In green tech, overcapacity is a boon

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It is the end of summer in the northern hemisphere (though it doesn’t feel like it in London). Thanks to my colleagues Claire Jones and Chris Cook who kept Free Lunch going through August — if you were away, do read Claire on how Italian prime minister Giorgia Meloni’s ill-judged bank tax has its roots in loose monetary policy, and Chris on how Russia is benefiting from design flaws in the western-imposed oil price cap.

The end of summer is a time of transition, of getting out of the slow pace of warm summer days and hunkering down for the autumn’s work. Transitions can be taxing on the human psyche — especially when it comes to very long-term change. So today’s column is about certain attitudes I have recently noticed towards the green transition, which political and business leaders approach with a somewhat split personality.

On the one hand, they acknowledge (or ought to!) the enormous industrial transformation that is now required to give us the tools to decarbonise the economy in large enough quantities. For example, within just a few decades we need to substitute our entire car fleet with electric vehicles, roll out huge numbers of batteries, and install enough renewable energy-generating machinery, and the grids to go with them, to decarbonise a power supply that will itself have to grow a lot.

(It’s perhaps a matter of personality whether you instinctively see this as a forbidding task or an exhilarating opportunity. As a paid-up techno-optimist, I expect the coming years and decades to be full of exciting innovations and technological improvements whereby the imperative to decarbonise, which is eminently achievable, also brings in smarter, more efficient and more comfortable ways of organising our economic lives. Free Lunch readers: what do you think?)

On the other hand, there is a palpable dread that other countries will produce so much of these things so cheaply that Europe’s own industrialists would find it impossible to compete. Two claims about “overcapacity” have cropped up in my readings in the past week.

The first comes in an FT interview with Oliver Zipse, the boss of BMW. He warns that with Chinese suppliers about to flood the European market, we should expect a price war in EVs — though if he is to be believed it will be a price war that would hit the market for cheaper cars rather than threaten his own company’s premium models.

It’s worth noting that EV price wars happen in the US as well. Tesla has been cutting prices on its models for some time, and a news report mentions several recent examples of 15 to 20 per cent price reductions from other makers as their supply of EVs begins to outnumber the customers willing to buy at original prices.

Even so, there seems to be a particular fear among European, especially German, carmakers of Chinese-produced EVs, which apparently stole the show at the latest auto show in Munich. As I have mentioned before, it is not just an issue of Chinese carmakers outperforming German ones in the EV space, but German carmakers finding it easier to produce EVs in China (in collaboration with Chinese manufacturers) and export back into Europe. They seem to find that easier than shifting from traditional to EV production at home.

The less confidence someone has in Europeans’ ability to compete in electric-car making, the stronger their belief that they may not need to — because carbon-neutral so-called e-fuels will make it possible to keep churning out the internal combustion engines they are so used to making. But a hope that tomorrow will look like yesterday despite all the signs to the contrary is not a strategy.

The other recent warning of overcapacity is in car battery production. My colleagues report that China is expanding manufacturing capacity so fast that it will outpace carmakers’ demand for batteries more than twofold this year, with no prospect that EV car production can absorb the full planned capacity any time in the future.

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These two are obviously related. If China ends up producing more car batteries than it buys EVs to put them in, more cars are likely to be exported at bargain prices. Alternatively, the batteries themselves will be dumped directly into export markets. As my colleagues write, one European battery maker “warned that a 500GWh supply gap in Europe in 2030 could be ‘compensated’ by 1,100GWh of overcapacity in China”.

I trust that by this point most Free Lunch readers are furrowing their brows at the incoherence of all these worries. Here are my three retorts to both these overcapacity warnings.

The first is to note that if there is an overcapacity in battery production, in China or globally, then that should make it easier for European carmakers to compete on EVs: they will, after all, have access to cheaper batteries, and batteries are the most important cost component in electric cars. That may not be good for their profit margins, which could be captured by the battery makers, but it at least alleviates the threat to jobs and plants that elected politicians worry about.

The second is that we should not be easily persuaded that forecast battery production capacity will, in fact, materialise. At least as common as fears of overcapacity are worries that the world is not extracting anywhere near the quantity of metals and other materials required for current battery technologies. This difficulty could, however, be overcome as recycling of old batteries takes off in earnest — do read the FT’s analysis of the coming recycling revolution in EV batteries.

The third, and most important: the whole notion of “overcapacity” just seems odd when our biggest challenge is to decarbonise fast enough. If production forecasts for batteries, EVs or other green tech exceed expected demand, that is because expected demand is far lower than it should be. But lower prices are a solution to this problem, not a contribution to it (naysayers tend to dismiss transport electrification by saying EVs are too expensive). The quantities needed for decarbonisation are so much bigger than what the world is at present producing that fast increases in capacity are exactly what we need.

Take batteries. Even if it were true that the world will soon produce more of them than would be needed to electrify the global car fleet, that is not the only use for batteries. Just as important will be electricity storage capacity in homes or business premises.

The EU’s energy commissioner Kadri Simson wrote an op-ed in the FT this week, which quite rightly pointed out that Europe’s green future depends on a much more powerful and intelligent electricity grid. Since the renewable electricity sources that will expand most — solar and wind — are intermittent, grid capacity has to be larger than for on-demand sources (whether renewable such as hydro, or non-renewables such as nuclear or fossil power stations). But as she briefly mentions, “flexible storage and demand response solutions can be crucial”. At the household level, managing the daily power cycle involves batteries with a capacity comparable (in fact less demanding) than what is common in EVs. Any overcapacity in EV batteries could quickly be retooled into supplying storage solutions for homes and businesses.

In conclusion, we should not join the jeremiads about overcapacity. If production of all things green tech expands strongly, that’s cause for cheer. If demand does not keep up, that means we need better policies to boost it — by tightening, not loosening or postponing incentives and requirements to shift into low-emission goods. That is why I have also said we should welcome a green subsidy race: the scale of the decarbonisation challenge is such that no production capacity for green tech can be too much.

Other readables

• In my FT column this week, I describe how EU leaders are beginning to seriously consider how to deepen the bloc’s integration in preparation for new countries joining the union.

• Is the G20 unfit for purpose after China’s leader declined to attend this week’s summit?

• Money laundering is a risk to financial stability, says the IMF.

• Chinese banks are stepping in to serve a Russian financial sector cut off from the west.

• The conspiracy theorists find their new bugbear in proposed central bank digital currencies.

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