A New Phase for the U.S. Battery Industry

In the United States, this buildout has already contributed to substantial and geographically widespread economic and employment benefits. Spurred by the bipartisan Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA), battery projects have helped drive a record wave of industrial spending that has seeded new manufacturing clusters across the South and Midwest. With more than 180 primary component facilities commissioned since 2019, battery manufacturing sites now span 38 states. As this footprint expanded, battery-sector employment also reached its highest level since 1972 in 2024—even as overall U.S. manufacturing employment declined—and was projected to create as many as 125,000 domestic jobs by 2032.

The U.S. Battery Buildout: Momentum and Gaps

Driven by this rapid buildout, total U.S. battery production increased by nearly 140 percent between 2020 and 2025, after years of stagnation. Despite this momentum, however, the localization of battery manufacturing has advanced unevenly across the value chain. Since the 2010s, most domestic capacity additions have concentrated in final-stage pack and module assembly, while investment in cell manufacturing only accelerated in the early 2020s. Capacity for critical battery components—including cathode and anode active materials, foils, and separators—has lagged even further, though electrolytes remain a notable exception.

These trends highlight the structural constraints that make complete decoupling across the value chain unlikely. Most forecasts now suggest the cell and pack capacity in the pipeline as of year-end 2025 could meet—or even exceed—projected U.S. demand by 2030. In contrast, significant shortfalls are still expected for midstream components, even if all domestic capacity announced as of 2025 comes online by 2030. The upstream picture is even more constrained: With less than 1 percent of global processing capacity for lithium, less than 3 percent for nickel, and less than 1 percent of global reserves of nickel, cobalt, and natural graphite, the United States is deemed unlikely by industry assessments to meet the entirety of its minerals or refining needs with domestic capacity alone by 2030.

Global Linkages and Market Context

Combined with the rapid expansion of downstream demand growth, these domestic capacity constraints have deepened U.S. reliance on global supply chains. U.S. lithium-ion battery imports grew almost sevenfold between 2018 and 2023. By 2024, lithium-ion batteries accounted for nearly 85 percent of all energy storage battery imports, compared to 17 percent in 2009. China is the main source of non-lead-acid energy storage battery imports, supplying nearly 70 percent of finished products and about 33 percent of parts in 2024. By absolute value, Chinese imports have increased more than tenfold from pre-pandemic levels.

China’s Market Gravity

China is not the only node in U.S. global linkages. Even as China’s share of U.S. downstream cell and module imports rose from 44 percent to 71 percent between 2020 and 2023, sourcing in upstream and midstream segments has diversified. Germany, for instance, has become the top supplier of anodes and cathode active materials. International partners have also been crucial—as direct investors or joint-venture operators—to recent U.S. manufacturing capacity expansions. Almost all major domestic cell plants currently in operation or under development have a non-U.S. partner; four leading Korean and Japanese incumbents alone are estimated to be supporting over half of all U.S. cell production capacity in 2026.
 

A Shifting Policy Environment

Overview

The U.S. battery sector now faces a more uncertain market environment, visible in its two biggest end-use segments. Transportation remains the primary demand anchor for batteries, but recent changes to policy incentives and regulatory frameworks have weakened the demand signal and increased downside risk for domestic capacity utilization. Grid-scale storage is an increasingly important growth market driven by reliability needs and improving economics, but its trajectory is sensitive to evolving constraints that include market rules, interconnection and permitting processes, and policy frameworks. At the same time, cross-cutting policy uncertainty is rising and affecting the entire sector. Sourcing restrictions and trade barriers have increased compliance cost and uncertainty, with implications for domestic capacity building. Together, these shifts highlight the need for coherent, predictable policy design.

The first section of this paper outlined a battery ecosystem marked by rapid growth, uneven capacity buildout across the value chain, and continued reliance on globally integrated supply chains. The focus now shifts to the forces reshaping that landscape: evolving market and policy dynamics that are that are redefining the outlook for transportation and grid-scale storage—the two segments set to dominate U.S. battery demand—along with broader cross-cutting uncertainties set to affect the entire manufacturing value chain.

Transportation: Still Dominant, but Policy Headwinds Mount

As is the case in much of the world, transportation has historically been the primary driver of battery demand in the United States. Mobility sectors are expected to remain the dominant end market and to continue to account for roughly 75–90 percent of total U.S. battery demand through 2035; about 40 percent of operating and planned U.S. battery manufacturing capacity was tied to partnerships with automakers in 2025. Given this reliance, recent policy and regulatory shifts that risk weakening what had been a relatively clear demand signal in the auto sector could have outsized implications on the entire domestic battery value chain.

The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, presents immediate challenges. On the demand side, OBBBA eliminated key federal incentives provided by the IRA. The $7,500 new electric vehicle (EV) credit (Section 30D), $4,000 used EV credit (25E), and commercial EV fleet credit (45W) all terminated on September 30, 2025. Additionally, the home charging infrastructure (30C) credit will not apply to property placed in service after June 2026. The market response has been swift: U.S. EV sales declined by about 36 percent between Q4 2024 and Q4 2025, after the tax credits expired in September. On the supply side, OBBBA also rescinds federal lending authorities that were crucial in supporting higher-risk projects across the battery value chain, including an estimated $1.6 billion in unobligated credit subsidy for the Advanced Technology Vehicle Manufacturing (ATVM) loan program.

Beyond direct incentives, recent regulatory changes also threaten two key compliance mechanisms that had been positioned to sustain high-volume demand for EVs and batteries. The first is the U.S. Environmental Protection Agency (EPA) 2024 Corporate Average Fuel Economy (CAFE) standards for model years 2027–2032, which sets fleet-wide average tailpipe emissions standards that automakers broadly agree can only be met if roughly two-thirds of new light-duty vehicles sold by 2032 are electric. OBBBA, however, eliminated monetary penalties for CAFE noncompliance while legal actions by states and federal agencies have further weakened the standards. At the same time, the EPA has also begun systematically challenging the legal foundation of broader federal emissions rules, including by moving to repeal its 2009 Endangerment Finding.

The second mechanism is California’s Advanced Clean Cars II (ACC II) program, which mandates that 100 percent of new passenger vehicle sales by 2035 must be zero-emission vehicles and plug-in hybrids. The current administration has attempted to use the Congressional Review Act to nullify California’s Clean Air Act waivers, which allowed the state to set its own—often stricter—standards such as the ACC II. As of 2025, 17 states and the District of Columbia—together accounting for over 40 percent of new light-duty and 25 percent of new heavy-duty vehicle registrations in 2023—had adopted some subsets of California’s standards.

Collectively, the attempted rollback of federal incentives and the erosion of federal- and state-level compliance regimes—along with associated litigation—have created legal uncertainties and economic headwinds that could slow EV adoption and, in turn, dampen domestic battery demand. U.S. EV sales in 2030 are projected by various industry forecasts to be as much as 44 percent (or about 14 million units) lower than pre-OBBBA expectations; a recent study estimates that the repeal of IRA clean vehicle tax credits and the EPA CAFE standards could result in the potential closure of 29–72 percent of current cell manufacturing capacity, as well as all planned facilities.

Power Sector: Poised for Growth amid Lingering Uncertainty

Although mobility is expected to remain the primary demand driver, grid-scale storage is emerging as a dynamic growth segment. As electricity load rises while generation and transmission additions lag, flexible resources that can absorb surplus power and discharge during shortages are increasingly valuable for grid reliability and price stability. Battery energy storage systems (BESS) are uniquely positioned to fill this role while also being among the fastest assets to deploy in the United States. BESS deployment has increased 25-fold between 2019 and 2025, making the United States second only to China in total installed storage capacity.

Still, the outlook for U.S. BESS deployment is far from certain. Renewables, which have historically enabled storage by creating colocation opportunities and favorable market conditions, face an immediate challenge from OBBBA’s accelerated phase-out of solar and wind tax credits. Combined with broader policy rollback and regulatory interference targeting renewables, these policy headwinds could indirectly slow BESS deployment—even though OBBBA largely preserves incentives for storage, including the Section 48E technology-neutral investment tax credit (ITC) and the transferability mechanism, which allows developers to sell tax credits directly to third parties.

In the near term, renewable deployment may continue rising on the momentum of remaining IRA tax credits and demand related to load growth and reliability concerns. Roughly 76 percent of solar and 86 percent of wind projects slated to come online by 2029—or about 33 gigawatts (GW) of capacity—are estimated to be safe-harbored and will retain their tax credit eligibility. Over the longer term, however, the durability of this growth remains to be seen. As policy support recedes, projects will become more sensitive to underlying price signals. Markets with weaker pricing dynamics or slower interconnection processes, for instance, may be disproportionately affected.

Power Market Mechanisms as Enablers of Battery Deployment

Grid-scale storage deployment will directly affect demand volumes and utilization rates for domestic battery manufacturers. Previous forecasts projected storage’s share of total battery demand to peak around 2030; more recent industry estimates suggest deployment could exceed expectations. Whether storage becomes a durable second growth driver alongside transportation, however, will depend on how developers and investors navigate evolving policy support, market rules, and revenue models—including how they balance merchant exposure and stable cash flow from tolling or power purchase agreements (PPAs) and ancillary service contracts.

Cross-Cutting Sources of Uncertainty

Sourcing Restrictions Introduce Added Complexity

Sourcing requirements are reshaping investment and deployment across the U.S. battery value chain. OBBBA introduces new restrictions on cross-border ties through the Prohibited Foreign Entity (PFE) criteria, which limits eligibility for the IRA’s remaining Sections 45Y, 48E, and 45X tax credits. The PFE rule set expands on the Foreign Entities of Concern (FEOC) provisions that previously governed eligibility for benefits under the 2021 National Defense Authorization Act, IIJA, CHIPS and Science Act (CHIPs), and IRA. The new framework applies to most of the remaining IRA tax credits and restricts foreign entities’ involvement in U.S. projects and firms across three categories: ownership, payments, and “material assistance.” Violation of any of these categories could result in the U.S. taxpayer losing the ability to claim or transfer tax incentives.

Specifically, OBBBA prohibits corporate taxpayers deemed to be PFEs—either a specified foreign entity (SFE) or a foreign influence entity (FIE)—from receiving credits. Eligibility is similarly denied if a PFE is “involved in aspects of [a given] facility’s development or ownership.” Taxpayers may also face recapture of up to 100 percent of credits received within the last 10 years if they enter into arrangements that confer “effective control” to an SFE or FIE. In addition, projects are subject to the material assistance cost ratio (MACR) test, which caps the percentage of the supplies used to build a facility that can come from PFEs.

PFE Guidance for Battery Manufacturing Thus Far

Industry stakeholders broadly agree that the battery sector is especially exposed to sourcing restrictions due to its extensive international linkages. Although firms have begun reconfiguring supply chain strategies to comply with these requirements, substantial uncertainty remains regarding how the Treasury Department will define and enforce key standards, including those related to ownership, effective control, and supply chain tracing. Forthcoming Treasury Department rulemaking—with final guidance and updated safe harbor tables set for release by December 31, 2026—is therefore seen as essential to restoring clarity for long-term planning.

Beyond creating immediate sourcing bottlenecks, proposed restrictions on licensing agreements and other forms of technological transfer could intensify longer-term competitive challenges—particularly given China’s growing share of global battery intellectual property and its leadership in the rapidly expanding lithium iron phosphate (LFP) market, where the country accounts for 98 percent of output. As lower-cost, higher-performance LFP batteries gain traction across both mobility and stationary storage applications, tightening licensing control could hamper U.S. manufacturers’ ability to pivot away from legacy chemistries and respond to evolving demand.

Tariffs Compound Cost and Volatility

The U.S. battery industry finds itself in the crosshairs of escalating trade disputes. “Liberation Day” tariffs, for instance, imposed a 64.5 percent composite import duty on Chinese lithium-ion batteries. At their peak, combined tariffs on Chinese lithium-ion batteries and components briefly reached a historic high of nearly 156 percent in April 2025. Additional barriers in 2025 affecting battery manufacturing included 50 percent tariffs on steel and copper, a 93.5 percent tariff on Chinese graphite, a 30 percent baseline tariff on all Chinese goods, and 25 percent Section 301 tariffs. Broader measures on other trade partners, such as 25 percent reciprocal tariffs on South Korea, further increased import costs for battery products. Although the Supreme Court struck down tariffs imposed under the International Emergency Economic Powers Act (IEEPA) in February 2026, the administration has continued to pursue battery-related trade barriers through other authorities—such as Section 232 investigations—while maintaining existing ones, including a 10 percent import surcharge under Section 122.

All else equal, tariffs on finished products may appear to increase the relative price competitiveness of U.S. outputs, but extensive reliance on imported inputs across the U.S. battery value chain means that trade barriers can impose significant burdens on project developers and manufacturers alike. Recent industry analysis finds that high tariffs could increase the cost of BESS projects by up to 50 percent. For some segments, there are currently no adequate capacity pipelines or feasible commercial pathways by which domestic production could fully replace imports. Moreover, frequent and unpredictable changes to tariffs—as well as the attendant legal uncertainties—further increase investment risk. As the permitting and development cycles of battery capacity can take years to complete, tariff volatility directly translates to costs and delays that impair the financial viability of projects. In the near term, therefore, tariffs are more likely to catalyze higher costs than to drive immediate localization of the entire ecosystem.
 

The Strategic Outlook: Policy-Market Feedback Loops

Overview

Policy and market shifts are prompting firms across the value chain to recalibrate. The adjustment is likely to be uneven. Downstream segments need to sustain utilization amid demand uncertainty; midstream segments remain difficult to finance without market coordination; upstream efforts must contend with resource constraints and commodity price exposure. Supply chain security is a central policy challenge that requires tailored intervention; complete decoupling is impractical, and carefully managed international linkages will remain crucial. Different segments present distinct risk profiles and cost tradeoffs, requiring calibrated approaches that balance domestic capacity-building, friendshoring, and diversification. Finally, this strategic outlook underscores that innovation leadership is inseparable from industrial capacity. Durable competitiveness depends on positive policy-market feedback loops that create an enabling ecosystem that allows technologies to commercialize at scale.

Recent developments are reshaping crucial feedback loops between public policy, technology change, and market behavior. This recalibration is already visible in investment and deployment activities: After a surge of announcements in 2022 and 2023, U.S. battery manufacturing investment has fallen roughly 38 percent from its late-2024 peak. In total, $8 billion in battery projects were announced and $11 billion were cancelled in 2025, marking the first time in recent years that cancellations have exceeded new announcements. Several major battery manufacturers have also announced plans to pivot capacity away from mobility and toward grid storage, even though the segment can have lower margins. Looking ahead, three interconnected dynamics will bear outsized implications for the trajectory of the U.S. battery value chain: (1) how shifting demand and policy signals reshuffle the domestic industrial base, (2) whether supply chain security objectives can be advanced without undermining deployment, and (3) how innovation pathways evolve under new opportunities and constraints.

Industrial Base Recalibration

Rather than a uniform slowdown or expansion, the U.S. battery ecosystem is likely to see asymmetric adjustment, with different segments responding differently to changing demand expectations, cost structures, and regulatory exposure. Understanding these uneven effects will be essential for policymakers to design—or revamp—strategies for specific segments.

Downstream: Utilization as the Binding Constraint

Downstream manufacturing—cells, modules, and packs—had been the primary beneficiary of policy efforts prior to 2025. Projects currently in the pipeline could increase U.S. cell and module manufacturing capacity fourfold and fivefold, respectively. Under scenarios in which EV demand weakens significantly and storage growth does not fully compensate, however, this buildout could result in overcapacity by 2030—especially in cells, where planned capacity is already sufficient to meet even high-demand projections. Even if surplus domestic output finds export markets, U.S. producers in these segments are unlikely to achieve price parity with Chinese competitors.

Firms’ recent pivots toward stationary storage reflect relative resilience of BESS demand under current policy conditions. But if producers converge on the same—and potentially smaller—set of bankable offtake opportunities, competitive pressure may intensify and raise the likelihood of bankruptcies and consolidation; this potential “bullwhip effect” is compounded by long lead times in the battery supply chain. The policy challenge for downstream segments, therefore, lies in whether demand-side levers can support sustained utilization. Without demand anchors, capacity additions may fail to translate into a durable industrial base.

Midstream: A Market Coordination Challenge

Despite recent activity, projected domestic midstream capacity additions—including for the processing of precursor materials and the manufacturing of components such as cathode and anode active materials, foils, and separators—still lag the planned cell and module buildout. A difficult mix of upstream supply volatility, downstream demand uncertainty, intense global competition, and regulatory hurdles have suppressed domestic investment. As policy incentives contract and trade arrangements shift, future capacity additions are likely to prioritize cost competitiveness, potentially further weakening incentives for friendshoring or localization; about 450 kilotons per year of cathode and anode capacity had already been canceled between Q3 2024 and the same period in 2025.

Midstream segments could benefit from clearer statutory treatment and a more targeted policy approach. For example, the two-year delay in IRS guidance for the treatment of midstream components under the IIJA was viewed as partially responsible for underinvestment. Policy interventions should focus on improving the bankability of strategic capacity through market-making and coordination—either domestically or with allied partners. Tools such as procurement anchors, price guarantees, warehousing, and risk-sharing mechanisms can help underwrite early investment until scale and ecosystem effects improve commercial viability. Such targeted support may be particularly warranted in segments that deliver crucial system-level benefits but face persistent project-economic challenges, such as refining.

Upstream: Structural Bottlenecks and Strategic Interventions

Supply-side policy efforts have lent momentum to U.S. critical minerals projects, but structural constraints remain. Limited resource endowments, high capital intensity, long lead times, environmental concerns, and technical complexity all mean the U.S. battery industry will rely on imports for key upstream inputs in the near term. Alongside retaining incentives for domestic investment where feasible, the strategic priority should be to diversify supply and strengthen resilience without sharply increasing costs. This requires granular analysis to identify which specific minerals and upstream capabilities constitute binding bottlenecks. Domestic lithium projects, for instance, have proven attractive to investors, in contrast to muted commercial interest in graphite.

Beyond project-level support, policymakers have proposed market-based instruments such as strategic resource reserves or a government-backed clearinghouse for price benchmarking to help mitigate volatility and reduce vulnerability to supply shocks. Strengthening credible midstream and downstream demand signals (see above) and easing regulatory burdens—especially permitting—could also create broad-based benefits. Ultimately, policy effectiveness will hinge on tailoring interventions to the specific characteristics and market structures of each mineral or input; ad hoc measures that distort incentives or privilege a narrow set of players can be counterproductive.

Supply Chain Security: A Balanced Approach

Adjustments across the battery industry are increasingly shaped by efforts to manage supply chain exposure. As firms reassess procurement relationships, the central policy challenge is to strengthen resilience without eroding deployment economics or undermining the scale and learning effects needed to build a durable domestic industrial base. Critically, supply chain security is not synonymous with complete onshoring or uniform localization across the value chain. Different segments present different risk profiles, cost structures, and strategic sensitivities. In some segments, acute vulnerabilities or market failures may justify reshoring; in others, friendshoring among trusted partners or diversified global sourcing may provide sufficient resilience at lower cost.

Batteries for Defense 

U.S. priorities in the battery sector span multiple—and potentially competing—objectives: reliability of supply, integrity of equipment and software, long-run manufacturing competitiveness, and sovereignty for sensitive applications. Each implies different risk tolerance and requires different policy approaches. Upstream capacity critical to defense applications, for example, may still require commercial demand from broader consumer markets. Effective de-risking therefore requires clarity about what is being secured, for which end uses, and at what cost, while also accounting for ecosystem interdependencies. Absent this discipline, policy can drift toward blunt localization mandates that weaken the very industrial base they aim to protect.

Global Linkages as an Asset

Even with aggressive reshoring strategies, international commercial partnerships and allied sourcing are likely to remain integral to the U.S. battery ecosystem. Canadian projects, for instance, were broadly counted on to support U.S. need for nickel, cobalt, and graphite for the near term as of 2025. Although U.S. mineral production may expand, the country still lacks sufficient reserves for key inputs; mining alone also does not solve the more binding constraint of limited domestic refining and processing capabilities. Conversely, the U.S. market has proven to be a crucial demand anchor that enables the necessary upstream projects to get built in partner countries. As a result, supply chain security will depend as much on sustained international diplomatic and commercial engagement as on domestic initiatives.

Beyond access to inputs and capital, U.S. battery manufacturing also benefits from the technical and operational know-how of the country’s international partners. Battery manufacturing requires a variety of skills, from engineering and process optimization to assembly. In particular, specialized personnel such as assemblers, fabricators, and metal and plastic workers require extensive technical programs or on-the-job training; foreign battery manufacturers have played an outsized role in providing this assistance and could continue to support domestic workforce development efforts. U.S. battery manufacturers’ international operations have likewise benefited from cross-border market integration; about 57 percent of Mexico’s lithium-ion imports, for instance, came from the United States and supplied U.S. EV plants in the country.

Acknowledging Market Realities

Despite recent momentum, the U.S. battery sector continues to lag global industry incumbents in scale and cost competitiveness. If sourcing restrictions and compliance rules become overly rigid, complex, or unpredictable, they risk raising the cost or constraining the performance of compliant batteries. In this case, firms may instead favor imported alternatives, whose cost or quality advantages could partially or fully offset the opportunity costs of policy incentives and avoided tariffs. For instance, recent industry analysis indicates that even with an estimated 58 percent tariff in place as of January 2026, U.S.-produced LFP battery cells still require the 30 percent ITC to match Chinese imports on cost.

Evaluating National Security Risks from Imports

The potential tradeoff between cost and compliance will shape procurement decisions, influence technology pathways, and affect market composition. With global battery prices expected to continue declining in 2026, localization requirements and compliance burdens that raise near-term costs too sharply can slow deployment and undercut the learning-by-doing and transfers needed to make domestic production competitive over time; they may also decrease the impact and fiscal efficiency of existing incentives. Successful capacity-building strategies should therefore prioritize establishing demand and de-risking investment first through clear rules and predictable interventions.

Allied Industrial Strategy and Realignment

The structure of the global battery value chain—and the U.S. position within it—will be shaped as much by allied strategy as by domestic policy. As the global market and geopolitical environment shift, some U.S. allies may pursue alternative arrangements to advance national strategic goals. Recent developments illustrate this dynamic: In Canada and Europe, for instance, resistance to partnerships with Chinese firms has begun to soften in early 2026. Upstream producers, such as Argentina and Australia, may likewise seek alternative offtake markets as uncertainty grows in U.S. end-use segments. Such realignments can have lasting consequences for the global distribution of capacity and expertise.

For U.S. policymakers, this underscores that supply chain de-risking requires sustained diplomacy attuned to where allied incentives align and where comparative advantages are complementary. Rather than relying on unilateral measures or insisting on uniform alignment, a pragmatic allied industrial strategy can reduce concentration risk while preserving economies of scale through targeted cooperation and a deliberate division of roles across capital, materials, and manufacturing capacity. Well-designed international partnerships can secure access to critical inputs while facilitating the transfer of expertise needed to build durable domestic capability. Operationally, international engagement is also essential to harmonizing complex technical and regulatory frameworks.

Managing the Innovation-Industrialization Nexus

Patent trends illustrate both existing strengths and emerging constraints in innovation: The United States is a qualitative leader in advanced LFP and NMC technologies, while China leads in overall patent volume across both mature lithium-ion chemistries and emerging alternatives such as solid-state and lithium-sulfur batteries. Although technical progress remains essential, innovation leadership is increasingly inseparable from the ability to commercialize and manufacture at scale under evolving market and policy conditions.

Understanding Technology Pathways

For lithium-ion technologies, electrode chemistry accounts for roughly 70 percent of cell costs and about 25 percent of total pack costs and is the central determinant of cost, performance, and raw material requirements; shifts in chemistry therefore carry significant competitive implications. Historically, U.S. battery technology choice was shaped by “range anxiety” in the EV market, which favored energy-dense chemistries such as NMC. As stationary storage begins to account for a larger share of demand, less energy-dense but cheaper chemistries—namely LFPs— have gained momentum, mirroring a global shift. In total, the United States now has an estimated 200 GWh of LFP capacity in the pipeline by 2030.

U.S. manufacturers report that switching production between EV and grid storage batteries is financially and operationally feasible, though not without friction. Retooling lines and retraining workers for different electrode chemistries is also achievable, as reflected by announced plans to retrofit existing plants, but variations in casing and form factor requirements can introduce complications or prevent manufacturers from capitalizing on existing process expertise and cost advantages. In practice, U.S. manufacturers may be able to adapt to shifting demand—but which technology pathways ultimately prevail will depend on how markets respond to relative costs, performance requirements, and policy incentives.

In the near term, commercially mature lithium-ion chemistries are likely to remain dominant, as continued innovation and manufacturing scale drive down costs. Globally, NMC, NCA, and LFP together represented over 90 percent of total EV sales in 2024, effectively setting the direction of the broader battery market. Although emerging alternatives—such as sodium-ion and solid-state batteries—have made meaningful technical and commercial progress in recent years, in the absence of major breakthroughs they are still likely to only play a complementary role; their combined market share is generally expected to remain below 10 percent in the near-to-medium term.

Innovation and Industrialization in Tandem

Looking ahead, the United States may still find opportunities to reposition itself in technological domains where leadership is not yet consolidated as the next wave of innovation takes shape. These opportunities span novel battery chemistries and alternative technology categories, such as long-duration energy storage (LDES). Similarly, emerging value chain segments such as recycling could create new commercial opportunities while easing U.S. resource constraints. In addition, although U.S. firms face structural disadvantages including higher energy and labor costs and a lack of vertical integration, they may be able to narrow cost gaps through operational means. AI could offer a potentially crucial lever: Predictive algorithms, for instance, could compress development cycles by accelerating new battery chemistry discovery and experimental validation through rapid iteration, while AI tools on the factory floor could help firms flatten the learning curve by improving yields and detecting defects.

Whether these opportunities translate into defendable competitive strengths, however, will depend on more than just first-mover R&D advantage. Even technically promising innovations will struggle to scale without an enabling ecosystem—capital access, workforce availability, regulatory clarity, industrial clustering, demand signals, and credible revenue models. These needs may become more acute if continued cost and performance improvements in lithium-ion technologies further raise the barrier of entry for emerging alternatives, which must compete within markets increasingly optimized for lithium-ion deployment. As a result, policy may need to play a bridge role by reducing early-stage commercialization risk long enough for learning effects to take hold, or by helping to build out the necessary infrastructure. History offers a useful precedent: Targeted tax incentives in the U.S. shale sector helped de-risk early investment and crowd in private capital, which sustained technological improvements in drilling and completion that eventually underpinned U.S. global leadership in the decades since.
 

Key Policy Observations

Recent market shifts underscore a recurring theme in industrial capacity-building: While policy incentives can catalyze investment, long-term competitiveness ultimately depends on enabling conditions that sustain commercial viability over time. Capital-intensive industries with thin margins and intense competition—such as the battery sector—are especially sensitive to policy-induced changes in both demand anchors and supply-side enablers. As such, the U.S. battery manufacturing ecosystem offers a revealing case study in how public policy and private capital can converge to strengthen industrial resilience.

With cost and performance competitiveness closely linked to scale, systemic inertia, and supply chain maturity, the central policy challenge is less about picking technological winners than about fostering commercialization environments that allow innovative solutions to grow organically. For batteries, this may include power market structures that reward flexibility and firm capacity, procurement frameworks that solidify demand signals, policy incentives that lower financing costs, favorable interconnection and permitting treatments that reduce completion risk, as well as compliance regimes that reinforce learning and aggregation across the value chain.

The following observations translate this report’s findings into actionable policy insights, organized around three central challenges: (1) building capacity where constraints are most binding, (2) de-risking without sacrificing the benefits of scale and diffusion, and (3) aligning innovation policy with industrial strategy.

1. Policy measures to cultivate domestic industrial capacity should be grounded in market realities across the value chain; a coordinated strategy is essential to a durable enabling ecosystem. Rigorous market analysis is critical to identifying the interdependent supply- and demand-side dynamics at play—and to understanding how policy interventions can align incentives across segments and stakeholders. Although access to cost-competitive inputs, leading technologies, and efficient production practices matters across the battery value chain, these factors may weigh more heavily on downstream segments that compete on scale and cost. Upstream and midstream projects, by contrast, may be more sensitive to demand certainty and commodity price volatility. These needs are heterogeneous but interlinked: Misalignment between segments or stakeholders can stall or distort development across the entire ecosystem, while policy uncertainty can have similar ripple effects. Achieving strategic goals therefore requires policymakers to reinforce intended market signals through coherent fiscal, trade, and regulatory measures that are deliberately sequenced and consistently executed.
2. De-risking strategies should manage exposure while preserving the benefits of scale, specialization, and diffusion; indiscriminate decoupling can be counterproductive. International partnerships have played an essential role in enabling the recent wave of battery manufacturing in the United States. Sweeping, abrupt decoupling that ignores market realities can backfire by undercutting deployment economics and learning curves. Efforts to reduce U.S. supply chain vulnerabilities should instead be guided by clear priorities, consistent policy signals, and disciplined deliberation over the appropriate scope and depth of de-risking. Certain sensitive battery applications or components may justify more thorough decoupling, but they often still rely on adjacent consumer-oriented industrial bases. Frequently, selective linkages are unavoidable—or even advantageous—particularly when resources, capabilities, or comparative advantages are geographically dispersed or prohibitively costly and time-consuming to localize. Where linkages remain appropriate, well-designed cross-border arrangements can still advance strategic objectives by sustaining capital formation, economies of scale, and technology and knowledge transfer.
3. Innovation and industrialization are distinct but complementary policy domains that require careful alignment; a healthy and competitive U.S. battery ecosystem requires both. Each of these two domains may prioritize different objectives over different scopes and timelines: Innovation efforts target long-term global competitiveness and differentiation, while industrialization focuses on scaling domestic capacity within existing market constraints. But innovation and industrialization should not be pursued in isolation, as neither can substitute for the other—innovation must reflect commercialization realities, and industrialization must remain adaptive to technological change. For batteries, ambitions to pivot to next-generation pathways must contend with the infrastructure, supply chain, and end use inertia of incumbent technologies. Through calibrated interventions, policymakers can harmonize innovation leadership and industrial capacity, which can be mutually reinforcing when effectively coordinated.
    

Ray Cai is an associate fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Jane Nakano is a senior fellow in the Energy Security and Climate Change Program at CSIS.

This report is made possible by support from the Hewlett Foundation.

The authors thank Elaine Buckberg, Derrick Flakoll, Charlotte McClintock, Michael Oatridge, Steven Schneider, James Wickett, and Ethan Zindler for their workshop presentations and comments on the draft report. The authors also thank other experts who shared insights through interviews and discussions. The authors are grateful to CSIS colleagues Leslie Abrahams, Navin Girishankar, Ilaria Mazzocco, and Mathias Zacarias for their feedback, and to interns Aaron Yang and Caroline Kiely for their research assistance. Any errors are solely the responsibility of the authors.