Unlocking finance is key to a thriving battery value chain

The pace at which the transition to clean mobility is happening requires massive investment across the entire battery value chain, from mining to materials transformation, manufacturing and recycling. A staggering $514bn of investment is needed across the entire battery value chain to meet demand by 2030.

While the largest funding and subsidy announcements are driven towards battery manufacturing, this is not the only part of the value chain competing to attract significant financing. Furthermore, requirements to obtain such funds require being able to respond to stringent criteria and performance-management parameters. 

Closing the financing gap across the battery value chain 

The battery ecosystem has been shaken by high-profile insolvencies in recent months, with a number of battery manufacturers in need of further financing to continue operations, or projects being put on hold as subsidies were renegotiated.  

For several reasons, self-financing the construction of assets in the battery industry is rare - we estimate accounting for less than five percent of projects in the sector. This shows how dependent the battery manufacturing sector is on external finance and subsidies.  

Battery manufacturers lead the race in attracting financing, but additional efforts are called for at regional or national level to enhance access to funds. From the call to arms in Europe to mirror the success of the US government’s Inflation Reduction Act (IRA), to advocacy for a stronger overall industrial sector vision and strategy in countries like the UK, many stakeholders in the manufacturing sector are vocal about the need for further support. 

Upstream processes (mineral extraction and refining) and downstream processes (such as battery recycling) represent 60 percent of the financing needs. As such projects are perceived to be lower margin and are subject to a ‘not in my backyard’ effect due to the perception of being dirtier or more dangerous, they often generate a public pushback, putting up planning barriers and fostering less political traction.  

“These factors increase the risk profile of such investments and result in lower bankability, which adds to lower subsidy availability, putting a strain on the entire battery ecosystem.”

This needs to be addressed as it could create a gap in capacity and extend supply dependence to other markets where the value chain is more developed. Awareness must be raised around the need to finance and subsidise all parts of the value chain equally, and to the required needs, to allow the industry as a whole to thrive. 

Creating a roadmap to secure project finance 

Navigating the financing landscape is a complex task. Factors such as the unique technical characteristics of each built asset, evolving technology and increasing regulation all pose potential limits to attracting finance as projects could be subject to early obsolescence risks.  

“Furthermore, unproven business models in some markets, or the fact that some key players are newly created entities, can also affect the bankability of financing many assets.”

To mitigate this, stakeholders need to understand what is needed to finance the construction of production assets. While the technical characteristics of the built asset may differ, the requirements from project finance lenders remain similar.  

Whether the project is a battery manufacturing plant, a cathode materials facility or a battery recycling facility, lenders will place common constraints.  

There are a range of factors to consider to effectively meet lenders’ needs and/or subsidy criteria. The four priority areas which battery players need to address to convince lenders to fund the construction of their asset are: 

1. Test construction project affordability - while this sector is driven by speed to market, it’s essential to take the time to fully validate affordability at the outset, rather than rushing forward. Construction market analysis, early cost estimating and design to cost initiatives should drive the initial steps of a project at feasibility stage.
2. Build the delivery strategy with project finance in mind - the first criteria from any funder will be to ensure the project’s bankability and the correct management of cash flows. As construction projects have long schedules, and cash inflow is usually linked to the successful delivery of the project, construction cash flow must be correctly anticipated and managed. Risks to cash flow need to be identified, measured and mitigated, aligning technical, schedule and cost criteria under exercises such as quantitative risk assessments.
3. Deliver the project in collaboration with the lender’s support team - stakeholders, such as the Lender’s Technical Advisors (LTA), are mandated by the lenders to evaluate and monitor the risk linked to construction. Failing to provide this stakeholder with accurate and timely information could increase the perception of risk, and therefore the financing costs. If you attract project finance, this will require the deployment of a dedicated reporting team. This will allow the project to be delivered to time and within budget, while responding to the asks from stakeholders at the LTA, including accurate reporting, efficient progress measurement and relevant levels of project controls.
4. Anticipate the subsidies requirements - the receipt of major subsidies is often linked to performance requirements, for example, evaluating the jobs generated, committing to employing a local workforce or delivering by a given date. Missing those performance requirements could create a financing gap and could also lead to the business case being unviable midway through the project. Implementing a comprehensive project controls framework will help in establishing the performance KPIs to be monitored to meet the requirements. 

Alternatives to self-financing, subsidies or project finance 

The battery sector can learn lessons from other industries’ funding models on constructing their assets.

“As they have matured, some key industries have successfully moved away from heavy reliance on project finance and from subsidy dependence.”

One alternative could be the ‘build to suit’ developer-led approach. This is a traditional model for some less complex and more mature industrial sectors, which is often seen for assets, such as black mass facilities or logistic and storage facilities.  

In this scenario, the end user will delegate the financing, construction and sometimes maintenance to a third-party developer, who will build an asset responding to the manufacturer’s needs.

For this model to work for the battery value chain, technical requirements must be clear, and developers need proof of steady revenues and higher levels of standardisation and modularity in building design. 

Using the data centre industry as a model - is this viable? 

The data centre industry has gone through similar accelerated growth to the battery sector in recent years and is now at a level of maturity that encompasses a unique way to deliver projects.

“The ‘co-location model’ - where the facilities are built and operated by a third party who rents the spaces to the operators - is surging. This reduces costs, spreads expenses and eases scalability.”

The viability of this model for the battery value chain will be dependent on a more standardised set of technical requirements for production, which seems hard to obtain in the short term, given the continuous technical breakthroughs in the industry.  

Both alternatives assume delegating the construction and operation of the asset to a third party. This may not be acceptable for stakeholders who want to internalise the processes and assets or who want to keep their intellectual property firmly controlled.

That being said, these alternatives offer the opportunity to accelerate scalability and concentrate on the technical and financial efforts in developing core activities.  

While we may not see an immediate pivot to alternative models, we can expect a change in the paradigm to financing and developing as the market matures. 

The financing race is on 

The race for money is key for the battery value chain to grow at the required pace. Whether from established means, such as project finance, or from the implementation of other alternatives seen in more mature industries, it is vital to anticipate the requirements of the entity that will either fund or build the asset.  

While different options are available, all come with their own complexities which need to be carefully navigated in order to secure a successful funding outcome. Early and best-in-class strategic support across aspects, such as cost and commercial management, project management and performance controls, are needed to navigate this process successfully.