China produces a majority of the world's battery cells, but that manufacturing powerhouse is slowing down due to COVID-19, a disease caused by a member of the coronavirus family.

The Chinese government has imposed provincial travel bans and factory closures to fight the spread of the virus, which has killed more than 1,000 people and infected more than 43,000 as of February 13.

Those efforts have slowed battery manufacturing in key industrial centers, enough to reduce China's expected 2020 cell output by 10 percent or 26 gigawatt-hours, according to analysis by research firm Wood Mackenzie. Further delays are possible, based on the spread of the virus and the government's ongoing response to it.

The supply constraint affects global electric vehicle markets as well as energy storage development for the electrical grid. It could lead to project delays or increases in cost. And the situation challenges the conventional narrative that EVs and grid storage projects will benefit from steady battery price declines.

China took advantage of last supply crunch

Battery cell supply faced a constriction in 2018, when a robust grid storage incentive led to a massive deployment boom in South Korea; that country became the top storage market that year, installing more than 1 gigawatt-hour.

The exact size of the 2018 supply constraint is difficult to quantify. But the coronavirus impacts could be larger, because China holds a considerably greater share of global battery production planned or online —175 gigawatt-hours in 2019, according to WoodMac data. The 26 gigawatt-hours of lost production amount to 7 percent of global production capacity, and that's just based on the slowdown so far.

Indeed, China's five largest battery manufacturers, led by BYD and CATL, all face high risk of additional production delays.

The South Korean supply crunch created a growth opportunity for Chinese manufacturers, as grid storage developers turned to them for supply. Now that supply chain faces its own risks.

Grid storage, though, only accounts for 8 percent of cell production, while electric vehicles and consumer electronics gobble up 90 percent. The challenge for customers going forward will be asserting priority over the more limited cell output; if major EV contracts get first dibs, individual storage projects may have to look elsewhere and absorb increased costs or installation delays. That will cause headaches for developers that banked on future cost declines to make aggressively low bids.

The constraint comes at a time of rapid growth for both electric vehicles and grid storage. In the U.S. alone, energy storage installations are expected to more than triple from 2019 to 1,425 megawatts in 2020, according to WoodMac's Energy Storage Monitor. Deployments will grow 2.5 times in the following year.

WoodMac previously predicted that battery costs will drop five times lower than 2019 levels by 2040. The long-term trends still support that outlook, but the cost decline expectation is subject to interruption in the short term based on unanticipated events like the coronavirus.

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