BESS storage hardships put the EU’s energy strategy at risk
Introduction
Northvolt was bound to succeed. Founded in 2017 by two former Tesla executives, this EV battery manufacturing startup immediately received extensive funding from a wide range of institutional investors: the European Investment Bank, BMW, Volkswagen, Goldman Sachs and BlackRock are among the parties who significantly invested in the company before the production of its first power cell. In 2023 Northvolt was the most funded startup in Europe, having raised over €5.15 billion to date (cumulative funding has reached €15 billion as of December 2024). It chose to operate in Sweden, a country with easy access to clean and cheap hydroelectric power to fuel production. Widely regarded as Europe’s answer to China’s dominance in the battery manufacturing sector, it attracted vast capital for a number of different projects: sodium-ions, aviation, AI and more. What could go wrong?
On September 23rd 2024, Northvolt declared it would suspend work on one of its new manufacturing plants, slow the expansion of its research and development (R&D) unit and lay off a fifth of its workforce. It blamed the situation on “headwinds in the automotive market and the wider industrial climate”. Regardless of the explanation given, the truth was that despite all funding and support, Northvolt was never able to meet its production goals, with repeated delays causing orders to be cancelled. Back in June, BMW decided to pull out of a $2b deal, plunging the company into panic. BMW had expected the first power cell to be delivered in 2024, but Northvolt was reportedly two years behind schedule; it was also producing waste in excess because of diffused inefficiency across its productive process.
A former senior executive at Northvolt interviewed by The Financial Times had said, "Making batteries is hard, really hard. We tried to do almost everything at once, [...] and the problems just kept piling up. I just don’t know if they can make it now."
Zeng Yuqun, founder and chairman of Chinese battery manufacturer CATL, and vice chairman of the Chinese Federation of Industry and Commerce, commented on the matter in a conversation with Nicolai Tangen, Norway’s sovereign fund’s CEO: "They have a wrong design [...] they have a wrong process [..] and they have the wrong equipment. How can they scale up?"
On November 21st 2024, Northvolt filed for bankruptcy. In its Chapter 11 petition, the company admitted that its “liquidity situation had become dire”. It reportedly had about $30m in cash, with which it could support operations for about a week. Moreover, it owed $5.8b to investors. On November 22nd, CEO and co-founder Peter Carlsson resigned. It is not unusual for start-ups to fail. Northvolt, however, was a start-up like very few others, and its success was crucial. The Swedish firm’s fate tells us that, despite enormous funding and unconditional institutional support, Europe simply couldn’t put up a credible opposition to Asia’s battery makers. As batteries and energy storage become increasingly crucial for the green industrial transition, how can Europe achieve technological sovereignty? What needs to be done, and what challenges lie ahead?
Technology and market overview
The electricity grid is a complex system which has to constantly balance demand and supply. In the last decades, this delicate equilibrium could be effectively “programmed” because an overwhelming majority of energy and electricity came from so-called “dispatchable sources”, such as natural gas or coal power plants, whose output can be easily adjusted to match demand, ensuring grid stability and smooth operativity. Renewable sources are now replacing fossil fuels, and while this process is necessary to achieve carbon neutrality, and make energy cheaper and more widely available, replacing dispatchable sources with intermittent ones like solar and wind power, whose output cannot be entirely predicted, carries a serious intrinsic risk: what if, at a given moment, the energy output is not enough to satisfy demand?
The consequences could be disastrous. Here’s a telling example from Montel Analytics: On November 8th, 2024, solar and wind power generation in the Netherlands was much lower than daily forecasts had predicted. On top of that, demand turned out to be significantly higher due to unexpectedly low temperatures. Energy production and imports couldn’t match the increased demand, resulting in a record balancing price of €2748 per MWh. From December 1st 2025, If the market runs out of capacity, a scarcity factor will be added to the balancing price. The impact of that measure, had it been live at the time, would have been significant, with a theoretical maximum price of up to € 68,000/MWh.
To avoid such catastrophic outcomes, grids resort to storage: essentially, it’s the ability to capture energy, expending it when needed. As of today, the two main technologies involved are pumped-storage hydropower and BESS (Battery Energy Storage Systems). The former is the most widely used method worldwide: Global capacity was around 8500 GWh in 2020, accounting for over 90% of total global electricity storage. However, its usage is heavily dependent on the location. BESS, on the other hand, consist of sets of batteries, stacked in racks and placed in containers. The most diffused and the fastest growing batteries are lithium-ion ones, like those used in cellphones, computers and EVs. Lithium-ion batteries are preferred to other designs because of their reliability, their energy density and their durability. Many diverse battery prototypes are currently being researched, but high costs and technical difficulties hinder their scalability. Figure 2 represents the evolution of Europe’s cumulative battery storage installed capacity in the past decade. Starting from 2020, the capacity began increasing at exponential rates, doubling every year from 2021 onwards. In 2023, the top installing countries were Germany (5.9 GW), Italy (3.7 GW), and the UK (2.7 GW).
Notice a pattern? These are all big industrialized countries, and they are starving for cheap energy. Germany and Italy’s industrial productions have been suffering for years because of high energy prices, and renewables alone cannot permanently solve this issue. Companies need certainty and visibility when it comes to their energy sources. There is some good news on the matter: the IEA anticipates that storage costs will keep diminishing as battery duration on a large scale increases drastically. In the following years, the BESS market in Europe is expected to grow at a steady pace, and the large-scale/industrial segment of the market should become predominant.
However, not all that shines is gold. A lot of the potential growth relies on a favourable policy setting, namely, a public sector that is willing to invest considerable amounts of cash on research, electrification, grid interconnections, etc. This critical conjunction comes at a time when many political forces are dialing back on “green” policies, which are increasingly viewed by the public as expensive luxuries society cannot afford, rather than critical steps towards technological edge over competitors in critical markets such as the one for batteries. Furthermore, as we have seen, all the political will and the government spending may still not be enough, if Europe cannot master battery production on a large scale. This leads us to the following point: from whom will we get the much-needed batteries?
China’s dominance
Over a span of just a few years, China has been able to build and expand its dominion over the battery sector on a global level. Batteries (alongside EVs and solar cells) are part of the “New Three” group that Chinese leadership has defined as the foundations of its modern economic growth. The numbers are impressive: according to the IEA, in every stage (from mineral extraction to manufacturing) of the value chain for lithium-ion batteries, China’s share in the global market goes from 70% to 90%. For example, China controls 90% of global cathode active material manufacturing, and over 97% of anode active material manufacturing.
China’s production potential is so immense that, as of now, it could cover the entire world’s demand. This overcapacity, as well as a large knowledge gap, undermines European companies’ ability to develop and commercialize their battery products, as they face cut-throat competition from Chinese incumbents. Rare earths sourcing and supply chain organization also pose serious questions to the EU’s relevance in the sector. Consequently, Europe is (directly and indirectly) dependent on China for its battery supply (and more, e.g. solar panels). This is not a comfortable position to be in: by outsourcing this critical technology Europe is exposing itself to economic coercion, trade weaponization and commercial aggressions, something that China has been practicing all over the world. It could ultimately result in limited political independence as decarbonization progresses and the bloc’s energy supply becomes increasingly reliant on solar power and BESS storage (Notably, China is also the world’s lead exporter of wind turbines).
European leaders have so far avoided confrontation with China on the matter, choosing an “avoidant” terminology; Ursula von der Leyen talked about “de-risking, not decoupling” from China in a 2023 speech, the point being that Europe should find a compromise between seeking complete independence (unfeasible at the moment) and accepting complete dependence regarding crucial sectors like solar panels, EVs and more. While the practical policy implications of this stance are not entirely clear yet, Europe at the moment isn’t significantly progressing towards self-sufficiency, risking technological and economic insignificance in these sectors. For instance, in 2024, the Commission managed to pass a Critical Raw Materials Act that focused on reliably sourcing rare earths. According to Reuters, of the many goals it set for these minerals, Europe is due to achieve only one: magnet oxides local processing. Boosting rare earths output should be a top-priority on the path towards independence; the same analysis, however, found that Europe will only be able to produce a fraction of its needs by 2030.
The Northvolt case shows that some degree of Chinese participation is currently required to produce batteries on an industrial scale. Many of the workers at the Swedish plant reportedly came from China, with employees admitting that, without their competences, production would have been impossible. This asymmetry in know-how and technological expertise cannot be balanced out in a few months. Evidently, it is of paramount importance for the EU to deal with these challenges in a well-planned manner.
What now?
There are a number of policies the EU could adopt to improve its situation, but many of them require a degree of cohesion and collective industrial vision that is simply not present at the moment. Recall that China dominates every stage of the battery making supply chain: this means that any move from Europe has to be weighed accurately, as it’s likely to result in economic retaliation. In practice, EU leadership has to decide how swift and extensive the process of decoupling from China should be.
For batteries, there are two scenarios. The first option can be termed as “Heavy”: This setting is about Europe using every tool at its disposal to immediately detach itself from China. These include import tariffs on Chinese batteries and EVs; the setup of vast funds (possibly via joint debt) to finance tax breaks, grants and investment in R&D, fostering European production and trying to close the technological gap with China’s biggest producers. Chinese companies are excluded from these programs, much like the Biden administration excluded them from IRA tax credits. Furthermore, the bloc’s countries begin pivoting to third countries for the supply of batteries (like South Korea and Japan) and critical raw materials it cannot extract on its own (for example Brazil, Australia, Mexico or Ghana). However, this level of collective decision making and collaboration is distant from reality. It is a strategy that requires a number of structural changes to how the Union works: from joint debt to common foreign policy, it is not realistic to expect such a revolution in the short-medium term. Moreover, from an economic point of view, heavy import tariffs would have a strong and immediate inflationary effect on EVs: a product whose demand is already curtailed due to excessive prices. Furthermore, domestic production of batteries is far more expensive than importing: production costs for a new battery plant in China are expected to come down from $60 million/GWh currently to $50 million/GWh by 2030. In comparison, production costs in Europe are set to stay around $100-120 million/GWh, or above. China would also retaliate with sanctions and export restrictions on rare earths and components. Other green tech markets, like the solar panels one, would be heavily impacted. All this means that Europe is not yet ready to fully detach itself from China.
A more likely scenario is the “mild” one: this scenario involves a certain degree of collaboration between the bloc and Chinese companies, which are still allowed to conduct operations in Europe. They would however be excluded from subsidies and tax exemptions (the US did the same for IRA funding). They are also forced to share know-how and technology (much like China itself is doing at home), so that the gap can be closed more quickly. EU countries may also choose to include diversification requirements in production processes: this could boost the development of European and most importantly, non-Chinese, supply chains for essential inputs. The goal is to create a more level playing field for European companies while avoiding trade wars and price spikes. Over time, a stable stream of affordable batteries would help lower EV prices, sustaining demand. Job creation and re-industrialization ensue. At first glance, this looks like a satisfying outcome, given the initial conditions. Still, an important criticism worth noting is that this setting would not solve the dependency problem: even with diversification requirements, substantial dependencies remain and could be weaponized. Security issues will arise, since BESS systems will be integral parts of new smart grids that will carry an enormous quantity of sensible data. Avoiding leaks of this information is of paramount importance. Finally, in this scenario, European battery makers have little chance to achieve global scale and compete with Chinese ones on the world stage.
Conclusion
Decisions are already being made that suggest that this is the most likely outcome. While going for the “heavy” policies may produce better overall results in the long run, it is currently unfeasible. Even if it happens, it would risk killing the European battery industry, a developmental bottleneck too difficult to overcome. Policy activism in the form of tariffs on Chinese EVs and hydrogen tech, knowledge sharing requirements etc. from the bloc’s authorities is an encouraging signal. But there are several critical questions left unanswered: how effective will those policies be? Can the EU unite against whatever retaliatory measures China will take? Can the new Commission resist pressure from right-wing parties who strongly oppose the EV industry, and in many cases renewable energy in its entirety?
Overcoming these obstacles is crucial for the industrial and economic future of the EU. Energy security and affordability are key chapters of the infamous Draghi report; the Italian economist urged member countries to consider measures to lower energy costs as pivotal means to regain competitiveness. These include but are not limited to the creation of a single European energy market in the wider context of a European single market, heavy investment on grid infrastructure to connect energy producing regions to industrialized cores more efficiently, and quick BESS layout to avoid blackouts and sky-high prices in an increasingly renewable-powered system. Each of these measures requires higher degrees of collaboration than what we have seen until now. The million dollar question is whether Europe is up to this defining challenge.
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