Analysts at the US Department of Homeland Security shared an internal report to local agencies in August, warning them about the economic risks of using Chinese utility storage batteries. It warns that the dependence on Chinese batteries could hurt developing a secure supply chain in the US.

The document, first obtained by national security transparency nonprofit Property of the People and seen by WIRED, accuses Chinese companies of “using People’s Republic of China state support to quickly and cheaply enter the emerging US utility battery energy storage industry and create supply chain dependencies on China,” and asks that any suspicious activity be reported.

Specifically, the report alleges three companies—Contemporary Amperex Technology Co. Limited (CATL), Build Your Dreams (BYD), and Ruipu Energy Co. Ltd. (REPT)—have “benefited from the various forms of state support and leveraged this to further business strategies for gaining US market share.”

Currently, CATL and BYD lead the global energy storage battery market by far, with 40 percent and 12 percent market shares, respectively, according to South Korean energy research firm SNE Research. Eight out of the 10 top companies in the industry are from China, so there are few alternatives to turn to when building grid storage.

The report says it builds on previous documents that analyzed Chinese “state-supported firms’ use of noncompetitive tactics in the electric vehicle and battery supply chains.” DHS did not respond to a request for further comment.

In 2022, CATL entered a deal with Primergy Solar to build the largest US solar and storage project in Nevada, which came online this year. Its battery products have also been used by Duke Energy, a North Carolina–based utility company, although the latter dropped CATL as a supplier for marine base electricity storage after concerns around national security were raised by, in part, lawmakers in Washington.

In an emailed statement, Fred Zhang, a CATL spokesperson, rejects the categorization that the firm has relied on state support to gain an edge. “CATL has achieved tremendous growth through continuous innovation, farsighted strategic planning, and a commitment to high-quality products at a reasonable cost,” the statement says.

BYD and REPT did not reply to WIRED’s request for comment.

Following efforts to curb Chinese EV companies’ competitiveness, the US government is now also concerned about how domestic utility companies could become too dependent on Chinese batteries for energy storage.

The US government has in recent years started to catch up in the battery industry. The Inflation Reduction Act and the Bipartisan Infrastructure Bill set out investment tax credits and other economic incentives to build up energy storage capacity in the country. In September it awarded another $3 billion in incentives to projects that boost domestic production of batteries.

These incentives are also the focus of the DHS report, which alleges that Chinese-based firms are targeting US incentives to further grow their market share. “BYD’s public website as of spring 2023 highlighted how US state incentives can make BYD utility storage systems an attractive investment,” the report claims. (WIRED was unable to find the BYD website referenced in the report.)

The CATL spokesperson says the company “does not receive any US federal or state incentives.”

As the US utility grids incorporate more renewable energy sources like solar and wind, it’s essential to build up a battery storage capacity that can store intermittent energy supply for times of heightened demand. And Chinese companies have dominated the global industry of producing lithium batteries for this job. These companies make over 80 percent of the EV battery cells in the world, and they had plans to invest another $2 trillion in 2023 into new production capacities inside and outside the country.

“Chinese original equipment manufacturers currently supply about 90 percent of the energy storage system batteries, actually a larger share than for EVs,” says Vanessa Witte, a senior research analyst at Wood Mackenzie who focuses on US energy storage. “There is a huge oversupply right now, partly due to softening EV demand, along with a number of Tier 2 and Tier 3 OEMs that have started new manufacturing facilities. The excess supply is a big reason the prices are so low.”

These batteries are essential for global energy transition, and Chinese battery companies see them as an opportunity to widen their product markets. They’ve become such an important industry that the Chinese central government emphasized their importance for the first time in its annual government report in March.

The battery supply chain has also emerged as one of the top economic and security concerns around China in the eyes of the US government. The Biden administration has so far raised a 25 percent tariff on Chinese-made lithium-ion EV batteries (and even higher for the EVs they power.) The government has also repeatedly sounded alarms about the national security threats of having Chinese-made equipment and parts in domestic infrastructure.

So far, the particular conversations around energy storage batteries have mostly surrounded cybersecurity, worried that the components could contain backdoor access for hacking like those that have been suspected in Chinese-made port cranes. Those concerns are “a bit overstated,” Witte says. “There haven’t been any incidents that would lend one to believe the battery management system is sending data to China or could disrupt our infrastructure.”

There have been several political efforts to restrict the use of Chinese-made batteries in the US. The pentagon will be the first to be banned from buying batteries from six Chinese companies, in an order which will become effective in 2027, but some congressmembers are still asking for CATL and other Chinese companies to be added to trade blacklists, and there’s a bill in Congress that would ban DHS from procuring Chinese batteries.

But the DHS report shows that the government is also looking at whether the dominance of Chinese batteries can be an economic issue.

“It is simplistic to see this as just unfair competition due to Chinese government support, as a lot of what China did, such as creating demand for batteries through EV subsidies, is not unlike what we see in the West today,” says Yayoi Sekine, head of energy storage research at BloombergNEF.

The pricing advantage that Chinese battery companies have are also the results of harsh market competition and a more established battery supply chain in China, she says, and these battery companies are willing to squeeze their own margins in exchange for keeping their market shares. “We think the US government’s attempts to support a healthy battery industry domestically has been incredibly generous through the incentives in the Inflation Reduction Act and the Bipartisan Infrastructure Law,” says Sekine, “but it may still be challenging to compete on cost.”