EU's battery production ambitions take shape with new German factory, criticism over state aid

German chancellor Olaf Scholz has hailed the start of construction of a battery cell factory by Swedish Northvolt in northern Germany for being "of strategic importance" to the country and Europe as a whole. "Germany was, is and will remain a strong industrialised country, and the manufacturing of good cars will remain the backbone of our industry, also beyond the combustion engine," Scholz said. For this, "battery cells made in Germany, made in Europe" were needed to secure technological sovereignty and value creation on the continent, he added. Northvolt's factory is set to commence operation in 2026. It will have a maximum annual production capacity of 60 gigawatt hours (GWh) and employ around 3,000 people, the company said.

However, the government offered generous state support to lure Northvolt to Germany. The European Commission had approved the state aid plans worth 900,000 million euros earlier this year and local authorities gave the green light for construction shortly thereafter. The Commission also called strategically important for the energy transition. Without state aid, Nothvolt would have built the plant in the U.S., where support was offered via president Joe Biden’s Inflation Reduction Act. the Commission added. German economy minister Robert Habeck confirmed in a recent interview with public broadcaster NDR that Northvolt said it would locate the U.S. if it was not for German state aid.

"The EU has allowed itself to be pushed into a subsidy race," said Moritz Schularick, president of the Kiel Institute for the World Economy (IfW), adding that  using a lot less money would likely have allowed for a worthwhile investment by Northvolt. "The money now has to be paid by taxpayers and is missing elsewhere, for example in investments in education or infrastructure." Schularick added that targeted support for research and development might be the better alternative. In an opinion piece in Neue Zürcher Zeitung, René Höltschi wrote that large-scale subsidies lead to distortions of competition also between countries. " Smaller EU members are less and less able to keep up with the German orgy of subsidies," he wrote.