Can US trade policy deliver a domestic battery supply chain?

When considering the battery supply chain from the perspective of numerous tariffs and restrictions on tax credits due to ‘foreign entities of concern’ (‘FEOC’), the consensus within the current administration is that the policies are intended to drive onshoring of the battery supply chain, bringing as many steps of battery manufacturing into the United States as possible.

While a wholly domestic battery industry is technically possible, it’s important to consider what that would mean, what it would cost, and if anyone is going to do it.

Lithium, graphite and other raw materials

At the furthest upstream end of the battery supply chain, markets are at their most diversified. Lithium deposits which are financially attractive to extract occur all over the world, and Australia and South America hold large portions of the raw lithium market. With increasing technological development of lithium brine extraction, even more processed compounds like lithium carbonate are being refined all over the world.

So what of the United States? There are certainly lithium deposits here, with plays like the Salton Sea in California, Thacker Pass in Nevada, and Smackover in Arkansas. That said, the pace of development in the United States is impacting the lithium industry, with the western projects just recently having the permitting to go ahead, and Standard Lithium’s project in Arkansas currently at the demonstration stage.

There does seem to be some degree of understanding, though, that developing a new industry requires incentives, regardless of what other trade policies are in effect: Standard Lithium has won a grant from the Department of Energy (DOE), and the DOE recently acquired a 5% stake in the Thacker Pass mine, providing a needed cash infusion for the capital-intensive and already delayed project.

Graphite is luckily insulated from the same sorts of mining economics and needed exploration budgets; while natural graphite does play a small role in batteries for energy storage, synthetic graphite is the most commonly used anode material and can be produced anywhere there is a source of carbon.

The synthetic graphite industry in the US is also quite immature; while a consortium of graphite producers petitioned for the anti-dumping and countervailing duties (AD/CVD) that the Department of Commerce would eventually pass, said petition was based on the notion that artificially low prices had prevented the industry from forming, as there wasn’t actually any synthetic graphite production capacity in the United States at the time.

Although the AD/CVD rate ended up being 105-115% of the price of graphite, depending on the producer, the duty-inclusive price of high-quality synthetic graphite is still only US$5-7/lb, and new plants are unlikely to produce graphite at a grade that will realise that price level. While battery manufacturers wait to see if the US can stand up graphite processing capacity, currently around 90% of all battery anode active material is processed in China.

The current state of midstream processing

Battery anodes and graphite go hand in hand, with few other ingredients besides graphite needed to make anode active material (AAM). Cathode active material (CAM), on the other hand, is more than just lithium and does not have the same diversity advantages that upstream lithium does.

As with graphite and AAM, over 90% of the lithium iron phosphate (LFP) cathode processing capacity is within China, and developing more capacity outside of the country has been slow. China has also introduced export controls on technology used to make high-performance cathode active material, a move that may help reinforce its position in the supply chain.

While it’s unclear any export controls would stop the production of LFP outside of China, they would certainly slow the adoption and development of higher-end cells that have driven China’s commanding position in the battery market.

There are developments happening in North America, albeit in the earlier stages. Recently, startup Electroflow secured US$10 million in funding for its novel lithium processing technology. The company’s goal is to produce LFP for US$2.50/kg, which would be lower than current China prices even without duties and tariffs.

If the company is successful in this goal, it could disrupt the LFP cathode market, permanently changing American battery supply chains. However, Electroflow is a seed-stage company, and there is still uncertainty and risk associated with bringing its technology to full commercialisation.

Battery cell manufacturing

Cell manufacturing is where there has actually been a response to the broader market conditions, with first auto manufacturers and then other OEMs moving in to meet US battery demand with domestic cell manufacturing.

The ordering of that demand has recently posed a problem for BESS integrators and developers as two key characteristics of battery cells for electric vehicles (EVs) don’t align with those for energy storage.

First, most EV batteries produced in the US have nickel-manganese-cobalt (NMC) cathodes. NMC cathodes provide greater energy density at the expense of cycle life; this is ideal for a car where range is a key differentiator, and even 3,000 cycles to 80%, an insufficient rating for BESS, will still see the battery lasting well over half a million miles in essentially any modern EV.

The second characteristic is form factor; EV cells are cylindrical which allows for higher power density (and lower charge times) at the expense of energy density. As an EV motor operates at discharge speeds as high as 4C while a typical BESS is between C/4 or C/2, this once again makes sense. Still, it means that all that manufacturing capacity for EVs doesn’t serve the storage market.

In the last year, however, the dynamics of EV and BESS demand have induced OEMs to make changes where they can. LG Energy Solution uses pouch cells for both its EV and ESS batteries, and that made it much easier for it to retool EV battery lines to make ESS batteries, in the process becoming the largest domestic ESS battery cell manufacturer in the United States at present.

The next few years will see more ESS cell manufacturing in the US than ever before, but with most of it coming from foreign companies and a lot of it coming from retooling existing facilities, there’s still uncertainty in the fate of downstream BESS manufacturing.

Most greenfield efforts to manufacture batteries in the US have either failed or stalled out, and none of the forecasted cell manufacturing facilities are coming from new-build firms. Having domestic manufacturing capacity will reduce geopolitical risk and tariff burden, which are net positives for the energy storage industry.

That said, with most of this capacity being supported by existing supply chains in other countries, even the most developed parts of the US battery supply chain remain highly interconnected with global market networks.

Uncertainty of emerging policies meets growing demand

Ultimately, although some portions of the supply chain are more developed than others, there is no realistic path to a wholly domestic lithium-ion battery supply chain in the United States. Policies like those in the budget bill aim to address these challenges, though trade policy alone has not historically been successful in encouraging industrial investment or growth.

Price increases for FEOC-compliant battery supply and margin compression of non-FEOC-compliant supply mean that storage demand will continue to be met by the same set of OEMs currently active in the market, albeit with shifts in their relative shares.

South Korea is expected to grow in significance, China’s share may decrease, and the overall market will likely resemble conditions from roughly a decade ago more than those immediately following the passage of the Inflation Reduction Act in 2022. Demand will slow in the short term but, as history has shown, technology will improve, prices will decrease, and the need for storage on the ageing North American grid will continue to grow.

Although demand is expected to grow over time, today’s developers and integrators must contend with the uncertainties of emerging policies. Market conditions, whether natural or created by policy, do show the role that domestic industries and shorter supply chains can play in influencing exposure to various operational risks.

At the same time, the global supply base is agile, and incumbent suppliers are already moving to adapt to the new regulatory environment. Whether by moving to compliance with the new law or evaluating the options for moving forward without tax credits, there will be a range of strategies available to those looking to develop storage projects in the face of current regulations.

And, as power demand and electricity prices are projected to rise in the future, the scale and characteristics of storage needs are expected to shift accordingly in ways that are not solely determined by the current political environment.

About the Author

Aaron Marks is a battery energy storage expert on Intertek CEA’s Market Intelligence team. His background includes over a decade of experience in the electric power industry, focusing on storage cost, revenue, and operations analysis. Before joining Intertek CEA, Aaron worked as an energy storage research analyst at Wood Mackenzie, contributing to critical insights for the industry. His prior roles at PowerAdvocate and National Grid further enriched his knowledge of energy supply chain data analytics and corporate technology related to energy storage.