The Battery Belt
Over the last few years, America’s shift towards clean energy and electric vehicles has birthed a new region dotted with scores of high-tech manufacturing facilities. Legislation and business incentives have turbocharged the development of the country’s new economic powerhouse: the Battery Belt. The need for domestically-sourced rechargeable batteries is causing the Battery Belt to become the epicenter of the clean energy transition.
Batteries 101
The world is going through a renewable energy revolution. The switch from fossil fuels to clean energy through electrification has taken hold of policy and business initiatives. Billions of dollars are pouring into the development of transportation and energy generation and storage, two mega-industries whose decarbonization will have a significant impact on slowing climate change.
The increasing demand for electrification has made batteries the most important technological advancement in the pursuit of net-zero emissions. The most crucial systems rely on lithium-ion batteries due to their superior energy density and rechargeability. Lithium-ion batteries work by releasing positively charged lithium ions from a negatively charged anode which is carried via an electrolyte through a separator to a positively charged cathode, often made of critical elements like cobalt and nickel. This creates free electrons in the anode and a charge at the positive current collector which causes an electrical current to flow through a circuit, powering a device. When charging, the ions flow in the opposite direction, resupplying the battery for its next use.
Lithium-ion batteries are ubiquitous and found in mobile phones, computers, and notably electric vehicles (EVs). The World Economic Forum predicts demand for lithium-ion batteries for EV and storage applications to grow to 9,300 GWh by 2030, 17 times the demand from 2010. This increase is driven by consumer demand for EVs and the goals of countries and corporations to achieve net zero emissions. China currently commands the EV battery market, making up 56% of the global market. A single Chinese firm, CATL, produces one-third of the world’s total supply.
Batteries are also used for mass energy storage of renewable-powered grids. Solar and wind energy are not always reliable as they both depend on specific natural factors to capture energy. This can lead to an inability to service energy demand, especially at night or when the wind is not blowing. Large-scale battery systems can capture energy during low demand and release it onto the grid when needed.
Rechargeable lithium-ion batteries are clearly important to further America’s shift towards a sustainable future, and given China’s domination of the supply chain, the government has taken notice.
Legislation Driving Change
In 2022, President Biden passed the Inflation Reduction Act (IRA) which prioritizes the push for a “Made in the USA” supply chain for critical materials. The Bill includes a $369B earmark for energy security and climate change spending over the next 10 years. Included in the provisions is a revised $7,500 tax credit for consumers that only applies to EV manufacturers that have a portion of their critical battery materials extracted or processed in the U.S. or by a free trade partner. The previous EV tax credit did not have a domestic battery sourcing requirement. The threshold for eligibility will be 40% of materials sourced in the U.S. in 2024 and 80% by 2026. With the goal of half of all new car sales being EVs by 2030, there is a coordinated effort by the government and automakers to invest in and develop a domestic battery supply chain.
Since 2021, more than 15 lithium-ion battery factories have been announced. These gigafactories are all in a region newly dubbed the Battery Belt, a stretch of land spanning from Michigan to Georgia through most of Appalachia. Not coincidentally, many of the major automakers have manufacturing facilities in this part of the country, so having battery factories nearby simplifies an already complex automotive supply chain. Planned investment from the IRA to support these factories and ensure the supply of EV batteries is expected to be north of $40B.
The push for electric vehicles is further supported by the recent passing of the Bipartisan Infrastructure Law which includes a $7.5B investment for a nationwide EV charging network and the CHIPS and Science Act which will onshore semiconductor manufacturing used in EVs. With this help from the government, the private sector is preparing to rapidly scale capacity and production of electric vehicle fleets.
Progress through Joint Ventures
The American auto industry has poured billions into new EV and battery manufacturing facilities over the last few years, and that investment is expected to increase given the federal tax credits of the IRA. To qualify for these benefits, U.S.-based auto companies are forming joint ventures with existing battery manufacturers to bring their capabilities and supply chain onshore.
Ford pivoted to EVs with the release of its Mustang Mach E and F-150 Lightning. To service high demand, the company is working to source raw materials, already sourcing 70% of its expected four-year run rate. Ford is further expected to spend up to $50B on its EV initiatives through 2026, and the IRA will help further these initiatives. For example, Ford is planning two battery factories in Kentucky via a joint partnership with South Korean firm SK Innovation. The facilities could be eligible for a $3B tax break.
General Motors meanwhile plans to spend $35B through 2025 on battery technology for their EVs. In December, the Department of Energy granted a $2.5B conditional loan for Ultium Cells, which is a joint venture between GM and LG Energy Solutions, another South Korean battery company. The loan will be used to finance the construction of three new lithium-ion battery facilities across the Battery Belt. Notably, the factories are set to create over 11,000 new jobs across Michigan, Ohio, and Tennessee, aligning government spending, corporate initiatives, local communities, and the United Auto Workers.
Progress also extends upstream to battery component manufacturers. Redwood Materials is investing $3.5B into a Nevada facility to process cathode and anodes, another process that is primarily done overseas. Redwood’s production of materials in the U.S. makes them eligible for a 10% tax credit under the IRA. It is worth noting that Redwood is also known for lithium-ion battery recycling where discarded batteries can be stripped of their components and refabricated into new ones. Battery recyclers are expected to be critical stakeholders in the circular clean energy value chain.
The Market Opportunity
Venture capital and growth equity investors are no strangers to battery technology companies. According to TechCrunch and PitchBook, the last decade has seen 1,700 battery deals worth nearly $42B. With legislative tailwinds and a renewed commercial interest in innovative battery technologies, venture investment in particular is picking up. EV battery startups raised $3.6B across 26 deals in 2021. Chinese battery cell manufacturer Svolt raised $3B, but even subtracting that amount from the total leaves a total investment amount nearly triple that of 2020.
Global Battery Tech Funding
The landscape around battery investing is also changing alongside the technology. With evolving ecosystems, deal flow is increasing into areas such as battery design, supply chain management, and charging capabilities, not just manufacturing or recycling processes. That isn’t to say these areas have not continued to receive funding, however. In 2022, Northvolt, a lithium-ion manufacturer from Sweden raised $2.8B, Redwood Materials raised $750M, and Washington-based Group14 completed an oversubscribed $614M Series C.
Furthermore, investments are being made into new high-energy density solid-state batteries, instead of technology around lithium-ion batteries. However, such science-based investments have longer R&D cycles than companies with products ready for commercial use, a potential deterrent for shorter-term investors.
Despite a venture slowdown in 2022, climate tech (which battery tech is a subset of) has continued to receive the lion’s share of funding. Funding for climate tech companies represented more than 25% of every venture dollar invested in 2022. With climate change showing no signs of slowing, investors are taking note and putting their money to work.
A New Future in a Non-obvious Place
The IRA has essentially shifted the incentives for electric vehicle adoption from the consumer to the manufacturer. The consumer still benefits from lower costs and an ability to skip the gas pump, while automakers are now federally rewarded for using materials in the U.S. This is why Ford and GM have expanded on their core capabilities and partnered with battery manufacturers to onshore while investors have sought out opportunities to take advantage of.
We can expect a race for control of domestic materials supply chains through more joint ventures and verticalization as automakers ensure their vehicles are American made. With this activity, new partnerships will form and new startups will emerge to address increasing demand. Investment dollars will continue to flow into the Battery Belt, developing the heartland that will be critical to America’s future success.
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This blog post is for informational purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security or instrument in or to participate in any strategy with any Fund. All figures are based on information provided by third-party sources and we cannot guarantee the accuracy or completeness thereof.
