Break-even Analysis of Production Subsidies for Stellantis-LGES and Volkswagen

Summary

In April, the federal government announced funding support to Volkswagen for their electric vehicle (EV) battery manufacturing plant, including an estimated $13.2 billion in production subsidies. At the time of the announcement, the Prime Minister indicated that “projections show that the full economic impact of the project will be equal to the value of government investment in less than five years.”

In July, the federal government and the government of Ontario announced production subsidies for the Stellantis-LG Energy Solutions (LGES) EV battery manufacturing plant, subject to an overall cap of $15 billion. Based on the federal government’s estimates, this brings announced production subsidies for Stellantis-LGES and Volkswagen to $28.2 billion by the end of 2032.

At the same time, the federal government announced a cost-sharing agreement with the Ontario government. Under this agreement, the federal government will now cover two-thirds of the production subsidies for Stellantis-LGES and Volkswagen ($18.8 billion), while Ontario will now provide one-third ($9.4 billion).

The federal government has not announced a break-even timeline for the Stellantis-LGES production subsidies.

This report first details the federal government’s break-even analysis of the production subsidy provided to Volkswagen. Next, using the same data source, we provide a break-even analysis of the support for Stellantis-LGES and Volkswagen.

Given the uncertainty surrounding the future geographic location of investments and production related to other nodes of the EV supply chain, such as EV assembly and battery material production, PBO’s estimate represents only the government revenues generated by cell and module manufacturing, upon which the production subsidies are based. This contrasts with the federal government’s break-even analysis for Volkswagen, which included investments and assumed production increases in other nodes of the EV supply chain.

PBO estimates that federal and provincial government revenues generated from the Stellantis-LGES and Volkswagen EV battery manufacturing plants over the period 2024 to 2043 will be equal to the total amount of production subsidies. That is, the break-even timeline for the $28.2 billion in production subsidies announced for Stellantis-LGES and Volkswagen is estimated to be twenty years.

Background

In June, PBO released a report that examined Canada’s support for Volkswagen’s electric vehicle (EV) battery manufacturing plant.[^1] The federal funding included a production subsidy to match the U.S. Inflation Reduction Act’s (IRA) Advanced Manufacturing Production Credit (AMPC) and a contribution through the Strategic Innovation Fund to support the plant’s construction.

Since PBO’s June report, new announcements have been made regarding Canada’s automotive sector. On July 6, the federal government announced funding support for the Stellantis-LG Electric Solutions (LGES)[^2] EV battery manufacturing plant.[^3] The Stellantis-LGES plant, announced on March 23, 2022, is the first large-scale EV battery manufacturing plant to be built in Canada.[^4]

The production subsidy that will be provided to Stellantis-LGES for battery cells is the same as that offered to Volkswagen—equivalent to US$35 per kilowatt-hour (kWh). Stellantis-LGES will also receive a production subsidy for battery modules equivalent to US$10 per kWh. These production subsidies match the IRA’s AMPC and are subject to an overall cap of $15 billion.

Based on the federal government’s estimates, this brings announced production subsidies for Stellantis-LGES (of up to $15 billion) and Volkswagen (of $13.2 billion) to $28.2 billion by the end of 2032. After 2032, the production subsidies will be eliminated.[^5]

In addition to the new agreement with Stellantis-LGES, the federal government also announced a cost-sharing agreement with the government of Ontario. Under this agreement, the federal government will now cover two-thirds of the production subsidies for Stellantis-LGES and Volkswagen ($18.8 billion), while Ontario will now provide one-third of funding ($9.4 billion). No changes have been made to the existing agreement between the federal government and Volkswagen.

Further, following the release of PBO’s June report, the Minister of Finance clarified that the production subsidies provided to Volkswagen will not be subject to taxation.[^6]

This report first details the federal government’s break-even analysis of the production subsidy provided to Volkswagen. Next, using the same underlying data source, we provide a break-even analysis of the support for Stellantis-LGES and Volkswagen to estimate the period over which government revenues generated from their EV battery manufacturing plants will be equal to the total amount of production subsidies announced by the governments of Canada and Ontario.

Break-even Analysis

The federal government’s break-even analysis of the Volkswagen production subsidy

When the federal government announced the Volkswagen agreement in April, the Prime Minister indicated that “projections show that the full economic impact of the project will be equal to the value of government investment in less than five years.”[^7] This timeline was echoed by the Minister of Innovation, Science and Industry, stating the “payback” of the investment would occur within five years.[^8]

At the time of the announcement, no underlying detail was provided on the break-even timeline. To understand the analysis supporting the government’s timeline, the PBO sent an information request to the Minister of Innovation, Science and Industry.

In response to the PBO’s request, Innovation, Science and Economic Development (ISED) indicated that to estimate the break-even timeline, they relied on modeling done by the Trillium Network for Advanced Manufacturing (Trillium Network) and Clean Energy Canada in their 2022 report, Canada’s New Economic Engine. The report presents four potential scenarios for Canada’s electric vehicle battery supply chain in 2030 based on various degrees of government support (not quantified) and estimates the economic impacts under each scenario.

ISED identified two scenarios of interest for their analysis: scenarios 1 and 3. The first scenario (“Off-Target EV Adoption”) includes only EV battery-related investments announced in Canada at the time of the report, including the Stellantis-LGES facility, and assumes EV sales across Canada and the U.S. fall short of government announced targets. ISED characterized scenario 1 as the most likely scenario had the federal government not announced the production subsidy for Volkswagen.

Scenario 3 (“Continued Momentum”) includes the addition of another major battery cell facility, as well as achieving government announced EV sales targets in Canada and the U.S., and includes additional investments and assumed increases in production in other nodes of the EV supply chain.

ISED then used the difference between scenarios 3 and 1 to represent the incrementality of the Volkswagen EV battery manufacturing plant and other investments in the EV supply chain.[^9] To estimate a break-even timeline for the production subsidy announced for Volkswagen, ISED calculated the difference in combined federal and provincial government revenues in 2030 between scenario 3 ($6.7 billion) and scenario 1 ($2.7 billion) shown in Table 1.

Assuming an additional $4 billion annually in government revenues at full production, ISED estimated that government revenues (that is, federal and provincial), on a cumulative basis, would be equal to the value of the production subsidy (of $13.2 billion) in 3.3 years—consistent with the “less than five years” timeline announced by the Prime Minister and Minister of Innovation, Science and Industry.[^10]

Modeling done by the Trillium Network encompasses the entire EV supply chain. As shown above in Table 1, government revenues in the report include revenues generated from all supply chain nodes.[^11] Cell manufacturing, which will occur at the Volkswagen plant, only represents a fraction of incremental revenues (8.6 per cent) across the supply chain. ISED confirmed to PBO that the additional government revenues in their analysis are “due not only directly to the PowerCo. [Volkswagen] investment, but to other anticipated investments made through the supply chain.”[^12]

The federal government has not announced a break-even timeline for the Stellantis-LGES production subsidies.

PBO’s break-even analysis of the Stellantis-LGES and Volkswagen production subsidies

Based on the same Trillium Network report used by ISED, we estimate a break-even timeline for the $28.2 billion in production subsidies announced for Stellantis-LGES and Volkswagen.[^13]

However, given the uncertainty surrounding the future geographic location of investments and production related to other nodes of the EV supply chain, such as EV assembly and battery material production, our estimate represents only the government revenues generated by cell and module manufacturing, upon which the production subsidies are based.[^14] This contrasts with the federal government’s break-even analysis for Volkswagen, which included investments and assumed production increases in other nodes of the EV supply chain.

For this report, the break-even timeline refers to the period over which government revenues generated by the Stellantis-LGES and Volkswagen EV battery manufacturing plants, on a cumulative basis, are equal to the amount of the production subsidies announced by the governments of Canada and Ontario ($28.2 billion). Further, our break-even timeline begins the first year of planned production (2024 for Stellantis-LGES).

PBO’s break-even analysis is not a cost-benefit analysis. The analysis does not include public debt charges that would be incurred to finance the production subsidies, nor does it discount future government revenue and expenditure amounts (that is, a present-value calculation).[^15]

With the inclusion of both the Stellantis-LGES and the Volkswagen EV battery manufacturing plants, we judge scenario 3 in the Trillium Network report to be the most relevant scenario. Using the government revenues and production levels for both cell and module manufacturing from scenario 3, we calculated revenue yields in terms of dollars per gigawatt-hour (GWh) for both nodes (Table 2).

Government revenue yields were then applied to projected annual production levels of both plants to estimate government revenue on an annual basis, starting the first year of planned production in 2024.

As the government revenues in the Trillium Network report are projected in 2030, we increased the revenue yields by projected growth in nominal GDP for years beyond 2030 based on PBO’s July 2023 Fiscal Sustainability Report. For years 2024 to 2029, we assumed that the 2030 revenue yields would be realized.[^16]

Production of battery cells and battery modules from 2024 to 2032 are based on estimates provided in the Stellantis-LGES and Volkswagen agreements. Beyond 2032, we assumed that full production levels of cells and modules would be maintained.[^17]

We estimate that federal and provincial government revenues generated from the Stellantis-LGES and Volkswagen EV battery manufacturing plants over the period 2024 to 2043 will be equal to the total amount of production subsidies (Table 3). That is, the break-even timeline for the $28.2 billion in production subsidies announced for Stellantis-LGES and Volkswagen is estimated to be twenty years.