a main anchor OEM for the bulk of its capacity and then contracting with others (which could be an energy storage company) for the excess. BESS in Europe is still fairly underdeveloped relative to the UK. Financing will be done on the basis of automotive OEM offtakes.”

One interesting counter-example was the apparent intention of the buyer of failed UK gigafactory firm Britishvolt to pivot away from the automotive sector to making batteries for ESS, and a McKinsey partner discussed the pros and cons of this approach with at the time (March 2023, Premium access).

This wasn’t specifically mentioned by Herman, but another point to consider alongside the potentially lower size of an ESS companies offtake is their generally relatively lower bankability rating compared to automotive OEMs, which are much larger.

Even assuming a developer has the necessary bankable offtake partners, there are significant challenges around the financing process itself, securing the necessary raw materials and the obvious question of competitiveness of their battery products once they do enter the market.

Competitiveness with the US and China

The biggest question is whether lithium-ion batteries produced in Europe will be competitive in the European and global markets, given the US is paying producers US$35 per kWh produced as a tax credit, while production in China is already cheaper.

Automotive OEMs in Europe are driving gigafactories’ business case in Europe through long-term offtake agreements and, Herman explains, they are making the bet that, although EU-made batteries might be more expensive, eventually the premium that cars made using them can garner will offset that.

“There are a lot of subsidies into gigafactory projects which will help,” says Herman. “OEMs are also betting that, at some point, environmental, social and governance (ESG) criteria will become a criteria for applying premiums to specific cars, and so cars produced with European batteries become competitive compared to Chinese cars.”

“But for now, it’s true that this market is being built as we speak. OEMs have to play on two levels. They are entering into contracts with established battery makers in China and South Korea for their current models while also investing with a long-term view in battery production in Europe or through partnerships or offtake agreements.” asked Herman if the business case for gigafactories in Europe is now less strong than two years ago, to which he says: “The gigafactory business case has struggled, but these projects take time to develop. The business case continues to evolve but, at some point, it needs to be set in stone and that’s a difficulty.”

“Its been wagered that the gigafactory projects currently in development will come online quickly enough. The construction schedules are very tight. Lithium-ion is the tech being used right now and OEMs have been designing their cars around this tech.”

Financial and material challenges

The other big challenge is intimately tied to the above market dynamics and is the fact that OEMs, by backing these projects, are finding themselves in unfamiliar territory by doing so.

“One of the biggest challenges is the financing. Lenders are keen to ensure the gigafactory company can benefit from a bankable long-term offtake agreement with the OEM. This can create a disconnect, as OEMs are not used to the extensive bankability requirements in the project financing space,” Herman says.

“When negotiating the offtake agreements, banks and investors may consequently have contrasting views and priorities to the OEMs. The challenge becomes reaching an agreement that works for both sides.”

There are also challenges around securing raw materials for lithium-ion production such as lithium, nickel, cobalt, manganese and graphite. As is the case in project financing, Paul Morton, another partner at HSF, explains that this a new space for automotive OEMs.

“Securing access to key raw materials is the challenge for gigafactory projects but also the OEMs,” says Morton. “There security of supply challenge is compounded by the politics around where those are and who is controlling them. Both production and processing is often controlled by a small number of countries, particularly China.”

“OEMs are looking at increasingly complex and longer-term offtake agreements to secure those volumes, and investment structures that these types of companies have not historically been involved in.”

On top of that, Morton notes that a “constellation” of stakeholder pressure around sustainability and ESG has arisen in the last few years.

“There is also a constellation of stakeholder pressures on sustainability, including management of human rights and environmental risks throughout the supply chain, traceability and carbon footprint for car and battery manufacturers that are having a big impact on the way they can procure minerals,” says Morton.

“Five years ago an offtake contract may have been much shorter and simpler, but now supply chain due diligence obligations (to not only identify but mitigate against environmental and human rights risks) require more complex relationships between seller and buyer. It’s a very different world to be operating in for both producers and offtakers.”’ publisher Solar Media will host the 9th annual Energy Storage Summit EU in London, 20-21 February 2024. This year it is moving to a larger venue, bringing together Europe’s leading investors, policymakers, developers, utilities, energy buyers and service providers all in one place. Visit the official site for more info.

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