Feds Try to Entice Canadian Pensions to Finance EV Battery Plants
The federal government is trying to entice Canadian pensions to finance the building of dozens of electric battery plants and lease them back to the automotive industry.
François-Philippe Champagne, the minister of innovation, science and industry, said the proposal would be a win for industry and for the retirement plans because it would speed up the building of plants to service growing demand for electric cars while providing stable returns to pensions.
Speaking at the Bloomberg Canadian Finance Conference on Thursday, Champagne said pairing institutional investors with large production facilities is not without precedent — citing Brookfield Infrastructure Partners L.P.’s agreement with Intel Corp. last month to jointly fund Intel’s under-construction semiconductor fabrication facility in Arizona.
It would also help clear a “bottleneck” by accelerating construction of production facilities to process critical minerals that are abundant in Canada such as lithium, nickel, cobalt, manganese and graphite, he said.
“If you talk to the major car manufacturers, we’ll need dozens of them,” Champagne said, adding that a single plant could cost $5 billion.
“So what I’ve been trying to discuss with them (and equipment manufacturers) is whether we can use pension funds where you have patient capital coming in helping to build these asset and then lease them back in order to accelerate and increase capacity.”
He suggested Canada has an edge over countries such as Australia with similar labour and environmental standards because it is close to a large automotive hub in the Windsor-Detroit corridor.
“I think we can be creative in financing these assets and providing stable returns to these pension funds and at the same time ensuring access to these critical minerals in a jurisdiction of choice,” Champagne said.
Michel Leduc, senior managing director and global head of public affairs at the Canada Pension Plan Investment Board, said he isn’t aware of any current talks specifically about electric battery plants but he “can’t see why it wouldn’t be interesting to explore.”
The sub-sector and theme of electric vehicles and critical minerals would be “on target” for Canada’s largest pension, he said.
What’s more “the model isn’t entirely foreign” to CPPIB, which has experience with buying intellectual property rights in the pharmaceutical sector in exchange for a share of royalty payments.
“Not the same, yet a relatable model,” Leduc said.
An article published by The Logic this month said the federal government is also trying to encourage Canadian pension funds to invest in green projects from carbon capture and energy storage to the decarbonization of heavy industries.
It cited a December 2021 memo, written by an official at Innovation, Science and Economic Development Canada (ISED) and obtained through an Access to Information request, which said Ottawa was targeting “meaningful and broad participation from Canada’s largest pension funds.”
Canada needs to spend as much as $125 billion each year for the economy to reach net zero by 2050 and Ottawa is hoping private capital will contribute a large share, according to the report in the subscription-based news outlet that focuses on the innovation economy.
The Logic said the message from pension funds to the government is there is no interest in small clean-tech projects that carry a high degree of risk and an uncertain payoff, and Ottawa is now considering establishing a pooled-capital fund to encourage investment.
Maria Merano of Teslarati reports Canada proposes financial plan for more EV battery plants:
Canada’s federal government is trying to convince Canadian pensions to finance construction of a dozen EV battery plants in the country. The financial plan aims to build electric vehicle battery production facilities as Canada seeks to become a “supplier of choice” for EV automakers.
François-Philippe Champagne– CDN’s Minister of Innovation, Science, and Industry–talked about pensions financing the construction of EV battery plants at the Bloomberg Canadian Finance Conference on Thursday, September 29.
Canada can be the green supplier of choice for the world when it comes to EVs and the battery industry.
— François-Philippe Champagne (FPC) 🇨🇦 (@FP_Champagne) September 29, 2022
That was my message to Toyota and Prime Planet Energy & Solutions in Japan this week.
We’ll keep working hard to see more jobs and more growth back home in 🇨🇦. pic.twitter.com/F4QJfysXv9“I think we can be creative in financing these assets and providing stable returns to these pension funds and at the same time ensuring access to these critical minerals in a jurisdiction of choice,” said Champagne.
As per the Financial Post, Michel Leduc—the Sr. Managing Director and Global Head of Public Affairs at the Canada Pension Plan Investment Board (CPPIB)—noted he was unaware of any talks related to electric battery plants. CPPIB is Canada’s largest pension. Leduc hinted that the idea of CPPIB financing such a project might not be too farfetched, stating that the sub-sector and theme of electric vehicles and critical minerals were “on target” for the pension.
Champagne estimated that EV battery plants could cost up to CAD$5 billion. He explained that building EV production facilities would help clear the “bottleneck” for cells. The Minister suggested that some EV battery facilities could process critical minerals for cell production, like lithium, nickel, and manganese—which are abundant in Canada.
“If you talk to the major car manufacturers, we’ll need dozens of them,” said Canada’s Minister of Innovation, Science, and Industry. “So what I’ve been trying to discuss with them (and equipment manufacturers) is whether we can use pension funds where you have patient capital coming in helping build these asset[s] and then lease them back to accelerate and increase capacity.”
Canada is committed to building a robust and reliable automotive and battery supply chain in North America. Canada aims to be a top EV supplier to automakers worldwide, especially those catering to the North American market. Champagne stated that Canada has the edge over countries like Australia, which offer similar labor and environmental standards. He explained that Canada’s edge was its proximity to Windsor-Detroit, a major automotive hub in the United States.
Car manufacturers are starting to look at Canada for potential opportunities in the country. For instance, last month, Volkswagen and Mercedes Benz entered into separate agreements with Canada for EV battery materials.
Earlier this year, LG Energy Solution and automaker Stellantis N.V. entered into a joint venture with CDN. The joint venture includes a total investment of more than USD$4.1 billion for constructing an EV battery production facility in Canada.
Canada has also initiated talks with lead EV automaker Tesla. Elon Musk joked about a potential Tesla gigafactory at this year’s Shareholders Meeting. Public documents in Canada have fueled rumors of a Tesla factory in Canada.
These articles caught my attention for several reasons.
First, why is the federal government trying to entice large Canadian pension funds to finance EV battery plants?
Back in March, Ontario Premier Doug Ford along with federal and municipal officials confirmed that Windsor, Ont., will be home to an important electric vehicle battery manufacturing plant:
Canada's first lithium-ion electric vehicle (EV) battery manufacturing plant is coming to Windsor, Ont., as part of a $4.9-billion joint-venture deal between Stellantis and LG Energy Solution, federal and provincial officials announced Wednesday.
The operation is set to create 2,500 jobs in the region, with each level of government offering incentives for the project.
Ontario Premier Doug Ford, Economic Development Minister Vic Fedeli, federal Minister of Innovation François-Philippe Champagne, federal Transport Minister Omar Alghabra and Windsor Mayor Drew Dilkens were among those at the facility's future site in the southwestern Ontario city for the announcement Wednesday.
"This is the largest automotive investment in the history of our province and the country as well," said Ford.
"This game-changing battery plant will help guarantee that Ontario is at the forefront of the electric vehicle revolution and ensure we remain a global leader in the auto manufacturing just as we have been for over 100 years."
The companies say they've "executed binding, definitive agreements" to establish the factory, set to have an annual production capacity of 45 gigawatt hours.
Stellantis chief operating officer Mark Stewart said the facility will supply a "substantial amount" of EV batteries.
"This battery plant is going to supply across North America for us as one of two that we have envisioned," said Stewart, adding the factory's proximity to the U.S. makes Windsor an ideal location for business.
Stellantis plans to announce their second EV battery manufacturing plant, which will be in the U.S., in the coming weeks.
Stewart said Windsor's new facility will be the size of about 112 NHL hockey rinks, with Champagne calling it Canada's first gigafactory.
While each level of government has partnered in the deal to create massive incentives to the companies, it's unclear how much funding the federal and provincial governments have kicked in.
When CBC News asked for details about the amount of taxpayer money that will be spent, Ford said: "I can't divulge that. It would compromise some negotiations moving forward with other companies as well, but it's a massive investment and its hundreds of millions of dollars."
With rising rates and a recession on its way, cash-strapped governments aren't in the mood to finance the building of more EV battery plants with taxpayer money, they are looking for creative alternatives.
We definitely need to increase our EV battery plants in this country and it makes sense for our large pension funds to invest in such projects. These plants are part of the transition to a green economy.
But our large pension funds operate at arm's length from all governments, this is a critical part of their governance.
Importantly, the federal government cannot force any pension fund in Canada to invest in any project but it can make suggestions and create the right conditions to entice them to invest.
Still, it needs to fit their mandate, pass their investment and other criteria and equally important, it needs to be scalable to make a meaningful impact to entice these large pensions to invest n it.
Like I stated, the idea of Canadian pensions financing EV battery plants:isn't a bad one.
Quite the contrary, it's a good idea and Canada's large pension funds are already investing in this sector abroad.
For example, back in June, Northvolt announced the signing of a $2.75 billion private placement to finance further battery cell production capacity and R&D efforts in order to meet the increasing demand of customers engaged in the transition to decarbonized, electric solutions:
The private placement was co-led by new investors AP funds 1-4, via the co-owned company, 4 to 1 Investments, and OMERS, one of Canada’s largest defined benefit pension plans, alongside existing investors Goldman Sachs Asset Management and Volkswagen Group. Also participating in the equity raise are current owners AMF, ATP, Baillie Gifford, Baron Capital Group, Bridford Investments Limited, Compagnia di San Paolo through Fondaco Growth, Cristina Stenbeck, Daniel Ek, IMAS Foundation, EIT InnoEnergy, Norrsken VC, PCS Holding, Scania and Stena Metall Finans.
Including the private placement, Northvolt has now raised more than $6.5 billion in equity and debt to enable an expansion plan leading up to and beyond 150 GWh of deployed annual production capacity in Europe by 2030. In addition, Northvolt has to date secured in excess of $27 billion worth of contracts from key customers, including BMW, Fluence, Scania and Volkswagen, to support its plan, which also includes establishing recycling capabilities to enable 50 percent of all its raw material requirements to be sourced from recycled batteries by 2030.
Peter Carlsson, Co-Founder and CEO of Northvolt, commented:
“We have a solid base of world-class investors and customers on-board who share Northvolt’s mission of building the world’s greenest battery to enable the European transition to renewable energy.”Northvolt’s first gigafactory, Northvolt Ett, in Skellefteå, Sweden, will be expanded from the earlier plan of 40 GWh to 60 GWh of annual production capacity in order to meet the increased demand from key customers, including a $14 billion order from Volkswagen announced earlier this year. The factory will commence production later this year.
“We have been producing cells at our cell industrialization facility, Northvolt Labs, for more than a year and are excited to now bring the knowledge and technology we have developed to the north and start large-scale production,” said Peter Carlsson.
In order to meet its 2030 capacity target, Northvolt currently anticipates building at least two more gigafactories in Europe over the coming decade, and is actively exploring the opportunity of building the next of these in Germany.
During the same timeframe, Northvolt foresees tremendous growth in other parts of the European value chain for battery manufacturing; from processing of raw materials to component and equipment manufacturing, to production of battery cells and systems and the build-up of recycling infrastructure.
“This is a new European industry in the making and it will require significant investments over the coming decade. It is encouraging to see that the investor community has identified the opportunity early, and we hope to see more investments throughout the value chain over the coming years,” said Alexander Hartman, CFO of Northvolt.
In July, Northvolt raised another $1.1 billion for its European expansion from these investors.
This is an example of Swedish pension funds and OMERS taking part in a private placement to finance Northvolt's growth.
Northvolt Ett – one of Europe’s largest gigafactories – will have a
production capacity of 60 gigawatt hours (GWh), which would supply
batteries for approximately one million electric vehicles annually.
It would be nice if Northvolt builds a large gigafactory here in Canada and that might happen.
François-Philippe Champagne, the minister of innovation, science and
industry, discussed pension funds financing the building of dozens of electric battery plants -- at a cost of $5 billion each -- and lease them back to
the automotive industry.
Speaking on behalf of CPP Investments, Michel Leduc, Senior Managing Director
and Global Head of Public Affairs said he isn’t aware of any current talks specifically about
electric battery plants but he “can’t see why it wouldn’t be interesting
to explore,” adding:
The sub-sector and theme of electric vehicles and critical minerals would be “on target” for Canada’s largest pension, he said.
What’s more “the model isn’t entirely foreign” to CPPIB, which has experience with buying intellectual property rights in the pharmaceutical sector in exchange for a share of royalty payments.
“Not the same, yet a relatable model,” Leduc said.
Michel is right, this model is relatable but again, it must fit the criteria CPP Investments and other large Canadian pension funds are looking for.
They are investing across the energy spectrum so it's definitely something that would interest them as they want to expand their green assets at home and abroad.
But it has to be scalable or else these large pension funds will not be interested in "small clean-tech projects that carry a high degree of risk and an uncertain payoff."
And therein lies the kink.
Who will build these EV battery plants? Will there be a partner of choice like Northvolt or equal caliber? How will the government derisk this project and make it enticing for pensions to invest?
I think the Canada Infrastructure Bank should take part in these discussions if they are to proceed and they can find a way to entice more private sector involvement through a public-private partnership.
There is no question this is a good idea and if it is done right, Canadian pension funds can take part in it to finance it.
But as I stated above, the governance of our large pension funds operating at arm's length from the government is critical and if such a project does go through with their involvement, optics matter, they will only do so if it fits their mandate and investment and other criteria.
Having said this, at a cost of $5 billion to build each EV battery plant, that is a lot of money needed to finance this transition economy, so it definitely makes sense to have some form of public-private partnership.
You can't expect large pension funds to take on all the risks in a greenfield project unless of course, they can dictate their terms to make sure their reward is commensurate with the risks they are taking.
Another option is for car manufacturers to work directly with large investors to finance such projects.
Last year, CNBC reported that automakers are spending billions to produce battery cells for EVs in the US:
As supply chains remain in distress across the globe, automakers are spending billions to move production of battery cells to their home countries to meet what’s expected to be rapidly growing demand for electric vehicles over the next decade.
Automakers from Detroit to Japan plan to simplify supply chains to lower costs, ease logistics and avoid massive disruptions. A global shortage of semiconductor chips has highlighted the industry’s reliance on overseas manufacturers for the parts.
Those based in or that have large operations in the U.S. are also hoping to appease the Biden administration, which has called for companies to bring supply chains to the U.S.
Other than Tesla, the country’s electric vehicle sales leader, automakers have been reluctant to invest in battery cell production until recently. Instead, they’ve relied on suppliers, largely based in Asia, to build such parts. Many, including Tesla, have or plan to partner with battery cell suppliers such as Panasonic and LG Chem to produce the parts.
“There’s the rapid electrification that’s going to happen, plus the Covid-19 semiconductor shortage has really taught us that we need to do more than just rely on battery as a commodity,” said Arun Kumar, a managing director in the automotive and industrial practice at AlixPartners. “You’re going to see this accelerate even more, in our viewpoint, primarily because localization becomes an important factor, if you really think about producing batteries at scale.”
Electric vehicles are powered by battery packs that have modules, which hold the cells. The packs are by far the most important and costly part of an EV. They can also weigh hundreds to thousands of pounds, making shipping more difficult than smaller items such as small semiconductor chips.
$330 billion in EVs
Based on a rolling five-year average of announced investments, AlixPartners expects companies to invest $330 billion in the next five years throughout the EV supply chain globally. About a third of that is expected to be for batteries, largely in the China and Europe, while the U.S. attempts to catch up.
That forecast is up by 65% from an expected $200 billion from 2018, according to Kumar.
“Electrification is occurring faster than many were thinking even a few years ago,” he said. “The plans OEMs have in place have started to change dramatically.”
The investments are being made in preparation for new demand. While plug-in vehicles, including all-electric and plug-in hybrids, are forecast to only account for 4% of the U.S. market this year, there’s expected to be a rapid adoption globally over the next decade, including the U.S.
AlixPartners expects about 28% of vehicles globally to be EVs by 2030. In the U.S., LMC Automotive expects about a third of new vehicles sales in the U.S. to be EVs by then.
Panasonic, led by Tesla, is the country’s largest producer of battery cells, according to a report by Argonne National Laboratory that was written for the U.S. DOE’s Office of Energy Efficiency & Renewable Energy. The Japanese company supplied battery cells to 70.9% of vehicles sold in 2020 in the U.S., according to the report.
But others, such as LG Chem and SK Innovation, are partnering with automakers and making their own moves.
‘Increasingly going vertical’
Automaker Stellantis, formerly Fiat Chrysler, and LG Chem’s Energy Solution spinoff on Monday announced an agreement to form a joint venture to produce battery cells and modules for North America. The companies did not provide financial details, but it will add to billions in already announced investments.
Toyota Motor on Monday also said it plans to invest about $3.4 billion (380 billion yen) on automotive battery development and production in the United States through 2030, including a new $1.3 billion battery plant.
“The 10s of billions of dollars that are being invested by most of the big automakers over the next five to 10 years on making the transition to electric, the last thing they want to do is be stuck without key components that they need whether it be batteries or chips,” said Guidehouse Insights principal analyst Sam Abuelsamid. “They are increasing going vertical in some cases or diversifying their supplies in other cases.”
The announcements Monday come after Ford Motor said last month it will invest more than $11.4 billion in new U.S. facilities that will create nearly 11,000 jobs to produce electric vehicles and batteries, including twin lithium-ion battery plants in central Kentucky through a joint venture with SK Innovation.
“Due to Covid and now the reaction to the semiconductor shortage, our government and companies are looking to onshore,” said James Lewis, a senior vice president with the Center for Strategic and International Studies, which works with automakers. “Car companies in particular don’t want to get caught out again the way they were caught out on chips.”
U.S. plants
Following Tesla’s lead, General Motors could be next to produce it’s own battery cells and packs in the U.S. Through a joint venture with LG Energy Solution, the Detroit automaker is scheduled to begin cell production at an Ohio plant next year. The plant is expected to be the first of at least four, including another announced in Tennessee, in the coming years.
There are 27 battery facilities, including cells and packs, that have been announced or are currently operating in the U.S., according to the Center for Automotive Research.
Separately from the battery plant announcements, iPhone maker Foxconn, which is preparing to produce EVs, on Monday said it plans to produce electric cars and buses for auto brands in China, North America, Europe and other markets.
The Taiwanese company last month announced it will purchase an Ohio factory from embattled EV start-up Lordstown Motors for production of a vehicle for the company as well as EV start-up Fisker.
“This is the wave of the future,” Lewis said. “This is a modernization of our auto industry.”
All this to say, I'd personally love to see our large pension funds be part in the financing of these electric vehicle battery plants as long as it makes absolute sense for them to do so, fits all their criteria from a risk-reward perspective and benefits their contributors and beneficiaries over the long run.
Lastly, take the time to read IMCO's electric vehicle research report here, it is excellent and packs a lot of great insights in a relatively short report.
Below, CBC reports Windsor, Ont., will soon be home to Canada’s first electric vehicle battery plant – a joint venture between automaker Stellantis and South Korean battery-maker LG Energy Solution. The $4.9-billion plant is expected to create 2,500 jobs in a region hard hit by layoffs in the automotive industry.
And Northvolt was founded in 2016 with an idea that many dismissed as a pipedream. Five years later and Northvolt Ett has produced its first lithium-ion battery cell. This is the story behind the new industrial landmark that is Northvolt Ett.
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