The U.S. government’s effort to create an electric-vehicle battery industry suffered a setback last week when one of the companies it funded as part of this effort saw its parent company file for bankruptcy protection. Battery maker Enerdel had been awarded a $118.5 million grant to build a lithium-ion battery factory in Indiana as part of a $2 billion grant program for electric-vehicle component and battery manufacturing; its parent company is Ener1.

Ener1 hopes to emerge from bankruptcy, and says Enerdel will continue operations during bankruptcy proceedings. Yet its difficulties point to the challenges of creating a new industry: at least for now, there are too many companies chasing too few contracts for making electric- and hybrid-vehicle batteries.

Demand is expected to grow over the next few years as government regulations and incentives push automakers to roll out more battery-powered cars, and as technical and manufacturing advances make batteries cheaper. But for now, U.S. battery makers are competing in a tight market. Those that win key contracts—or that have large amounts of funding—will likely survive the next few years, while others could collapse.

Ener1’s troubles are the result of a heavy reliance on a single major customer, the electric-car company Think. Last summer, Think itself failed after poor sales of its expensive two-seater car, in the face of stiff competition from GM’s Volt and Nissan’s Leaf, which are both cheaper and more practical vehicles.

According to a filing with the U.S. Securities and Exchange Commission, Ener1 had been counting on the market for electric cars to grow quickly, creating enough demand to sell its batteries alongside ones from Asia. “The demand for EVs, however, did not develop as quickly as anticipated,” the company’s filing says.

Dan Galves, an analyst at Deutsche Bank, says battery makers simply need to bide their time while the electric-vehicle market grows. “We are convinced that factories that can be built will be utilized over the long term,” he says. “It’s a question of timing, and how long battery companies can wait.”

Nine companies received grants to build advanced-battery factories from the U.S. government as part of the 2009 Recovery Act. A 10th factory, proposed by a joint venture between Nissan and NEC, is being built with the help of a $1.4 billion federal loan guarantee.