Tesla has confirmed that it started production of the new Model 3 battery cell at Gigafactory 1 in Nevada over the weekend – an important step toward launching the production of the Model 3.

The new battery cells are believed to be key to Tesla achieving the necessary cost reductions that enable the Model 3’s $35,000 starting price tag before incentive.

Tesla’s new 2170 format battery cells went into production back in January, but those cells were using Nickel Manganese Cobalt Oxide (NMC) chemistry for stationary energy storage products, Tesla’s Powerwall and Powerpack.

But for its vehicle battery packs, Tesla has been using Nickel Cobalt Aluminum Oxide (NCA) chemistry optimized to cycle in electric vehicles. While the company confirmed that they would still be using different batteries for their vehicles, they didn’t confirm if it would still be a NCA chemistry.

Nonetheless, Tesla said that it aimed to start the production of those vehicle cells during the second quarter and Tesla’s co-founder and Chief Technology Officer, JB Straubel, confirmed this weekend that the production of the cells has started at Gigafactory 1.

He confirmed it during a keynote presentation at Midwest Renewable Energy Association’s 28th Annual Energy Fair in Wisconsin on Saturday. Straubel said that they were “right now” starting the production lines for the new Model 3 battery cells and preparing to ramp then up as needed for the production of the car.

Tesla has designed a new battery module and pack architecture to use the 2170 battery cells in the Model 3. The cells are manufactured by Panasonic, while Tesla is in charge of manufacturing the modules and overall battery packs. Everything is done under one roof at Tesla’s Gigafactory 1 in Nevada.

Neither Panasonic nor Tesla have released much information about the new cells, but Tesla CEO Elon Musk has been boasting about them over the past few months. He said that it’s the “highest energy density cell in the world and also the cheapest”.

The company has been aiming to achieve a 35% cost reduction with the new cells. At first, they will only be used in the Model 3, but Tesla also plans to transition Model S and Model X on the new cells as they increase production.

Update: Musk added today that they don’t plan to change the cell format for Model S or Model X, contrary to what he said earlier this year:

No plans to change cell form factor for X and S — Elon Musk (@elonmusk) June 19, 2017

By the end of 2018, Tesla plans to reach a production rate of 50 GWh of battery pack energy capacity at Gigafactory 1, which could be enough to produce 500,000 cars and a lot of Powerwalls and Powerpacks.

The new cells could also feature improved durability. Tesla battery researcher Jeff Dahn has been talking about significant breakthroughs in improving the lifecycle of li-ion batteries, but it’s not clear when those improvements will make it into Tesla’s cells.

Nonetheless, the start of Model 3 battery cell production is an important step toward the launch of the vehicle.

While the battery packs are produced in Nevada, they are then shipped to Tesla’s Fremont factory, where Tesla plans to start producing the Model 3 in July. A delivery event is planned for the end of the month.

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