Companies such as Ford are retooling battery plants to produce industrial and utility-scale energy storage batteries. At a Tesla energy storage facility in California. Analysts project Tesla's energy storage business revenue will surge 45% this year, while electric vehicle sales growth is only 2.3%. Electric vehicle battery manufacturers are pivoting to produce energy storage batteries for data centers and power companies, including firms like Ford. Supported by electric vehicle policies, battery makers invested heavily in the United States in recent years. However, following the change in administration, consumer subsidies for electric vehicles were eliminated, and penalties for automakers with high fuel consumption were repealed, altering the industry landscape. Benchmark Mineral Intelligence forecasts that the energy storage sector will account for 41% of total U.S. battery demand this year, up from 26% two years ago. Concurrently, clear subsidies remain for domestically produced grid-scale batteries in the U.S. Although related legislation repealed tax credits for solar and wind power, energy storage projects can still receive incentives provided the equipment does not contain excessive Chinese content. Batteries manufactured in China face high tariffs. Disruptions in the fossil fuel market due to geopolitical conflicts are further incentivizing data centers to move away from diesel or natural gas generation in favor of batteries. While rising natural gas prices could theoretically benefit electric vehicles, the current U.S. policy environment makes hybrid vehicles more advantageous for the foreseeable future.
Two deals announced this week highlight this shift:
South Korea's LG Energy Solution announced it will use a Michigan factory, originally intended to produce EV batteries for General Motors, to manufacture battery cells for Tesla's energy storage business. The project involves an investment of $4.3 billion. Samsung SDI announced a $1 billion agreement to supply batteries to an unnamed U.S. energy company through its joint venture factory with Stellantis in Indiana.
Other companies making the transition include:
Ford plans to invest $2 billion between 2026-2027 to retool electric vehicle battery capacity in Kentucky. Japanese battery maker AESC has retooled a Tennessee factory that previously produced batteries for the Nissan Leaf.
Shifting from automotive batteries to storage batteries often requires adjustments to battery chemistry:
Most electric vehicles use nickel-manganese-cobalt (NMC) lithium-ion batteries, which offer higher energy density suitable for extending driving range. Grid energy storage more commonly uses lithium iron phosphate (LFP) batteries, which have lower cost, longer cycle life, better heat tolerance, and can be densely packed.
According to Hughes, a research director at Benchmark Mineral Intelligence, adjusting the chemical composition is relatively low-cost, taking 6 months to 1 year. However, changing the battery form factor (cylindrical, pouch, prismatic) is more expensive. Ford's Kentucky plant will modify both the chemistry and the form factor: switching from NMC pouch cells to LFP prismatic cells. Is this transition profitable? Ford's CEO, Farley, stated on last month's earnings call that the energy storage business offers a "short payback period" and can "de-risk the core auto business." For Tesla, the energy storage business is already experiencing rapid growth and high profitability. As the leader in U.S. grid-scale batteries, its energy storage business achieved a gross margin of approximately 30% last year, significantly higher than the 18% margin for its automotive business. Analysts project Tesla's energy storage revenue will surge 45% this year, while electric vehicle sales are expected to grow by only 2.3%.
Batteries are attractive to data centers for two main reasons:
Regulations require data centers to reduce load during peak electricity demand; on-site batteries can meet this requirement. Batteries respond quickly, making them suitable for the highly fluctuating power demands of data centers.
Furthermore, the cost of LFP batteries has halved over the past two years, primarily due to technological advancements and economies of scale. Data from BloombergNEF shows that the levelized cost of energy for battery storage fell below that of gas turbines for the first time last year.
Key risks facing the industry include:
China's dominance of the global battery supply chain, accounting for up to 99% of LFP cathode material production, could make it difficult for U.S. manufacturers to meet subsidy requirements. Chinese energy storage manufacturing capacity already exceeds global demand; if Chinese manufacturers lower prices to offset tariffs, it could impact global markets. The most significant risk is policy volatility: tariffs on China, tax credits, and related eligibility rules are all subject to change. As automakers experienced in the electric vehicle sector, investments reliant on policy support can quickly face difficulties if incentives are removed.
