With Stellantis, Volkswagen deals, Ontario eyes bigger role in battery plant subsidies

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Ontario will pay a major share of subsidies for battery factories being built in the province, under a new agreement with the federal government that will relieve Ottawa of some of the financial burden of luring these facilities to Canada, and put the two levels of government into a new form of partnership as they determine the next steps in their pursuit of a domestic electric-vehicle industry.

Under the terms of the deal, reached this week, Ontario Premier Doug Ford’s government has agreed to pay one-third of the costs of up to $15-billion in production subsidies for Canada’s first large-scale EV battery factory, which is being built in Windsor, Ont., by LG Energy Solution and automaker Stellantis NV STLA-N.

More than that, the two levels of government revealed on Thursday that the same arrangement will also apply to the Volkswagen VWAGY battery plant being built in St. Thomas, Ont., even though Ottawa had initially committed to pay Volkswagen up to $13-billion in similar subsidies by itself. And Mr. Ford’s office said that it expects to share costs on similar terms for future battery facilities in the province.

The arrangement ends a standoff that escalated in May, when Stellantis and LG halted construction on their factory. They said the federal government had not kept a commitment to them to increase the facility’s initial $1-billion subsidy to match much greater incentives offered to battery makers in the United States, under that country’s Inflation Reduction Act. The American legislation passed in 2022, after the Windsor deal was first struck.

The Ontario government had previously argued that matching the U.S. subsidies was solely a federal responsibility. The federal government was concerned about the reaction elsewhere in the country if it continued footing the entire bill for tens of billions of dollars in subsidies for one sector in one province.

But now, having combined forces in the way Ottawa had hoped, both governments find themselves together at a crossroads – one at which they will have to decide whether it’s time to declare victory in their efforts to land battery factories to serve as the pillars of Canada’s EV supply chain, or whether to pursue more of them no matter how exorbitant the cost.

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Details of how precisely they will carry on that decision-making process are seemingly still being hashed out, as evidenced by some mixed messaging on Thursday.

Mr. Ford’s deputy chief of staff, Ivana Yelich, told The Globe and Mail that the province’s pledge to cover one-third of the payments to battery makers “is now a framework for future deals.” The Premier’s office also shared a letter that Mr. Ford sent to Mr. Trudeau and federal Finance Minister Chrystia Freeland during the Stellantis-LG dispute, which proposed that subsidy split as part of a new “national electric vehicle and battery auto pact.”

While Ms. Freeland publicly enthused about her government’s working relationship with Mr. Ford, on which she has been Ottawa’s point person, a spokesperson in her office, Katherine Cuplinskas, said that for now the cost-sharing arrangement applies only to Stellantis-LG and Volkswagen.

Both governments have incentives to further clarify the terms of their partnership, because decisions on subsidizing other automakers may be looming.

The most advanced negotiations involve Sweden’s Northvolt AB, which is considering locating a factory in Quebec. This suggests Ottawa will need to decide whether similar contributions will be required of other governments. But there has also been industry speculation that Ford Motor Company F-N and Toyota Motor Corporation TOYOF will begin making batteries in Ontario, where they already assemble vehicles.

Federal Industry Minister François-Philippe Champagne, who is Ottawa’s lead in courting automakers, has repeatedly said his government intends to be selective about which battery factories it provides with financial backing, implying a different cost-benefit calculus than either government has undertaken so far.

Both of the agreements for battery plants in Ontario have been justified largely on the basis of their symbolism.

Mr. Champagne has touted the Stellantis-LG and Volkswagen deals as a signal to the world that Canada – whose auto sector was only a few years ago mired in a long decline – could be home to an industry of the future. There are signs this is proving effective. Smaller EV supply-chain investments have recently been announced in Ontario and Quebec.

That symbolism at first came relatively cheap, with the $1-billion initially required to secure the Windsor factory. But after the Inflation Reduction Act’s passage, Canada had little choice but to match the U.S. subsidies – first to nail down Volkswagen, then to prevent Stellantis and LG from relocating their plant south of the border, as they were threatening to do when they stopped construction. The new subsidies are to be doled out annually, tied to how many batteries the factories produce, and are to be phased out by 2032.

Now that Ontario is back to having two landmark battery facilities under development, putting the province in a position to supply a large share of the vehicles that Stellantis and Volkswagen will roll out across North America during an EV scale-up pivotal to both those companies’ futures, the calculus has become more complicated.

The less that battery factories are needed to put the province and country on the EV-making map, the more governments will be pressed to explain what tangible economic benefits each additional factory will bring.

The federal and Ontario governments have not made significant efforts yet to delve into those details, at least publicly.

When announcing the Volkswagen deal earlier this year, for instance, they pointed to offshoot benefits, such as the creation of 10 indirect jobs for each person directly employed at a factory. That is a best-case scenario borrowed from groups advocating for the EV sector. It relies on several assumptions, including that there will be a relatively near-term boom in Canadian mining of battery materials.

Both Ottawa and Ontario now have incentive to get more precise, as they seek to determine which investments will produce the most lasting value out of the new auto pact Mr. Ford envisions.

With a report from Bill Curry