Korea's battery industry is targeting the energy storage system (ESS) market, cited as a new revenue source, but expectations are growing that it will be difficult to offset weak results stemming from the slump in the electric vehicle market. ESS batteries have smaller supply volumes than EV batteries, and profitability is also expected to fall short due to price competition with China, which has already secured a lead in the market.
According to the energy industry on Jan. 5, domestic battery corporations are facing difficulties as supply contracts previously signed with automakers have been terminated one after another. With the EV chasm (temporary demand stagnation) continuing, automakers have revised their EV transition strategies and resumed investments in internal combustion engine vehicles.
LG Energy Solution said in Dec. last year that its EV battery supply contracts with U.S. automaker Ford and U.S. battery pack maker FBPS were terminated. The sizes of the canceled contracts amount to 3.9 trillion won and 9.6 trillion won, respectively. Ford halted production of its electric pickup truck, and FBPS decided to exit the battery business.
L&F disclosed that although it signed a contract to supply cathode materials to Tesla worth 383.47 billion won, the actual volume supplied amounted to only 9.73 million won. SK On decided to dissolve BlueOval SK, its joint venture with Ford in the U.S. for battery production. LG Energy Solution decided to sell to Honda the land, buildings and other assets of their joint battery plant in Ohio.
With the Donald Trump administration in the United States ending the tax credit for EV buyers in Sep. last year, many expect demand in the EV market to continue to contract. In response, domestic battery corporations have recently turned their attention from EV batteries to producing ESS batteries, where demand is rising due to construction of artificial intelligence (AI) data centers.
The issue is that in the ESS market, the adoption rate is high for lithium iron phosphate (LFP) batteries, which have lower energy density but are cheaper and carry a lower fire risk. The LFP battery market is led by Chinese battery manufacturers, while domestic companies have strengths in the more expensive, higher-quality nickel cobalt manganese (NCM) batteries.
BloombergNEF (BNEF), a U.S. market research firm, forecast that by 2027 the global ESS market's LFP adoption rate will rise to 94%.
Given these circumstances, domestic battery companies are focusing on developing LFP battery technology and converting facilities to target the ESS battery market.
LG Energy Solution plans to convert part of the lines at its Holland, Michigan, plant for ESS use and begin mass production in June. SK On will also begin mass production of ESS-dedicated LFP batteries in the second half of this year. Samsung SDI plans to expand its U.S. ESS battery production capacity to 30 gigawatt-hours (GWh) per year around the end of the year.
However, many in the industry say the ESS battery market itself is smaller than the EV battery market, and contracts are not continuous, so the impact on improving results will be limited.
A battery industry official said, "EV batteries are supplied through contracts lasting six to 10 years to coincide with the launch of new models, but ESS battery contracts last only about two years, the period it takes to build a data center." The official added, "Data centers are mostly one-off contracts that end after a single installation, and subsequent orders are not guaranteed."
For domestic battery companies operating 100 GWh-class gigafactories, the scale of ESS battery orders is negligible. Although the AI market has recently grown, boosting data centers' power consumption to 500 MWh to 1 GWh, from the perspective of a 100 GWh plant, that is less than 1% of total operating capacity.
Lee Chung-jae, an analyst at Korea Investment & Securities Co., explained, "The single-contract size of the world's largest battery energy storage system (BESS) is around 3 to 4 GWh, which means only a few lines need to operate at a 100 GWh-class facility," adding, "It is difficult for domestic battery manufacturers to reduce costs and generate revenue through the ESS market."
There are also expectations that even if LFP battery orders continue to increase, it will be difficult for battery manufacturers' plant utilization rates to rise quickly. As of the first half of last year, SK On's utilization rate was 52%, while LG Energy Solution and Samsung SDI stood at 51% and 44%, respectively.
Price competition with Chinese battery corporations is also a burden. China effectively holds a monopolistic position in the global LFP battery market. Even Tesla, the largest ESS operator in the United States, procures LFP cells for its Megapack in large volumes from China's CATL.
However, many in the industry expect that as the United States raises tariff barriers against China, domestic corporations' market share in the U.S. ESS market will continue to rise. The United States currently imposes a 40.9% tariff on Chinese-made ESS batteries and plans to raise the rate to 58.4% starting this year.