Pictured from left are VW Group CEO Oliver Blume, Thomas Schmall, VW's technology chief and François-Philippe Champagne, Canada's Minister of Innovation, Science and Industry.
The federal and Ontario governments are keeping mum — at least for now — about the financial incentives required to land Volkswagen Group’s first overseas battery cell plant.
But as speculation mounts about how much the two governments offered, previous spending, the latest federal budget, and hundreds of millions of dollars tabled in competing Oklahoma, provide some telling clues.
Brendan Sweeney, managing director of the Trillium Network for Advanced Manufacturing, breaks down what governments will get from their investment::
Greig Mordue, an associate professor of engineering and ArcelorMittal chair in advanced-manufacturing policy at McMaster University in Hamilton, Ont., said “all” the automotive incentive rules have changed since the introduction of the Inflation Reduction Act (IRA) in the United States late last summer.
“The starting price on these things is now a billion dollars … but it could be CAD$10 billion before it all shakes out.”
Volkswagen and its in-house battery unit PowerCo announced their plan to build the new cell plant in St. Thomas, Ont. March 13. No details about the total value of the investment, size of the plant, or government backing for the project were announced, though an event in the city midway between Toronto and Windsor, Ont. in the coming weeks is expected to shed further light on the specifics.
For Canada’s only other battery plant, which is currently under construction in Windsor, Ont., Ottawa and Queen’s Park are widely suspected to have jointly provided CAD$1 billion. That is 20 per cent of the CAD$5 billion Stellantis and LG Energy Solution plan to spend, and would align with automotive funding typical of the past two decades, Mordue said.
That was before the IRA.
The federal legislation offers new battery cell manufacturers in the United States a US$35 tax credit for each kilowatt-hour produced, as well as a US$10-per-kilowatt-hour credit for module assembly, which often takes place at the same site.
For a 45 GWh plant, the size of the Windsor facility, the tax credits would be worth about US$2 billion per year, if the plant were running at full capacity.
CANADA'S RESPONSE
In response to these huge incentives, Ottawa’s 2023 budget, tabled March 28, included a 30 per cent tax credit on “new machinery and equipment used to manufacture or process” batteries and several other clean technology products. Ottawa has committed to spend CAD$4.5 billion on the program between 2023 and 2027, and CAD$6.6 billion between 2028 and 2034.
Exactly what portion of plant set-up costs would fall under the proposed tax credit is not yet clear, but if Volkswagen’s choice of Ontario over competing jurisdictions in the United States is any indication, Ottawa’s new incentive is likely to boost government’s share of investment substantially above its traditional 20 per cent.
In Oklahoma, a jurisdiction reportedly competing with Ontario for the Volkswagen investment, Gov. Kevin Stitt signed a bill to amend a previous law aimed at pulling large investments into the state on March 2. The legislation created a US$698 million incentive package for investors that spend at least US$3.6 billion in Oklahoma and create at least 3,500 jobs over five years.
Those in the southern U.S. state have “been wringing their hands” since the St. Thomas announcement, Mordue said.
“In Oklahoma, [Volkswagen] could have had a similar investment to what the feds and province provided last year for Windsor, plus whatever the IRA would have provided, which is quite likely over several years, several billion dollars.”
To take full advantage of the IRA, however, Volkswagen would have needed to move quickly.
The Ontario plant is not expected to begin production until 2027, and ramp-up times at cell plants are rarely quick, said Conrad Layson, senior alternative-propulsion analyst at the U.S.-based forecasting firm AutoForecast Solutions.
“Battery making is really about producing and controlling a series of electrochemical reactions. Rushing to raise the production rate usually results in an increased number of rejected cells and a rise in the facility’s scrappage rate.”
Because cell plant production starts slow, and the U.S. tax credits are linked to output, Volkswagen would have had a short time horizon to take full advantage of the IRA before the program is phased out between 2030 and 2033.
But that does not mean Canadian governments did not pay a heavy price.
The question, Mordue said, is whether the benefits will outweigh the cost.
“It’s basic economic theory. What’s the best alternative to do with the $10 billion?” he asked, pointing to options such as launching a homegrown Canadian automaker or building hospitals.
“That’s why people make these numbers transparent and then there can be a discussion and debate about it.”
— With files from Greg Layson
