Cerium oxide based ceramic fuel cells (CFCs) enable a good cell performance with high ionic conductivity when a lithium compound is utilized as the anode material. However, the mechanism of enhancement of the ionic conductivity and its effect on the fuel cell performance as well as the stability involved via the lithium effect have not been fully understood in this stage. In this paper, the role of lithium was unveiled through experimental measurements and DFT calculations in cerium oxide-based CFCs. It is found that the redistribution of lithium in cerium oxide causes gradient Li+ distribution, resulting in the diffusion of Li+ in CeO2 electrolyte to improve the cell performance. Further study discloses that the lithium at the anode is depleted and in situ doped into the cerium oxide lattice, modulating the band structure of CeO2, leading to the increased electronic conductivity and open circuit voltage (OCV) degradation. This work provides an insight into the role of lithium in cerium oxide-based CFCs, opening a new methodology for designing high performance CFCs.