Energy Transition: Betting on the Battery Belt

In the last decade, more renewable power was added to the global grid annually than conventional and nuclear power combined¹. The evolution away from fossil fuels towards sustainable energy is highly dependent upon critical supporting technology and infrastructure, geopolitical collaboration, and both economic and financial incentives.

As the global interest in renewable energy continues to grow, battery technology plays a key role in the further buildout of power generation from intermittent resources, such as wind and solar. As more of these resources come onto the grid, batteries offer a way in which to balance that power and deliver clean energy when and where end users need it. This is expected to result in opportunities across the battery life cycle, from the mining of critical metals, to manufacturing, EVs and EV charging, and ultimately to battery recycling. 

Emergence of the Battery Belt

In the U.S., federal and state incentives are acting as an accelerating force to the development of the EV market toward U.S. and national energy transition goals. The collective impact of loan programs, tax incentives, subsidies, and other legislative initiatives is resulting in an increase in U.S. lithium-ion gigafactories clustered in the Midwest and the South. They are mapped closely near automakers in a region that runs between Michigan to Georgia in what many in the industry call the “Battery Belt.”

The Inflation Reduction Act added tens of billions of dollars in provisions for EVs—from vehicle manufacturing to batteries to drive parts and components of the broader EV infrastructure (e.g., EV charging stations and battery recycling). The focus on the entire EV ecosystem and the geographic concentration of projects along the Battery Belt has an added benefit. The triangulation of EV auto production, battery manufacturing, and subsequent battery component recycling all within a geographic area creates a closed supply chain by reducing costs, supplier risk, and transportation emissions.

Lending through the U.S. Department of Energy Loan Programs Office (DOE LPO) now amounts to approximately $400 billion. Such programs, if utilized by manufacturers, suggest significant project finance transaction activity. In one highly publicized example, Ford Motor Co. and South Korean manufacturer SK Corporation created a joint venture called Blue Oval SK, which entered into a $9.2 billion loan for the construction of battery factories in Kentucky and Tennessee. This loan sits on top of subsidies and tax incentives provided by the two states.¹

Proliferation and concentration in the Southeast

Additional examples of smaller loans and transactions are supported at the state and local levels. These include Redwood Materials, Volvo, Scout Motors, and BMW, among many other industry names. According to the DOE LPO, 140 companies and projects have applied to the Loan Programs Office for support, totaling nearly $120 billion in loan requests alone. The number is estimated to double as additional projects participate.² Such loans help signal stability to private-sector lenders and investors looking to put capital to work in project financing transactions.

The result of this activity promises to create a net new industry in states like South Carolina, perhaps unexpectedly for the region. Rather than replacing former auto manufacturing plants, it has the potential to shore up local economies with green, high-tech facilities and jobs, pushing the boundaries of renewable and clean energy and climate policy. It also helps more established energy and resource-intensive manufacturing converge with energy transition goals. For example, lithium processing and vehicle manufacturing are energy intensive. The convergence effect redirects this energy usage to create cleaner transportation.

Regional and state-level economic development organizations, such as Sustain SC, also play a vital role in attracting and driving investment. They report between 2022 and 2023, companies announced more than $9.7 billion in EV investments across South Carolina. The organization connects the sustainability goals of businesses operating or building in South Carolina with local solutions for economic, environmental, and workforce benefits.

Redwood Materials is currently building a Battery Materials Campus just outside of Charleston, S.C. The plant will take in end-of-life batteries, break them down to their basic metals (like nickel, copper, cobalt, and lithium) and then rebuild those metals into cathode and anode products, the most critical and expensive components in an EV. According to Redwood, currently, anode and cathode components are not produced in North America, and battery cell manufacturers have to source them via a 50,000+ mile global supply chain. Sourcing these components locally will retain funds and jobs in the U.S.

Impacts for project finance trustees and agents

The energy transition activity in the Mid to Southeastern U.S. is creating a wide range of opportunities for project finance transactions and therefore a demand for prudent, experienced trustees and agents. While core processes include administering loan payments and following loan documentation, project finance service providers must be agile when working within the frameworks of state and federal programs for the entire infrastructure financing.

More activity in the space raises the bar on both capacities and capabilities for trustees and agents. The roles of trustees and agents in project finance transactions can differ from their roles in traditional large bank loans. In general, trustees act as fiduciaries for noteholders, overseeing notices, consent requests, and reporting on the use of funds raised through bond issuances. In project finance, trustees monitor the use of funds and safeguard investor interest.

Project finance agents address similar requirements that exist within syndicated bank loan facilities and bond transactions, acting as intermediaries between borrowers and their various lenders, bondholders, or investors, mitigating risks and addressing conflicts of interest.

In addition, project finance transactions may be subject to specific regulations and requirements set by government bodies, requiring trustees and agents to ensure compliance with these regulations. Given the high visibility of the projects, there can be greater emphasis on investor and lender protection. There is typically also a greater need for transparency in fund utilization and reporting, leading to more stringent oversight by trustees and agents.

What’s exciting

We foresee the Battery Belt producing a surge of projects and transactions that will provide a host of opportunities. The critical success factors include working with the right trustee or agent. We believe this provides an opportunity for the strongest agents and trustees who have a clear focus on the energy transition to stand out and show their command of the nuances of project finance. In betting on the new Battery Belt, exciting opportunities for growth and innovation lie ahead.

This growing asset class fits perfectly within Wilmington Trust’s strategy and focus on energy transition. For more information, learn how Wilmington Trust can work with you, and contact one of our specialists.