This week, Chrysler announced that it will use batteries from A123 Systems in its planned electric vehicles and plug-in hybrids, the first of which will be available in small demonstration fleets by the end of the year. The automaker will use a modular battery system that the two companies developed together over the past three years.

Chrysler chose A123 in part because the company was looking for a supplier based in the United States, says Lou Rhodes, the vice president of advanced vehicle engineering at Chrysler. A123 is based in Watertown, MA, and is building factories in Michigan. The company’s battery cells–the basic components of a battery pack–met Chrysler’s performance and safety specifications, and the company was developing battery modules that could be easily adapted to fit different vehicles. This was important, Rhodes says, because the automaker plans to start selling several different electric vehicles at around the same time.

A123 and Chrysler developed battery systems that use the same battery cell–one with a flat shape known as a prismatic cell–rather than tailoring the cells’ chemistries for each different vehicle. Rhodes expects that this will lead to larger volume production for the battery cell, which could drive down costs. The companies also developed battery modules–units that consist of a collection of cells with safety systems and electronic controls. The modules are designed so that the number of cells in each, as well as the voltage, can be varied according to the application. Finally, the companies developed battery packs for each vehicle. These comprise a varying number of modules arranged in different ways, depending on the configuration of the vehicle.

A123’s technology also lent itself to relatively simple battery packs, Rhodes says. The cells use a lithium iron phosphate electrode that is chemically much more stable than the lithium cobalt oxide used in most laptops and in some electric vehicles. Cobalt oxide batteries have been known, in very rare cases, to catch fire in laptops. To prevent this in the much larger and potentially more dangerous battery packs in electric vehicles, companies such as Tesla Motors have designed elaborate cooling systems that carry coolant past each of the thousands of cells in the pack. Because iron phosphate cells are less prone to overheating, the coolant system can be far simpler. The battery modules sit on a heat sink–flat metal sheet–which is cooled by a coolant loop.

A123’s battery chemistry does have a disadvantage compared with some other types of lithium ion batteries, including cobalt oxide. It stores less energy, which would limit the range of a car. But Chrysler is making up for this in part by taking advantage of the battery’s stability. Cobalt oxide deteriorates quickly if a battery is completely discharged and recharged; to make such batteries last longer and keep them more stable, they’re typically electronically limited to using only half of their energy. But A123 says that its iron phosphate batteries can be discharged almost completely without degrading; the result is that more of the energy in the battery can be used. In Chrysler’s electric vehicle, the battery pack can be discharged to 10 percent charge to provide a range of up to 200 miles–comparable to the range in similarly sized batteries with chemistries that store more energy.

At a press conference at the New York Auto Show earlier this week, Chrysler’s president, James Press, emphasized that the cars will be produced domestically. “In our tradition of being the quintessential American company,” he said, “we’re partnering with A123 Systems, which is Massachusetts based, and we’re going to build a factory in Michigan, and build all-American batteries for our cars.”

The decision could help promote an advanced battery industry in the United States, assuming the foundering automaker can stay afloat. A123 Systems is building factories in Michigan to manufacture battery cells and modules and assemble these together to make battery packs, and Chrysler hopes to provide a market for those batteries.

Right now, almost all advanced battery makers build their batteries overseas, including A123, although it has a pack assembly facility in Massachusetts. The company has started construction on the first factory, with help from the state of Michigan, but David Vieau, A123’s CEO, says that further help in the form of loans or grants from the federal government could help the company scale up its operations. A123 has applied for $1.8 billion under a loan program that was funded late last year. The company may also apply for grants made available under the stimulus package passed in February.