SK On's ESS Deal: The Direction Matters More Than the Size

SK On has signed a five-year agreement to supply 9GWh of lithium iron phosphate (LFP) pouch cells to NeoVolta, a fledgling American energy storage system (ESS) pack assembler, covering the period from 2027 to 2031. In a battery-sector research note published on 1st September, DS Investment Securities argued that the significance of the deal lies not in its scale but in its direction: "a customer that previously bought Chinese cells has now placed an order with a Korean supplier — and a latecomer at that."

The contract value was not disclosed, but applying the industry convention of roughly 300 billion won per GWh, the implied figure is approximately 1.5 trillion won (around $1.1bn). Production will take place at SK On's standalone factory in Georgia. Should a separate agreement for an additional 9GWh on a consignment basis be concluded before year-end, total volumes could double to 18GWh.

A small counterparty, a large question mark

The profile of NeoVolta warrants scrutiny. The company recorded revenues of just $8.43m in its most recent financial year (to June 2025) — a fraction of the implied contract value. As of 31st August, no 8-K disclosure related to the agreement had been filed with the US Securities and Exchange Commission, meaning the legal enforceability of the contract was not expected to be confirmed until early September. The consignment structure for the second tranche of volumes — under which SK On would carry the inventory and working capital — appears designed to accommodate NeoVolta's limited financial resources. Investors should assess independently the counterparty's ability to execute.

That caveat noted, DS Investment Securities sees the deal as evidence that the exclusion of Chinese batteries from the American market has become structurally irreversible. Among Korea's three major battery manufacturers, SK On is the relative newcomer to the ESS segment: its previous firm order stood at just 1GWh, secured with Flatiron Energy in September 2025, with a further 6.2GWh held only as a right of first negotiation. The fact that five years' worth of orders have now been concentrated with this latecomer — filling a gap left by delays at more established suppliers — suggests that demand for non-Chinese alternatives is shifting in a durable way.

Regulation stacks up against China

American policy is tightening on multiple fronts simultaneously. Investment tax credits (ITC) and tariffs have been reinforced by Executive Order 14421, signed on 26th August. Under ITC rules, projects beginning construction from 2026 must source at least 55% of their costs from non-Chinese materials; within grid-scale ESS systems, cells account for 52% of the MACR Safe Harbour allocation. In practice, Chinese cells are effectively disqualified from meeting these requirements starting this year.

Executive Order 14421 goes further than either tariffs or tax credits, because it cannot be circumvented. A developer can forgo a tax credit or pass tariff costs on to buyers, but failing a national security test means being barred from connecting to the grid altogether. The order covers not only hardware — transformers, grid-tied inverters, battery storage systems and uninterruptible power supplies — but also software such as battery management systems, remote access and maintenance services.

Material-level transition timelines are also crystallising. Under US guidance on Foreign Entities of Concern (FEOC), cathode materials must be sourced outside China by 2028 and anode materials by 2030. The share of Chinese-origin content permitted under the Advanced Manufacturing Production Credit (AMPC) falls from 40% this year to 30% by 2028 and 15% by 2030. Samsung SDI's decision in March to secure a multi-year supply of LFP cathode material from L&F extending beyond 2029 is interpreted as a deliberate hedge against customer qualification timelines and the lead times required for capacity expansion.

Demand proves resilient

DS Investment Securities is sanguine about ESS demand holding up, even against the backdrop of data-centre permitting freezes and November's mid-term elections. New York has suspended environmental approvals for new data centres above 50MW for up to a year, and Texas ordered an audit of all pending grid-connection requests in August. Yet these measures restrict grid connection, not electricity demand itself — and the regulatory response is pushing large power users towards securing their own generation and storage capacity.

The distinction between behind-the-meter (BTM) and front-of-the-meter (FTM) ESS is critical here. BTM installations are tied directly to construction schedules and thus exposed to permitting delays. FTM systems, by contrast, are linked to load growth and grid capacity shortfalls, and the backlog of pending connection requests provides a durable demand floor. NeoVolta's pack facility is described in public filings as a "utility-scale battery manufacturing facility," placing it squarely in the FTM category.

Reinforcing this dynamic, PJM Interconnection — the largest electricity grid operator in the United States — submitted a proposal to the Federal Energy Regulatory Commission (FERC) on 31st July under which large new loads of 50MW or above that fail to secure their own power supply by June 2027 would face curtailment first during shortages. As power self-sufficiency becomes a de facto condition for breaking ground, the pool of ESS buyers is expected to broaden well beyond traditional utilities into the technology sector.

Bipartisan tariffs, cross-party tailwinds

The durability of trade restrictions deserves emphasis. Section 301 tariffs originated under a Republican administration in 2018, but it was a Democratic administration that raised the levy on non-EV lithium-ion batteries to 25% during the mandatory four-year review in 2022. De-sinicisation is, in effect, a bipartisan policy. Regardless of mid-term election outcomes, tariffs and FEOC requirements are likely to remain in place. Should Democrats succeed in reinstating expanded tax credits — a bill to that effect was introduced in March 2026 — Korean battery makers could find themselves in an even more favourable position.

DS Investment Securities identifies two regulatory milestones as the decisive variables for the second half of the year: the finalisation of implementing rules for Executive Order 14421, due on 24th December, and the publication of the definitive Safe Harbour table on 31st December. Once confirmed, these will spell out precisely which supply chains qualify, potentially improving the competitive position of Korean manufacturers further.

Stock picks: Samsung SDI and L&F

Samsung SDI is the brokerage's top pick among battery makers. DS Investment Securities sets a target price of 840,000 won, implying upside of 45.6% from the current share price. The company has completed the construction of a non-FEOC supply chain, and its existing order book is expected to exceed current production capacity from 2028 onwards. Revenue for 2026 is forecast to rise 18.2% year-on-year to 15.68 trillion won, with operating profit of 373 billion won — a dramatic swing from an operating loss of 1.72 trillion won in 2025.

Among materials producers, L&F is the preferred name, with a target price of 350,000 won — a potential gain of 138.6%. The company has locked in a four-year LFP cathode supply agreement with Samsung SDI and is scheduled to begin full shipments from its Daegu line (30,000 tonnes of annual capacity) in the third quarter, with a further 30,000-tonne expansion planned for the first quarter of 2027. L&F's LFP cathode shipments are projected to surge from the equivalent of 6.9 billion won in 2026 to 69.1 billion won in 2027. Repeated delays at CATL's Jinsha'wo lithium mine have kept lithium prices below $25 per kilogram (excluding VAT) — the level at which Western refinery investment becomes attractive — creating a favourable pricing environment for cathode producers.

Risks to watch

Several risks merit independent assessment. NeoVolta's limited track record leaves genuine uncertainty over contract execution. Any delay in finalising the Safe Harbour table, or a result that diverges from market expectations, could disrupt the timetable for materials localisation. Given that ESS assets typically have useful lives of 15 years or more, macroeconomic conditions — including project finance borrowing costs — are a material determinant of project economics. Readers should note that the assessments above represent the view of a single brokerage and should exercise their own judgement before acting on the recommendations for Samsung SDI and L&F.