US Grid Ban Hits Batteries Hardest: Analyst Reaction

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2:01Getting a handle on these ever evolving rules is critical for understanding the US energy transition today. But the only way to really understand the whole is to delve into and explore the individual parts. For instance, what was up with that executive order signed in late August about? And I quote, the threat to the United States regarding foreign supply of bulk power system electrical equipment. Here's the short spoiler-laden answer. It's about power and power grid equipment from China. But power grids are massive and sprawling and incredibly complex. And while some key pieces of grid technology come from China, many others don't. So what exactly is this executive order trying to accomplish? And what parts of the US power system are most vulnerable to the change? Today I'm joined by Zoe Zakshevska, one of BNF's trade and supply chain analysts, to discuss her reaction, US grid and power equipment ban hits batteries hardest. BNF clients can find this and other relevant research by heading to BNF supply chains go on the Bloomberg terminal or at bnaf.com. If you'd like to learn more about how BNF connects the dots of the energy transition, visit us at about.bnaf.com.

3:06And if you'd like to speak with a member of our team about becoming a client, email us at sales.bnaf at Bloomberg.net. But for now, it's time to talk about batteries and power equipment banned with Zoe. Zoe, welcome to Switch Dawn. Thanks, Kamala. Thank you so much for having me. So what exactly does the new US executive order restrict and how broad could it reach B? Yeah, so this executive order, which was passed or put out on August 26th, essentially incorporates equipment relating to the bulk power system. And that's a term frequently used throughout the executive order. And layman's terms, essentially the bulk power system is any sort of equipment used in the US grid. So this is grid equipment itself, but it also includes power generation equipment, generators, turbines, and other things used to provide firm, non-intermittent power to these.

4:07So they're sort of the realm of technologies that this executive order addresses. And who does it apply to? So essentially the executive order, it gets a bit technical here, but it addresses the fact that continuing the reliability and security of the bulk power system is essential. And essentially flags that any equipment that is sourced from a term that the administration is referring to as a covered for an entity could potentially be blocked. So a covered for an entity is a new term that we haven't seen. So essentially the exact definition is it is basically any country or person that is subject to a country that is under a US arms embargo or sanction regime under the international traffic and arms regulations. So there's a bunch of countries at ball under this definition, but most of them in terms of the energy technology manufacturing space aren't particularly relevant. So they include countries like Cuba and Iran, which don't really supply a lot of energy technologies for US. However, the most notable name on that list is China.

5:09And another notable thing about this definition is that Hong Kong under this, I guess these definitions, Hong Kong is considered as part of China. So China and Hong Kong produce a lot of energy technologies and are essentially the biggest country targeted by this regulation. So covered for an entity that covers a lot of different things and it's really complex as you said, but essentially what it means for our purposes today is China. So that's where the stuff is coming from now. What about where it's going? What part of the US power sector is most exposed to these restrictions? So what we looked at at the enough when we were responding to this react is I guess there's two areas. If you think of US supply as coming from there is domestic capacity and imported technology. One thing we did is we looked at imports of a lot of the technologies that are explicitly named on this executive order. So this includes gas turbines engines, both gas and diesel, transformers and verters and batteries. And what that pay data shows us is that the US sources a large percentage of its batteries from China.

6:14So essentially around 60% of all lithium iron battery imports the US in 2025 came from either China or Hong Kong. And yeah, this is really indicative of the fact that the US is sourcing a large percentage of its battery supply from China for these other technologies. There is a bit of supply coming from China, but it's a far lower percentage than we see for batteries. I'd say a technology that is maybe not as impacted as batteries, but is still nonetheless impacted by this executive order and developers will have to respond accordingly is inverters. The US doesn't import a lot of its inverter supply from China, but a lot of the US's imports come from Southeast Asia and India, where a lot of Chinese manufacturing firms have set up plants, which then in our view likely are being exported to the US. So it seems like in terms of imported supply, the US is quite dependent on Chinese technology. For inverters, there is also a dependency on Chinese firms technology, but for a lot of the other technologies we surveyed, Chinese firms provide a much smaller share of total supply.

7:20Okay, so it's not just products coming from China. It's any product made by a Chinese company that then ends up, wherever it's manufactured that then ends up in the US. That's the problem. Yes, so if you think of US policy or energy policy, there's kind of two approaches the US government has done before. Sometimes it's really just the country of origin, right? So if there's a manufacturing plant, let's say in China and the US government blocks Chinese exports the US, it doesn't matter if you're a French, a Korean, any other headquartered firm operating in China, your imports, your exports from China are still blocked. That's one category. We see this, for instance, with pairs. The other category is targeting allegiances or basically where the company is based and where its ties are. So essentially these sorts of policies block exports the US or the usage of technology in the US from Chinese firms. So it doesn't matter if the Chinese firm is based in India or Southeast Asia or even the US, if it is coming from a firm that has ties to China as headquartered in China, it would be limited or blocked under this category of verbal links.

8:31And this executive order falls into that latter category. Essentially blocks technology from being used if it comes from China tied firms. Exactly what a firm tied to China is considered is not entirely clear in this executive order. They leave it very broad, which is likely a move by the administration to give it as much control over the process of deciding which firms get a pass under this executive order and which ones do not. But it is clear that they are targeting firms that have ties to China in our headquartered China in this executive order. You know what's so interesting to me about what you just said is that even Chinese headquartered firm that's making products in the US, those would be subject to this ban. And I think sort of when as a layperson or as somebody who's thinking simplistically about these rules of the Trump administration is passing, I tend to think of them as being economically motivated. We don't want to take materials that could potentially be manufactured in the US and take them from somewhere else because that means that US workers are not making them or taking jobs away from the US.

9:34But there's very much ties into something. I saw when I read this executive order where it said and I quote, crucially, the order can also affect existing assets with equipment acquired or installed before August 26. So this is the day it was signed potentially subject to monitoring isolation replacement or removal if it meets the outlined criteria. So again, this sounds like it's not about economics so much. Is there concern about cybersecurity involved in all of this? Yeah, so the primary angle or I guess argument supporting this executive order is exactly what you said. It's more surrounding concerns of cybersecurity and the threats that the usage of technology coming from these cover for the entities could post the US grid. So it's much more in executive order targeting the uses of technologies that could pose a risk to US cybersecurity and national security. So as you mentioned, this policy is probably going to hit lithium ion batteries hardest and I'm looking at your report and there's an astonishing chart where the various other types of equipment have tiny little bars showing their share that comes from China and then lithium ion batteries. It's just a massive massive share.

10:43So in the near term, what does this ban mean for US battery storage build out? Yeah, a lot of the details in the actual executive order matter a lot, right? So I think there's a line where or there is a line in the executive order that essentially says that any technology that is purchased installed acquired could be from here on out band. But in the equipment procurement process, there are a lot of steps to it, right? And the executive orders not make it entirely clear where the line is drawn in that process of allowing existing procurement process to proceed and which procurement processes are too early on and must be stopped. So do contracts that are already signed are those given a sort of safe hardware period where they can go forward or are already signed contracts already nullified by this executive order. So it's essentially not entirely clear right now whether which point of the procurement process this executive order applies to and that is something that the industry will be looking out for further guidance on in the actual executive order.

11:47So the administration said that within 120 days there'd be additional guidance on this matter clarifying some of these points and that is a key one that the administration will be looking out on because there is currently a significant number of projects for which technologies have been procured those battery storage technologies have not yet then installed but those contracts are signed and they are moving forward. So I think for a lot of those projects, understand that little nuance will be a big deal. So the other projects as you said that are either under contract or perhaps already being built. What about longer term? What do we think is going to happen to battery storage in the US? So already before this executive order, we have seen at being this big build out of energy storage battery cell manufacturing capacity. So there's a chart that we showed in our react that really shows this big growth of manufacturing capacity in the US for energy storage cells. So a lot of this manufacturing capacity is coming from earned that do not apply to China. So a lot of these are US based or South Korean or Japanese firms.

12:48I think in 2026, we're expecting to see around 60 gigawatt hours of manufacturing capacity for energy storage cells in the US and this number is expected to almost triple by 2027. We're going to see around 150 gigawatt hours of manufacturing battery capacity in the US by the end of next year. So this large jump up, I guess if this executive order is indeed enforced where energy storage cells can't be used in these systems. A lot of this manufacturing capacity is going to be in a greater demand than ever. And already we were also seeing in the US a shift away from the usage of Chinese battery cells to non Chinese battery cells. So this was already a trend that's going on, but the executive order is really going to be a yes, another tailwind pushing that trend forward. Great. So it sounds like it could act to be a boon for manufacturers of batteries in the US. But on the flip side, I can see how if you are a grid operator and suddenly you have this band that could even apply to things that are already in place and already being used and or you have to source new.

13:50And you have to find a new source of this equipment. I could see that being very, very expensive. So then what does the order mean for grid operators and what they'll have to spend to maintain or replace or upgrade grid equipment? So the tricky thing about Chinese battery cells versus non Chinese battery cells is cells battery cells coming from Chinese firms tend to be less expensive than alternatives made by non Chinese firms. So for a project going forward that has an assumed project cost based on the uses of a Chinese cell. If those projects now have to switch to using non Chinese alternative cells that are higher cost that could drive up the expected cost of a project and could potentially in certain cases where going forward at the project is not deemed economical anymore lead to cancellations. So there is a possibility of us seeing certain kind of cancellations if manufacturers do have to indeed switch over from using Chinese cells to non Chinese cells for their projects. We're also expecting there to be quite a bit of delays in energy storage projects living forward as these developers wait for further guidance on this new regulation in order to determine what they can and can't do.

14:58So we do expect at least for the rest of the year that quite a few of these projects that are kind of in a limbo state might be waiting for further guidance before moving forward. And finally, the US has a long history of imposing trade restrictions on energy transition technologies from China. It even predates Donald Trump's liberation date to tariffs from 17 months ago or so. So how does this executive order compare to other regulations made by the US to restrict the use of Chinese energy technologies? So if we start back looking at what this administration has done so far to limit the use of Chinese energy technology, we can start with the one big beautiful bill act which was passed into July of 2025. So the one big beautiful bill act made changes to the inflation reduction act tax credits that clean energy technologies could claim for their manufacturing projects and just their power projects. And what the one big beautiful bill or OVA did is it made it far harder for Chinese tide firms to access these tax credits not only for Chinese firms to access these tax credits, but also for projects using Chinese technologies to access.

16:09And this is a big deal because those tax credits were quite lucrative right all these developers and manufacturers wanted to tap into those federal subsidies and tax credits. So that was the first kind of move we've seen by this administration to further limit the usage of Chinese energy technology in the US energy space. But I will mention that mainly involves the clean energy space right those tax credits are only as applies to clean energy. They don't apply much to fossil fuel generation for instance. Also those rules were quite clear about what they set out at least relatively now. It quite clearly set the limits on what a firm could or couldn't do to be considered China affiliated or not. However, if we fast forward to almost a bit over a year later recent rulings and regulations that the administration had passed had been by comparison far more vague and discretionary than that one original one big beautiful bill act. The regulations are quite vague. It also gives far more power to the administration to decide which companies are approved which technologies are applied which countries fall under the realm of a covered board entity.

17:20It essentially allows the government to make many more shots and to adapt the regulation and rules as a see fit. So we're really seeing this with this executive order as well as the FCC's inverter ban that came out in August. They're both from our vague and discretionary then the one big beautiful bill act that came out a year ago. Zoe, this is so fascinating. Thank you so much for coming on and explaining so clearly and in such detail what this executive order means. Yeah, of course. Thank you so much. Today's episode of Switched On was produced by Cam Gray with production assistance from Kamala Shelling. Bloomberg NEF is a service provided by Bloomberg Finance LP and its affiliates. This recording does not constitute nor should it be construed as investment advice, investment recommendations or a recommendation as to an investment or other strategy. Bloomberg NEF should not be considered as information sufficient upon which to base an investment decision.

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