US clean technology vortex pulls Tesla battery production away from Europe

The US Inflation Reduction Act (IRA) has claimed another victim in the clean technology arms race that is gripping the globe as Tesla relocates its German battery production to the US.

It’s assumed the rest of the production and assembly for European Teslas will still happen at the Berlin factory, but the battery packs being imported from the US.

“Tesla has started its battery system production in Gruenheide (Berlin) and is preparing to manufacture battery cell components,” the Brandenburg economic ministry said in a statement announcing the decision. “The company has prioritised further production steps in the US because tax incentives make business conditions more favourable there.”

The news comes after Tesla recently announced a massive $US3.6 billion expansion to its Nevada factory which will increase annual capacity by 100 GWh per year. Enough battery production to build an additional 1.5 million light vehicles each year.

US policy has changed the global economics of battery manufacturing

Tesla’s original plan was to produce entire battery packs at the massive $US10 billion Berlin factory. In 2020 Musk said the Berlin gigafactory would be the biggest battery factory in the world.

However, the Biden administration’s IRA has changed the global economics of battery production – and likely green hydrogen and other technologies – to such an extent that the world’s largest EV maker is changing its plans.

Advanced manufacturing credits, which make up part of the IRA, include a $US35 per kilowatt-hour (kWh) credit for batteries produced in the US.

On a standard Tesla Model 3 with a 60 kWh battery pack, the credits work out to $US2,100 per vehicle. So the decision to relocate battery production from Europe to the US is a simple one, when the cost of shipping the battery pack to the German assembly plant would be a fraction of the production savings from the credits.

Tesla had originally planned to produce over 50 gigawatt hours per year at the Berlin factory.

At $US35 per kWh, 50 gigawatt-hours will earn $US1.75 billion in US advanced manufacturing credits per year so the move is a no-brainer for Tesla.

How will Europe respond?

Tesla is not alone in its decision to prioritise battery production in the US because of highly favourable government incentives. Many companies are now scrambling to build facilities in the US to take advantage of the credits. The huge benefit of this policy to the US is that with every new factory comes new clean technology jobs, skills and capital.

Developing clean technology manufacturing ecosystems now will result in enormous benefits to countries who’s governments are smart enough to seize the opportunity. China knows this and has been scaling battery production for years. With the IRA the US is now doing the same.

EV market share in European countries is much higher than in the US and just last week the EU passed laws that will ban the sale of new petrol and diesel cars completely by 2035. European leaders clearly know that the writing is on the wall for petrol and diesel cars and that the future is all-electric.

So it’s puzzling as to why Europe hasn’t responded to the IRA with battery manufacturing incentives of its own. Tesla moving its Berlin battery production and the associated skills and knowhow to the US is clearly a great loss for Europe especially in this critical early stage of the clean technology industrial revolution.

It will be fascinating to see how the EU responds.