WSJ News Exclusive | Tesla Shifts Battery Strategy as It Seeks U.S. Tax Credits

Making more batteries domestically could help Tesla qualify for additional tax breaks available under the Inflation Reduction Act, also known as the IRA, which President Biden signed into law last month. 

The law provides production tax credits that could offset more than a third of the cost of EV battery packs, analysts say—so long as the rechargeable cells are made and packaged in the U.S. It also extends a $7,500 tax credit available to buyers of certain EVs whose batteries meet various sourcing requirements.

Tesla’s move reflects how the new U.S. law is reshaping the EV industry, accelerating the race to secure domestic supplies of battery cells and related ingredients.

Tesla didn’t immediately respond to a request for comment. In the days after the bill became law, the company told Texas officials that it was scouting regional sites for a factory that would refine lithium, a key battery input that today is mostly processed in China.

The shift in Tesla’s battery strategy comes as energy costs in Europe have soared as a result of Russia’s invasion of Ukraine, weighing on manufacturing businesses.

Sham Kunjur,

General Motors Co.

’s executive director for EV raw materials, said discussions with outside companies to build out a U.S. battery supply chain have heated up since the law took effect.

“Our thought process was that we would do this over a period of time, but with the IRA, we are actively working on figuring out how to accelerate,” he said. GM in the past year has invested in companies and struck long-term deals to secure future supplies of lithium, cobalt and other battery materials.

Today, the U.S. plays a relatively small role in making the lithium-ion batteries that power EVs, and a smaller one in producing the raw and intermediate ingredients that compose battery cells. For example, China processes more than two-thirds of all nickel and cobalt globally, compared with 1% or less of each mineral for the U.S., according to research firm Benchmark Mineral Intelligence.

The IRA seeks to ease that disparity by incentivizing car makers and battery companies to invest in a U.S. supply chain and reduce their reliance on China.

Among those carrots is a $35 per kilowatt-hour credit for U.S.-made battery cells. The law also affords $10 per kilowatt-hour for domestically produced modules, or collections of cells, and additional assistance for companies making raw and intermediate battery materials in the U.S.

If all of those production credits applied, a 75 kilowatt-hour battery pack such as those used in the long range version of Tesla’s Model Y compact sport-utility vehicle could see its cost drop by nearly 40%, according to Bernstein Research.

Tesla and one of its cell suppliers,

Panasonic Holdings Corp.

, share a Nevada battery factory and are likely to be among the biggest early beneficiaries of those battery production incentives, analysts said.

Tesla also has been trying its hand at manufacturing cells in-house, an effort designed to reduce the cost of a key component and mitigate the risk of battery shortages. The company has been producing those new, larger cells at a pilot facility in Fremont, Calif., and had been planning to do so at its factories in the Austin area and outside of Berlin.

Mr. Musk has long discussed the importance of boosting cell supply, saying recently that “lithium batteries are the new oil.”

Traditional car makers, including GM and

Ford Motor Co.

, also are expected to benefit from the tax credits as they race to open new battery factories through joint ventures with Korean cell manufacturers.

“It almost seems too good to be true from a battery maker’s perspective,” UBS analyst Tim Bush said of the production credits.

GM and its partner,

LG Energy Solution Ltd.

, started battery-cell production last month at a plant in Ohio, and have two more factories in the works. Ford’s joint venture with

SK Innovation Co.

Ltd. is planning two battery factories in Kentucky and one in Tennessee. And last month, LG and

Honda Motor Co.

said they plan to build a $4.4 billion battery factory in the U.S., targeting mass production by the end of 2025.

It isn’t clear how battery cell-makers and auto giants will divide the rewards of the production tax credits, or how much may get passed onto consumers in vehicle pricing.

RBC Capital Markets in a research note this week said the tax credit for U.S. battery production could deliver $3 billion to GM in 2025, if the company hits its goal of selling one million EVs in North America that year.

It is also likely to be easier to qualify for the production credits than it will be for consumers to receive the $7,500 tax break, which has been in place since 2009, said Mr. Kunjur, the GM executive. That is because the climate law essentially disqualifies from the consumer tax break vehicles that get battery raw materials or components from China, which dominates the supply chain. The production credits have no such restriction.

Write to Rebecca Elliott at rebecca.elliott@wsj.com and Mike Colias at Mike.Colias@wsj.com