Illuminating Climate

Illuminating Climate

Exporter interview: Charging up the transition economy

Alexander Hartman, CFO of battery manufacturer Northvolt talks to Katharine Morton about the scale of financing that’s needed for the energy transition, and his optimism that the ‘culture shock’ ECAs and OEMs are undergoing to make the change is going to happen. More flexibility will be welcomed.
Alexander Hartman
Alexander Hartman
CFO, Northvolt
Katharine Morton
Katharine Morton
Trade, Treasury & Risk, TXF
22/07/2021

Katharine Morton (KM): One thing the climate transition is going to need to rely on is a reliable, sustainable power source globally. Can you set the scene as to what the role of battery storage will be in the new energy mix?

Alexander Hartman (AH): The energy transition is huge, it is happening and we need to accelerate it. To do that, we need a lot of storage. Right now batteries are the key technology, and what’s driving our project is the transportation sector. To put things into perspective, if you believe current announcements, plans are for around 50% of the fleet to be electrified by 2030. And that's only 50%. For that, huge investment needs to happen.

We're talking about the 2.5 to three terawatt hours of battery capacity and per year that needs to be in place. Even with back of the envelope estimates it means investments of roughly $40 billion per year over the next six/seven years only to get to that. It’s huge that the battery is the key technology that people are working on right now, and that's going to be there for the next 10 years. And that's why it's so important.

KM: In terms of financing the transition, Northvolt has just raised an additional $2.75 billion in equity in June. You’ve had to do it the hard way. What's been preventing you getting financing to this level?

AH: We started out four and a half years ago and, being a start-up, and being a greenfield project with super-high capital needs, it has not been that easy. We set out the plan at the beginning and quickly realised that we needed to ‘package’ this and look at it in terms of project financing. It was tough in the beginning. I remember the early dialogues with some of the institutions, we looked at other industries and how they have transitioned and how they finance themselves, but it was still a first time within this industry. We had to start by understanding how project finance works and how could we fit within that envelope of project finance. And of course, we did not.

This whole industry did not have the same type of Engineering, Procurement and Construction (EPC) de-risked structures with long term offtake agreements or [being able to be] fully backed. And we didn't have a parent or one super-strong creditworthy owner that could back this up. There was a lot of structuring, a lot of problem solving and a lot of amazing people involved to enable us to get that structure in place and to finally reach the signing last summer. [Including the $2.75 billion private placement, Northvolt has raised more than $6.5 billion in equity and debt to enable planned expansion of over 150 gigawatt hours of deployed annual production capacity in Europe by 2030].

KM: How do investors, particularly ECAs, get their heads around the risks and returns, and how can they accept more risk in these types of projects?

AH: It’s a good question. We would have never been able to achieve what we have without these institutions involved and without the support of some of these policy-driven institutions such as EIB, Euler Hermes, NEXI, KEXIM, Bpifrance, Nordic Investment Bank. We have a lot of policy-driven institutions in our structure and that has really enabled this transaction and enabled our projects.

However, it did take a very long time and it was very tough to fit that envelope. This transition will happen and it will go faster than many people realise. Looking from a European perspective, if we want to keep this industry in Europe and if we want to be part of it, we need to accelerate much faster than we're doing today.

For that to happen, I would really like to encourage and see even more flexibility and bigger mandates and for the ECAs to step in and support and take more risks. And you can price [that risk]. But these kind of enabling projects like ours, and European projects need to happen now, within the next six years. It’s going to define the industry and hence the importance of these policy-driven, politically-backed institutions to enable the transition. I would really like to see more involvement.

KM: You mentioned that you're happy to price the risk in black and white. What are we talking about now in terms of pricing?

AH: In our experience, there is a structure that works. We had a mandate with a lot of these different institutions and there are certain rules with this asset class that you need to tick all the boxes and that gives you a good package. It takes time to get there, and not all projects can get there.

From my understanding it can be a bit ‘black or white’. I would like to see different rules, a bit more flexibility in how you can package projects and not look at precedents that have not gone forward but rather ask what can be done to solve problems. That can mean you price it higher and you can tap into pretty cheap financing compared with equity, etc. You can take more risk and a lot of projects will be happy to pay for that.

KM: There is discussion of ECAs needing to, or being able to, take more risk and needing to make that leap to finance sustainability. Would exporters be willing to give premium back if something isn't environmentally compliant? How should products evolve?

AH: Going back to setting the scene, this industry also needs to be sustainable, to be green. That is super important. Institutions should be able to have these high requirements. In terms of the menu of products, everything will go green eventually but maybe in the energy transition there should be some transition products that can easily be tapped into that can have more flexible structures and look at taking more risks.

In Sweden, where we are based, the Swedish government is going to start working with the Swedish National Debt Office on Green Products and to be able to guarantee certain projects within Sweden, which is great news. They're kind of adapting and taking steps forward to support sustainable projects now. It would be great to see more of that, both in terms of the green/sustainability, but also in terms of risk and price.

KM: In terms of the future trajectory what still needs to be changed? For instance, the role of original equipment manufacturers (OEMs) in ECA offtake agreements which could be something ECAs are not necessarily ready for. It's a bit of a culture shock. What's your thoughts on that now?

AH: Going back to how we had to package our project, that was not necessarily common. And how do we how to get our institutions and banks comfortable on the offtaker side and how could we convince OEMs to do something out of the ordinary? This is so important for the OEMs and we have been able to work with them in a true partnership and have them sign up to these long term commitments.

The whole contracting structure is an area [to discuss]. We need to have a way of working with risk that is unlike all of the existing precedents in terms of project finance. Maybe we should call it Project Finance 2.0 or something different. You need to understand and be able to take that risk. ECAs need to support that, as do banks and equity investors. And also the people behind the ECAs need to give the broader mandate to make it clear they can do it and were able to take this risk.

This is so important for the overall transition for our all our futures, so ECAs should be enabled to really positively support it. Time is very much of the essence, so we need to do it now.

We are here and we are where we are now because of the people at ECAs, etc, who have been working on this project, doing a fantastic job. It’s amazing to have this type of backing and I would really like to partner and do more and work to enable this for us, but also for other projects and for Europe.

This interview was conducted at TXF Export Finance Virtual World Fair 2021

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