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Big regulatory changes on the horizon for European EVs – interview with Kinstellar

Ahead of the approaching Automative & Battery Forum 2023 in Bulgaria’s capital, Sofia on 25-27 April, we spoke with two senior officials from the global law firm, Kinstellar: Antonia Mavrova, Partner at Kinstellar’s Sofia office firm-wide Head of the Automotive and Industrials sectors and Akos Nagy, Senior Counsel in Kinstellar’s Budapest office.

In particular, we discussed the current state of the European electromobility market, upcoming developments in the EU’s legislative realm and its impact on the future shape of the electric vehicles (EV) industry.

High prices, high demand, low availability

Starting with the assessment of the current battery sector in Central and Eastern Europe, Ms Mavrova and Mr Nagy identify four key issues in the coming months. First, they touch on the impact of record-high energy prices, in particular, the price of electricity and its high usage during production costs, which has directly impacted all manufacturers and distributors in the sectors across the board, they say.

“Today, it appears that there are local, regional and EU-wide attempts to take remedial actions and prices already seem to be decreasing in general rather than further increasing. Nevertheless, it is clear that the price volatility of electricity remains an issue and one that the battery industry alone will not be able to solve,” the Kinstellar officials underline.

Looking ahead, Ms Mavrova and Mr Nagy point out that the notable increase in FDI in the CEE region is already causing spikes in demand for electricity. “This is expected to cause some difficulties in electricity supplies, and while CEE governments are already trying to find new ways of sourcing, battery manufacturers tend to solve this issue themselves by applying special sourcing methods for potential self-developed alternative electricity generation,” they say.

In addition to the above, it is noteworthy that Tesla cut sales prices already five times in the last few months, resulting in an overall 20 per cent cut to the base prices for most models. This has had an effect on the battery market, as it leads to price competition on batteries. EU and Asian electric car manufacturers are keeping an eye on this rapid change, and it remains to be seen how this will affect producers supplying the big OEMs with batteries, especially for electric cars. This is definitely a new phenomenon and the effect of Tesla’s “suicidal” move is yet to be seen.

Last, but certainly not least, they note the scarcity of raw minerals. “Not only, but partially due to the war in Ukraine, the prices of key minerals used in batteries (for example, lithium, cobalt, copper, lead, nickel, magnesium) have been constantly rising, which affects the entire supply chain – not only from the price perspective but also in terms of sourcing and availability,” Ms Mavrova and Mr Nagy say.

Big regulatory changes on the horizon

Moving on to the EU’s regulatory landscape, Mr Mavrova and Mr Nagy note that prior to the challenges outlined above, the EU “rightly so” had been developing its green, sustainable and circular economy model. “As part of this legislative project, by 2020, it became clear that the previous directive on batteries, as well as the entire value chain, would have to undergo a certain overhaul,” they say.

June 2023 will be a true game changer with respect to the legal framework for batteries, with the approval of the final text of the new European Battery Regulation, they underline.

For the first time, the new requirements will cover the entire lithium battery lifecycle (from extraction of raw materials to production, design, labelling, traceability, collection, recycling and reuse). Batteries will be divided into four groups: (a) portable batteries, (b) automotive batteries, (c) EV batteries and (d) industrial batteries. While it may take a few years for the planned regulation to become mandatory for battery makers, given its effects on production, supplies, waste handling and durability, it is worth familiarising with the new rules already this year, as they will have a major impact on the entire industry.

The new regulation will set new general provisions regarding the requirements for technical documentation accompanying all batteries that will have a significant impact on battery producers, the Kinstellar officials highlight. Among them are European battery passports: beginning May 2026, batteries above 2 kilowatt-hours (kWh) placed in the European market will be required to be electronically registered. Another key provision is BMS: a battery’s health indicator. “This will impact businesses involved in electromobility, as only those with management systems for their batteries already in place will have an easier ride during this transition,” they say.

The more critical part, however, is the recycling efficiencies and material recovery targets set by the regulation. Towards the end of the decade, all battery producers must recover most of the cobalt, copper, lead, nickel and lithium used in their batteries.

According to Ms Mavrova and Mr Nagy, battery makers will have extended producer responsibility for batteries that are supplied in a Member State for the first time. Companies producing batteries will have to finance and organise the separate collection and treatment of waste batteries, report to the competent authority, promote the separate collection of batteries and provide information including end-of-life aspects of batteries.

Impact on businesses in the electromobility value chain

In terms of the direct impact of the new regulatory landscape on businesses involved in the industry, Ms Mavrova and Mr NagyBattery note a greater acceleration of technological innovation as a result of new regulations. “Stricter CO2 limits have triggered the rapid development of electromobility and consequently the need for better, cheaper – and now with the new regulation – more sustainable batteries, especially electric vehicle batteries.”

Cognisant of the growing interest in new production capacities, companies have shown a growing greenfield investment appetite in the sector in a number of countries in CEE.

Hungary is becoming the second-largest battery manufacturer in Europe; there are already signs in Bulgaria and Slovakia for further battery investments; and Romania is also a target for new developments, they highlight.

One thing is certain: each company that places or imports batteries into the EU market must already start adapting to new the rules on sourcing, production, design, waste handling and durability. Companies will have to find sustainable and low-carbon ways of sourcing and processing raw materials, whilst ensuring circularity in the new battery supply chain and achieving material recovery targets.

“Assuming that a greenfield project or existing battery manufacturer would place or import batteries into Europe,” they continue, “this could mean the need to invest in entirely new production facilities, which is indeed an important factor for larger players to reach true scalability.”

Emerging markets such as Bulgaria have a lot to offer in that context, they highlight. “Carbon-neutral, renewables-powered industrial zones are already a reality, and there is a strong economic and academic base for materials sourcing and processing. The latter becomes hugely important, as the use of materials in batteries represents up to 80 per cent of the value of a battery cell, and most job opportunities in the industry will be in the chemical processing of battery materials and the production of cells.”

Impact outside the EU

Looking beyond the EU, we asked whether the new regulatory framework will have an impact outside the bloc. “(Likely) yes, for all global players,” Ms Mavrova and Mr NagyBattery say. “The proposed regulation will apply to all batteries, regardless of whether they were produced in the EU or imported into the EU. Any battery not complying with the requirements will face some restrictions in terms of the free movement of goods in the EU single market. In the worst case, from 2023 onwards a battery not complying with the new regime will likely not be possible to be placed into EU-wide circulation,” they add.

This will necessitate a very delicate evaluation by those global battery players that intend to supply the EU or OEMs operating or originating from the EU, they note. “This would mean that US and Asian producers – and by extension, all of their suppliers – will need to adapt their existing and future technology and compliance to the new regulation if they want to sell to the EU and/or to EU-based electric car battery manufacturers.

“Indirectly, the new regulation will have an impact on getting closer to a circular economy globally, as the large US/Asian players will need to adapt partially or entirely so that they do not lose market share. That is, of course, unless some non-EU players make a strategic decision to completely exclude the EU market and EU operators from their range – which, frankly, is unlikely,” they add.

The Automotive Cluster Bulgaria, together with the InvestBulgaria Agency and Kinstellar, have partnered to organise the first high-level conference focused on batteries (Automotive & Battery Forum 2023, 25–27 April) where the new regulations will be discussed in further detail.

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