By: Caroline Arkalji
The backbone of the U.S. power system is showing strain at precisely the moment electricity demand is set to surge. Today, the country faces an estimated 30% deficit in power transformers, a bottleneck that forces utilities to compete for essential equipment just to maintain and modernize the grid. Power transformers are high-voltage devices that use electromagnetic induction to step electricity up or down between transmission and distribution networks — making long-distance delivery efficient, enabling safe local service, and supporting the integration of new generation sources. This shortage is not merely an infrastructure inconvenience. It is a warning signal that the United States must rebuild reliable, domestic manufacturing capacity to secure its energy future.
The United States is witnessing a massive investment in artificial intelligence. AI data centers, already major electricity consumers, are projected to drive a 160% increase in power demand by 2030. Without large-scale storage, the grid will struggle to meet these loads consistently and affordably. This is where battery energy storage systems (BESS) become strategically indispensable. By smoothing peak demand, supporting grid flexibility, and enabling the build-out of firm clean power, storage is now central to energy security, reliability and affordability goals but also to U.S. technological leadership.
To meet these challenges, accelerating domestic battery manufacturing is no longer optional — it is a competitive imperative. Fortunately, the market fundamentals are aligning in the United States’ favor. Global demand for stationary storage is expanding rapidly: the BESS market, valued at $7.8 billion in 2024, is projected to reach $25 billion by 2029. In the United States, deployment momentum is already visible. Texas emerged as the country’s largest BESS market in 2024, matching California’s annual installation rate of 4 GW, reflecting investor confidence that extends well beyond traditional renewable-only incentives. Cost declines further reinforce the opportunity for U.S. manufacturing leadership. Lithium-ion pack prices fell to a record low of $108/kWh in 2025, driven by global manufacturing surpluses, intense competition, and a rapid shift toward lower-cost lithium iron phosphate (LFP) chemistries. These trends make grid-scale storage more affordable and scalable than ever — at exactly the moment national reliability and AI-driven growth require it most. Against this backdrop, four areas will be critical for boosting grid-scale battery storage manufacturing in the United States.
The first is pivoting manufacturing to grid-scale storage. Stationary storage has manufacturing needs that differ markedly from EV batteries, making a strategic shift in domestic production increasingly necessary. The One Big, Beautiful Bill Act (OB3 Act), passed in July 2025, shielded battery storage systems from the credit cuts affecting wind and solar. While BESS incentives remain intact, the slowdown in renewable installations could still influence the sector because many planned storage projects between 2025 and 2028 are tied to wind or solar development. Even so, demand for grid-scale storage is now projected to outpace domestic manufacturing capacity, while expectations for near-term EV adoption soften. These market signals are prompting battery producers to redirect their focus. Several U.S. gigafactories are already retooling for stationary storage cells, a shift made viable by existing sunk costs and the strong economics of LFP-based storage. Major suppliers are moving quickly. LG Energy Solution, for example, plans to nearly double its ESS battery-cell production capacity at its Michigan facility by the end of 2026 — illustrating how domestic industry is beginning to reposition itself toward the fastest-growing segment of the battery market.
A second driver of domestic manufacturing is stable, long-term policy, particularly the continuation of high-value tax incentives. Unlike wind, solar, and EV incentives that were reduced under the OB3 Act, battery-storage incentives were preserved, providing the sector with rare policy certainty. Crucially, the advanced manufacturing production credit (45X), a key tool for building U.S. supply chain capacity, remained intact. However, the new OB3 Act introduces a phased wind-down of the 45X credit between 2030 and 2033. Companies can continue to use the credit, but only if both components are produced in the same facility, and at least 65% of the materials in the second component are sourced from parts mined or made in the United States. These tighter requirements raise the bar for compliance and will likely increase production costs and limit sourcing flexibility. Still, the continuation of 45X — even with constraints — offers manufacturers a more predictable policy environment than other clean-energy technologies, reinforcing the case for investing in domestic grid-scale storage production.
A third challenge for domestic manufacturers is navigating the Foreign Entity of Concern (FEOC) rules, which determine eligibility for major U.S. tax credits such as the 45X manufacturing credit and the 48E clean electricity credit. Companies linked to China, Russia, Iran, or North Korea are designated Prohibited Foreign Entities (PFEs) — a significant hurdle given China’s dominant position in critical minerals and battery components. To qualify for the 48E credit, projects must meet a rising “material assistance” threshold: 55% of costs from non-PFE sources in 2026, increasing to 60% in 2027, and 75% by 2030. Falling below these thresholds renders projects ineligible. Compounding this, a 10-year recapture rule allows the government to reclaim the full credit if any later payment is made to a PFE, creating long-term compliance, auditing, and contractual burdens. Given these constraints, the United States must strengthen partnerships with trusted allies through friendshoring. Negotiating targeted energy and mineral-supply agreements with countries that already host substantial non-FEOC cathode and battery-material production — such as South Korea — can help stabilize supply chains, diversify sourcing options, and ensure manufacturers can meet tightening eligibility thresholds.
Even with strong market signals for grid-scale storage, the United States still faces structural hurdles to becoming self-sufficient. Domestic battery production is expected to grow, but upstream constraints persist: critical minerals and processing chemicals remain globally scarce, and FEOC timelines add pressure to build compliant supply chains quickly, creating execution risks. A related challenge is the widening gap between integration capacity and cell manufacturing capacity, which can heighten system-level quality risks. As tariffs accelerate domestic integration and assembly, quality assurance becomes essential. Roughly 72% of BESS defects occur at the system level — in areas such as thermal management, fire detection, and suppression. Issues caught in factory testing are manageable, but defects identified in the field can stall projects for weeks while replacement parts are sourced. These constraints highlight that scaling U.S. manufacturing is not only about building more gigafactories, but it requires strengthening upstream materials supply, aligning FEOC-compliant supply chains, and raising quality standards across the full storage-system lifecycle.
The supply deficit in critical grid infrastructure — and the rapid rise in electricity demand driven by AI — underscores how urgently the United States must strengthen its energy system. Securing long-term policy stability through tools like the 45X credit, building FEOC-compliant supply chains with trusted allies, and expanding domestic manufacturing for grid-scale storage are now central to that effort. For utilities and developers, a robust U.S. battery-storage industry would reduce dependence on overseas suppliers, cut logistical and tariff-related costs, and accelerate project deployment. If the United States seizes this moment, it can position itself as a global leader in grid-scale battery manufacturing and deliver a more reliable, competitive, and secure energy system for the decades ahead.
Caroline Arkalji is a Research Assistant for the Global Economics & Development and Energy & Climate Policy programs at ORF America.