Brussels approves German state aid for Northvolt battery plant to avoid losing investment to US

The European Commission announced Monday that it had approved German state aid to allow Northvolt to build a gigafactory producing battery cells used in electric vehicles (EVs) in the town of Heide, Schleswig-Holstein, in an investment worth €2.5 billion.

It is the first time the bloc makes use of ‘matching aid’, an exceptional measure adopted in March to allow EU states to provide higher amounts of aid to companies when there is a risk of investment being diverted from Europe.

Without the move, Northvolt would have moved its investment to the US to benefit from the Inflation Reduction Act (IRA), the Biden administration’s attractive green subsidy plan that offers generous tax breaks and rebates for green technology made in the US.

The ‘matching aid’ rule is part of the EU’s response to prevent an industrial exodus across the Atlantic Ocean.

“Matching aid is a new feature that we are using (…) in order to make sure that if companies are offered aids in other jurisdictions, then if a member state is willing they can match the aid in order for the investment to take place in Europe, for the technology to be developed in Europe, for the jobs to be situated in Europe,” said the bloc’s competition chief Margrethe Vestager, who announced the approval alongside German Vice Chancellor Robert Habeck.

“We consider it a market failure that Europe has been completely lacking investment in batteries,” Vestager explained, adding that the decision “paves way for strong development in battery industry.”

Habeck described the decision as a “major announcement for Germany”, assuring that Northvolt had selected Heide as a strategic location due to the availability of renewable energy that would power its operations.

“They don’t only want to have green mobility, but they want to have a green production of green mobility,” Habeck said. “And this tells a story, I think, for the future of European industries. We need a more robust industry for the new sectors – semiconductors, batteries, electrolysis, hydrogen.”

The €902 million in German state aid will include €700 million in direct grants and €202 million in guarantees. Northvolt says its production will start in 2026, reaching full capacity in 2029.

The European Commission also approved €2.9 billion in French state aid on Monday under a scheme to support green tech production including batteries, solar panels, wind turbines and heat pumps.

The European bloc recognises it must rely on economic partners worldwide to drive its green and digital transition, as it lacks many of the critical materials and minerals used in electric batteries, semiconductors, solar panels and more.

It wants to drive investments in strategic projects on European soil while ‘de-risking’ its supply chains by fostering trade partnerships with like-minded global powers.

Other EU measures such as the Net Zero Industry Act and the Critical Raw Materials Act aim to scale up home-grown European industry and protect the bloc’s economic security.

Not ‘un-levelling the playing field’

Pressed on whether Monday’s decision to award the first matching aid to Germany, the EU’s biggest economy and industrial powerhouse, could send a message that the most powerful EU economies will be the first to benefit from such measures, Vestager said: “This is one of the things that we take very seriously. So one of the things that we have checked is, of course, whether this will ‘un-level the playing field.'”

She added that the EU executive was analysing the “numbers” to check that approval decisions and payments did not put any EU state at a disadvantage.

Habeck rebuffed the notion that such schemes could deepen economic inequality between EU states. 

“The real competition we are facing is not between Germany and Italy or Denmark or the Netherlands (..) It’s between Europe and China and the US,” Habeck said.

“I’m willing to do everything so that the internal, the single market is working properly. And also so that smaller countries or countries with a weaker economy, or countries with not much fire-power, maybe a higher debt rate (…) have also their chances,” he explained.

“But European solidarity means also that the ones who can invest, who can be part of a renewed strong economy, are not regarded with mistrust,” he added.

Germany is currently suffering from declining industrial outputs and a deepening recession, sparking fears that its feeble performance could drag down the wider EU economy.