In the world of battery storage, China dominates. Last year, it supplied 81% of the global lithium battery market, and exported 37% of its production, 57% of which went to the U.S. and the European Union, according to a recent report by Goldman Sachs.
China’s excess capacity — 1.5 times the global demand pool, and 3.3 times its own domestic one — has sent global prices plummeting. In the first quarter of 2024, lithium battery prices were 45% lower compared to last year.
The U.S., where battery projects have been facing delays and cancellations, is feeling the impacts of the plunge even despite the boost provided by the Inflation Reduction Act. There’s widespread concern that such overcapacity could hamper the energy transition globally.
However, according to Daniel Finn-Foley, director of energy storage at Clean Energy Associates, it’s too soon for the U.S. battery sector to panic.
“Generally speaking, when you have an oversupply you wind up with lower prices, which encourages more development, which encourages higher demand, which then normalizes prices,” he told Latitude Media. “At the same time, manufacturers are going to be adjusting their production, and they’re not going to be running these factories 24/7.”
These adjustments are likely to create an opportunity for supply and demand “to meet back in the middle,” he added.
According to the Goldman Sachs report, poor profitability is already pushing Chinese battery manufacturers to adjust their production pace, and 2024 “is likely to be the trough of this down cycle followed by a sustained recovery.”
This promise of a turnaround isn’t confined to lithium-ion batteries. Overcapacity problems are also likely to correct themselves in sectors like solar modules and electric vehicles as well — though each sector comes with its own set of tax incentives and regulations that inform the dynamic.
“We expect a rebalancing in supply versus demand, a restoration in profit, and sharp deceleration of Chinese supply to the world through 2028,” the report found.
Carrots and sticks
One element of why Chinese battery manufacturers are winding down production: the “uncertainties around limitations to market access to the U.S.,” among other countries.
In 2024, the U.S. tariff rate on lithium-ion EV batteries and on battery parts has increased from 7.5% to 25%, a steep hike that is scheduled to be implemented for lithium-ion non-EV batteries in 2026 as well.
Mike Hall, CEO of the BESS and solar software platform Anza Renewables, thinks these tariffs provide the U.S. market with some “insulation” from China’s oversupply challenges.
“The import duties and tariffs and the challenges of importing products from China are good for the economics of domestic manufacturing,” he said. “While domestic manufacturers still face foreign competition, it’s higher-cost and not as fierce as if we were fully exposed to imports from China.”
Paired with incentives, tariffs constitute what Finn-Foley describes as a “carrot-and-stick” approach that “is going to result in much higher battery capacity in the U.S.” Through the Bipartisan Infrastructure Law, the Defense Production Act, and the IRA, the Biden administration has invested nearly $20 billion in grants and loans to expand batteries domestic manufacturing, while also creating manufacturing tax credits to incentivize U.S. production.
“Clean Energy Associates anticipates that with the price trends as they are today, we could see domestic cells be price-competitive [in the U.S.] with Chinese cells in the next two years,” Finn-Foley said.
Hall, who has been in the renewables manufacturing space in the U.S. for over two decades, said the “two different layers of incentives” have the potential to be successful.
“I do believe they are going to stimulate a resurgence of manufacturing of the end product,” he said. “And with that, there will also be the supply chain and ecosystem to make the product more cost competitive long term.”
That said, it’s unlikely that the U.S. products will become competitive with Chinese without the incentives — or outside of the U.S.
Solar modules, for example, which are following a similar trajectory to batteries, are twice as expensive in the U.S. as they are in Europe, largely due to the layers of tariffs. And China’s lithium battery market domination is such that it’s not going to be dethroned any time soon.
“China has such a head start that I think that they’ll maintain that moving forward,” Finn-Foley said.
The country “is well-positioned to maintain its status as a major global battery manufacturer,” he added. “I don’t think that the United States, under the current production model, is going to eclipse that.”
