How Foreign Entity of Concern Rules Affect BESS Development
53 BESS OEMs Tracked | 127 Utility-Scale Product Lines | 18 With US Manufacturing | FEOC Status Assessed for Each | Updated Monthly
Starting in 2026, BESS projects must clear a new compliance threshold to qualify for the Investment Tax Credit: the Foreign Entity of Concern (FEOC) rules. Battery cells — 52% of total equipment cost under IRS safe harbor tables — are overwhelmingly manufactured in China. Projects that fail the Material Assistance Cost Ratio lose the entire 30–40% ITC. This guide explains how the FEOC rules work as they apply specifically to battery energy storage, which components trigger compliance review, what the supplier landscape looks like, and what developers should be doing now.
Battery energy storage is one of the best-positioned technologies under the current US tax credit framework. Standalone BESS projects can begin construction through 2033 and still qualify for the Investment Tax Credit under Section 48E. The 5% safe harbor test — eliminated for most solar and all wind projects in August 2025 — remains available for standalone storage.
But there’s a catch. Starting in 2026, projects must clear a new compliance hurdle that can erase the entire ITC: the Foreign Entity of Concern (FEOC) rules.
For BESS developers, the FEOC rules are not a theoretical risk. Battery cells — the single largest cost component in any grid-scale storage project — are overwhelmingly manufactured in China. According to the DOE’s 2024 BESSIE supply chain report, 90–100% of US BESS systems contain at least one Chinese-sourced component, and 65% of global Tier 1 BESS vendors are headquartered in China. The FEOC framework forces developers to confront this supply chain reality or forfeit credits worth 30–40% of project cost.
The term “Foreign Entity of Concern” refers to companies with ownership, investment, or contractual ties to China, Russia, North Korea, or Iran. In practice, the FEOC restrictions overwhelmingly affect Chinese battery manufacturers and their downstream customers — because that is where the vast majority of the world’s battery cell production is located.
The One Big Beautiful Bill Act (OBBBA), signed by President Trump on July 4, 2025, is the legislative backbone of the current FEOC regime. It imposed three layers of restriction on clean energy tax credits:
1. Material Assistance Rules — Projects cannot use “too much” equipment from Prohibited Foreign Entities (PFEs). Compliance is measured by the Material Assistance Cost Ratio (MACR), a formula that calculates the percentage of project equipment cost that is not sourced from PFEs.
2. Taxpayer-Level Restrictions — Companies that are themselves classified as “Specified Foreign Entities” or “Foreign-Influenced Entities” cannot claim, sell, or purchase tax credits. This applies to companies with significant Chinese ownership, board representation, or debt from Chinese lenders.
3. Effective Control Provisions — Contracts and technology licenses that give a Specified Foreign Entity operational control over a project or product can independently disqualify tax credits — even if the material assistance test is met and the taxpayer itself is not a PFE.
The law specifically names six battery companies as Specified Foreign Entities: CATL, BYD, Gotion, EVE Energy, Hithium Energy Storage Technology, and Envision Energy (parent of AESC). Any company ineligible for Department of Defense contracts under the 2021 NDAA also qualifies. These entities cannot claim Section 45X manufacturing credits, and their products count against the MACR for any project that uses them.
The financial consequences of FEOC non-compliance are severe:
Loss of the full ITC. A 30% base credit — potentially 40% or more with bonus adders — drops to zero if the MACR threshold is not met. For a 200 MW / 800 MWh storage project, this can represent $80–120 million in lost tax equity value.
10-year recapture risk. Under the OBBBA, if a developer claims a Section 48E ITC and then makes payments in any of the next 10 years under a contract that gives a Specified Foreign Entity effective control over the project, the full ITC must be repaid. This means FEOC compliance is not a one-time procurement decision — it is a decade-long obligation that extends through operations, maintenance, and warranty arrangements.
Reduced bankability. Tax equity investors and project finance lenders are incorporating FEOC compliance into their due diligence. Projects that cannot demonstrate a clear, documented FEOC compliance pathway face difficulty securing financing on competitive terms.
The OBBBA preserved favorable treatment for BESS relative to solar and wind. Storage projects that were under construction by the end of 2025 avoid the material assistance test entirely. Storage projects can still begin construction through 2033 to qualify for technology-neutral credits. But for any project beginning construction in 2026 or later, FEOC compliance is a threshold requirement for tax credit eligibility.
On February 12, 2026, Treasury and the IRS issued Notice 2026-15 — the first detailed interim guidance implementing the OBBBA’s material assistance provisions. This notice transformed FEOC from a conceptual policy risk into an auditable compliance framework with specific calculation methods, safe harbors, and documentation requirements.
The notice provides three interim safe harbor options for calculating the MACR: an Identification Safe Harbor (using the domestic content tables from earlier IRS notices), a Cost Percentage Safe Harbor, and a Certification Safe Harbor where suppliers attest under penalty of perjury that their products are not PFE-sourced. Developers must maintain documentation and supplier certifications for at least six years — matching the extended statute of limitations the OBBBA gives the IRS to challenge MACR calculations.
Comprehensive proposed regulations have not yet been issued, and further guidance on Specified Foreign Entity identification, effective control definitions, and updated safe harbor tables is expected in the coming months.
For the full legal analysis, we recommend the following resources from Norton Rose Fulbright’s Project Finance practice, which provides the most detailed practitioner-oriented walkthroughs available:
Additional analysis from Bracewell LLP, Baker Botts, and the Bipartisan Policy Center offer complementary perspectives on the statutory framework and its implementation.
The material assistance test is where FEOC compliance gets concrete for BESS developers. The calculation determines whether a project’s equipment sources are sufficiently free of Prohibited Foreign Entity content to qualify for tax credits.
The Material Assistance Cost Ratio is straightforward in concept:
MACR = (Total Direct Cost – PFE Direct Cost) ÷ Total Direct Cost
The result is the percentage of project equipment cost that is not sourced from Prohibited Foreign Entities. This percentage must meet or exceed the threshold for the year construction begins:
| Construction Start Year | Storage MACR Threshold | Power (Solar/Wind) MACR Threshold |
|---|---|---|
| 2026 | 55% | 40% |
| 2027 | 60% | 45% |
| 2028 | 65% | 50% |
| 2029 | 70% | 55% |
| 2030 and beyond | 75% | 60% |
Notice that storage faces higher thresholds than power generation projects — 55% in the first year compared to 40% for solar and wind. This reflects the supply chain reality that battery storage equipment is more concentrated in restricted-entity manufacturing than solar or wind components.
Projects under construction by the end of 2025 are exempt from the material assistance test entirely.
The IRS safe harbor tables (from Notice 2025-08, January 2025) assign standardized cost percentages to each component of a grid-scale BESS system (systems greater than 1 MWh). These percentages determine how much each component weighs in the MACR calculation:
Battery Pack / Module:
● Cells: 52.0%
● Packaging: 5.6%
● Production: 8.0% (only counts if all components of the manufactured product are domestically produced)
Inverter / Converter:
● Printed circuit board assemblies: 1.4%
● Thermal management system: 0.4%
● Electrical parts: 0.5%
● Enclosure & skids: 0.4%
● Production: 1.9%
Battery Container / Housing:
● Enclosure: 14.8%
● Battery management system (BMS): 7.4%
● Thermal management system: 5.6%
● Production: 2.0%
Steel or iron reinforcing products in foundation:
Separate requirement — must be US-made.
The critical number is 52%. Battery cells alone represent more than half of the total BESS equipment cost under the safe harbor tables. This single line item dominates the MACR outcome.
If a developer sources cells from a Prohibited Foreign Entity — which includes most Chinese cell manufacturers — the PFE content immediately reaches 52% of total project equipment cost. Even if every other component (inverter, BMS, thermal management, enclosures, packaging) is sourced from non-PFE suppliers, the non-PFE cost ratio would be approximately 48%. That fails the 55% threshold for storage projects beginning construction in 2026.
In plain terms: a grid-scale BESS project beginning construction in 2026 must use non-PFE cells to have any chance of qualifying for the ITC. The cell sourcing decision is the single most consequential procurement choice a developer will make for FEOC compliance.
This is also why the distinction between “manufactured by” and “assembled by” matters so much for battery storage. A system assembled in the United States using cells manufactured by a Chinese PFE still carries the full 52% PFE cost. US assembly does not cure PFE cell origin. As one industry analyst warned in a February 2026 report, buying within the US is not necessarily enough — Chinese companies operate domestically, and other companies rely on PFE components upstream.
Even if a project clears the material assistance test, it can still lose tax credits through the effective control provisions. Under the OBBBA, contracts and technology licenses with Specified Foreign Entities that grant operational authority over a project or production line are independently disqualifying.
For BESS developers, the following contract provisions with SFE counterparties should be scrutinized carefully:
Any new licensing arrangement with a Specified Foreign Entity entered into on or after July 4, 2025 is automatically treated as giving the counterparty effective control — regardless of the specific contract terms. This provision targets the technology-transfer model used by several US BESS integrators that license Chinese technology packages.
The 10-year ITC recapture provision means these contract risks extend well beyond commissioning. A payment in year 7 under a service agreement with an SFE counterparty could trigger full recapture of the ITC claimed at project completion. Developers and their counsel should be structuring FEOC representations and audit rights into supply contracts that survive through the entire recapture period.
The good news for developers: the FEOC-compliant supply base is expanding rapidly. The bad news: it is not expanding fast enough to meet near-term demand, and the supply that exists is already being locked up by anchor customers.
Any honest assessment of the BESS supplier landscape starts with China’s dominance. As of 2024, approximately 93% of all BESS systems installed globally originated from Chinese companies. All five of the world’s largest battery cell manufacturers by volume are Chinese (CATL, BYD, Tianjin Lishen, Gotion, CALB). China controls 80–95% of the battery supply chain across raw material processing, component manufacturing, cell production, and system integration.
For the US market, this means the FEOC rules are not a minor procurement adjustment — they require developers to rebuild their supply chains around a fundamentally different set of suppliers. This restructuring is underway, driven primarily by South Korean manufacturers pivoting from slowing EV demand to surging grid storage demand.
The most significant supply chain development in the past 12 months has been the rapid conversion of South Korean EV battery manufacturing capacity to energy storage:
LG Energy Solution is the furthest along. Its Holland, Michigan LFP cell plant, the first large-scale US LFP facility dedicated to grid storage, began production in May 2025 with 16.5 GWh of annual capacity, expandable to 30 GWh. LG has also signed a separate $4.3 billion deal with Tesla for LFP cells dedicated to Megapack 3, with production at LG’s Lansing, Michigan plant (a former Ultium Cells site) starting around August 2027 under a contract running through July 2030. The US government publicly confirmed Tesla as the counterparty on March 17, 2026, explicitly framing the deal as reducing reliance on Chinese imports and insulating Tesla’s storage business from Section 301 and FEOC exposure. LG has also signed a 5 GWh agreement with Qcells/Hanwha, and is targeting roughly 50 GWh of total North American capacity across its Holland, Lansing, and additional facilities.
Samsung SDI is converting EV production lines at its StarPlus Energy plant in Indiana (a joint venture with Stellantis) to grid storage cell production, with the facility now producing both NCA and LFP cells for ESS. The company signed a $1.36 billion LFP ESS supply contract in December 2025, is widely reported to have a separate deal with Tesla for roughly 10 GWh/year of Megapack cells, and on March 15 to 16, 2026 disclosed a fresh $1 billion (1.5 trillion KRW) long-term ESS supply contract with a US energy company with deliveries running 2026 through 2029.
SK On is converting NCM EV lines to LFP ESS production at its Commerce, Georgia gigafactory, with mass production targeted for the second half of 2026. Its first major US ESS deal, a $1.4 billion agreement with Flatiron Energy Development for up to 7.2 GWh through 2030, was signed in September 2025. In March 2026, SK On publicly stated it is in talks with multiple US data centers and energy developers to secure at least 10 GWh of ESS contracts in 2026 and is shifting additional capacity into LFP cells, explicitly citing slower EV sales, tariff pressure, and customer preference for non-Chinese batteries.
Zooming out, US ESS cell manufacturing has gone from essentially zero to roughly 20 GWh of operational capacity in the past 12 months, and industry coverage in late March 2026 (citing a US Energy Storage Coalition report) projects that figure to reach approximately 95 GWh by early 2027. The Coalition is a self-interested source and its claim that domestic capacity is now sufficient to meet 100% of grid-scale demand likely refers to nameplate rather than contracted-and-delivered supply, but the trajectory itself is real and matches the OEM-level announcements above. On March 13, 2026, the Department of Energy also issued a $500 million Notice of Funding Opportunity (DE-FOA-0003585) under IIJA Section 40207 for domestic battery materials processing, component manufacturing, and recycling, with awards prioritizing commercial-scale facilities and explicitly including cell and component manufacturing for grid-scale applications. Both signals reinforce the direction of travel: the FEOC-compliant supply base is materializing on roughly the same timeline that the MACR thresholds step up.
Together, these three Korean manufacturers could bring more than 50 GWh of US-based, FEOC-compliant ESS cell production online by end of 2026 — potentially enough to meet domestic demand. But the supply is not evenly distributed. Multi-billion-dollar anchor customers like Tesla have already locked up significant capacity through long-term contracts.
A critical nuance: manufacturing in the United States does not automatically mean FEOC compliance. Several Chinese-headquartered companies have opened or announced US factories, but their products may still carry PFE exposure through corporate ownership, upstream cell sourcing, or licensing arrangements.
Gotion, for example, operates a manufacturing facility in Manteno, Illinois — but is explicitly named as a Specified Foreign Entity in the OBBBA. The “NO GOTION” provision, introduced by Rep. John Moolenaar and passed as part of the bill, specifically targets the company. Despite US manufacturing and $536 million in state incentives, Gotion’s products are ineligible for Section 45X credits, and developers using its equipment will not qualify for the ITC.
AESC (owned by China’s Envision Group) began ESS battery production at its Smyrna, Tennessee plant in June 2025. AESC is Fluence’s primary US cell supplier. But AESC’s Chinese ownership places its FEOC classification under intense scrutiny — CRU Group analysis has identified AESC alongside Gotion as companies that would be classified as SFEs under the OBBBA. Fluence has stated it expects to meet FEOC compliance by regulatory deadlines and is negotiating a second US cell supplier, but this remains one of the highest-stakes unresolved questions in the industry.
Hithium opened a $200 million, 10 GWh facility in Mesquite, Texas in June 2025 and shipped its first ESS units in August. But Hithium is Chinese-headquartered (Xiamen) and named as a Specified Foreign Entity in the OBBBA. Its Texas plant performs system-level assembly — not cell manufacturing — so upstream PFE exposure from Chinese-manufactured cells likely persists.
The takeaway for developers: always evaluate the full PFE chain. Ask not just where the product is assembled, but where the cells are manufactured, who controls the manufacturing entity, and whether any licensing arrangements create effective control exposure.
FEOC compliance is creating a bifurcated market. Sourcing components from non-PFE entities costs an estimated 30–50% more than equivalent Chinese-sourced equipment. Some developers are reportedly choosing to forgo the ITC entirely — using cheaper Chinese batteries without tax credits — when the project economics support it.
But for most utility-scale projects, the math favors compliance. A BESS project using FEOC-compliant, domestically produced batteries can qualify for a 30% base ITC plus a 10% domestic content bonus — a 40% total credit. This spread makes FEOC-compliant equipment cost-competitive even at significantly higher unit prices, particularly for projects that qualify for additional adders (energy community, low-income).
The constraint is availability. Industry sources report that FEOC-compliant cells from LG and Samsung are already spoken for through near-term contracts, and a broader supply may not be available until 2027 or 2028. This supply tightness is a key reason to begin procurement planning early and secure supply commitments before they are absorbed by larger buyers.
FEOC restrictions and import tariffs are legally separate compliance regimes, but they compound their effect on BESS procurement economics. Developers sourcing from China face both the tariff cost uplift and the risk of losing the entire ITC.
The tariff landscape for Chinese-origin batteries stacks multiple layers:
The combined tariff burden on Chinese BESS equipment entering the US in 2026 totals approximately 55% before AD/CVD, and can reach significantly higher depending on component classification.
Additionally, Section 301 tariffs on natural graphite (used in battery anodes) increased from 0% to 25% effective January 1, 2026, and permanent magnets (used in some inverter designs) face the same increase.
A developer importing Chinese batteries faces the tariff cost uplift on equipment plus the potential loss of a 30–40% ITC if FEOC thresholds are not met. This double penalty is accelerating the shift toward non-Chinese supply chains even where Chinese equipment remains cheaper on a per-unit basis. The economics increasingly favor paying a premium for FEOC-compliant, domestically manufactured equipment and capturing the full ITC.
Carina tracks FEOC compliance, US manufacturing activity, and product line changes for 50+ battery storage OEMs as part of our ongoing market intelligence practice. Below are selected recent developments relevant to BESS developers navigating the FEOC landscape.
Tesla / LGES $4.3B LFP deal officially confirmed (March 2026). The US government publicly confirmed on March 17, 2026 that Tesla is the counterparty to LGES’s previously-anonymous $4.3 billion LFP supply agreement. Production will run at LGES’s Lansing, Michigan plant (a former Ultium Cells site) starting around August 2027, dedicated to Tesla’s Megapack 3, on a contract running through July 2030. This is the largest disclosed US ESS cell supply deal on record. The FEOC reclassification trigger is plant commissioning in 2027, not contract signing, so current Megapack inventory may still rely on Chinese cells until then.
Samsung SDI secures ~$1B US ESS contract (March 2026). On March 15 to 16, 2026, Samsung SDI disclosed a long-term ESS battery supply contract worth approximately 1.5 trillion KRW (~$1 billion) with a US energy company, with deliveries running 2026 through 2029. Production will take place at the StarPlus Energy plant in Indiana, which will now supply both NCA and LFP cells for US ESS customers. This makes Samsung SDI the second Korean OEM (after LGES) with material US ESS production tied to a named buyer and deliveries already in motion.
DOE opens $500M NOFO for domestic battery supply chain (March 2026). On March 13, 2026, the Department of Energy issued a $500 million Notice of Funding Opportunity (DE-FOA-0003585) under IIJA Section 40207 for domestic battery materials processing, component manufacturing, and recycling. Awards prioritize commercial-scale facilities (roughly $100 million minimum for new plants and $50 million for expansions), require 50% cost share, and explicitly include cell and component manufacturing for grid-scale and specialized battery applications. This is additional federal support for the FEOC-compliant supply base US developers will rely on through 2030.
Treasury and IRS Issue First FEOC Guidance for Storage Tax Credits (February–March 2026). Treasury and the IRS released Notice 2026-15 clarifying that the Material Assistance Cost Ratio (MACR) test applies FEOC restrictions to Section 45Y/48E generation credits and Section 45X advanced manufacturing credits, including BESS components. For standalone storage projects beginning construction in 2026, at least 55% of total direct equipment cost must come from non-FEOC suppliers to retain credit eligibility — a higher threshold than for solar and wind — rising to 75% for projects starting in 2030 or later. Developers should expect FEOC status to become a gating factor for financing, and vendor documentation and supply-chain diligence requirements to intensify accordingly.
SK On Pivots Toward U.S. Energy Storage Market (March 2026). SK On stated it is in active talks with multiple U.S. data center and energy developers to secure at least 10 GWh of ESS contracts in 2026, shifting more capacity toward LFP cells. Company commentary explicitly links the strategy to slower EV sales, tariff pressure, and customer demand for non-Chinese batteries. For developers, this signals a third major Korean cell supplier (alongside LGES and Samsung SDI) actively competing for FEOC-compliant ESS volume — with plant-specific announcements worth monitoring.
This section is updated as part of Carina’s monthly OEM intelligence review. Subscribe to The Carina Dispatch for the latest developments delivered to your inbox.
FEOC compliance is not a checkbox exercise. It requires proactive procurement strategy, rigorous documentation, and ongoing contract management through a 10-year recapture window. Here is what developers should be doing now.
Map your cell supply chain first. Cells represent 52% of BESS equipment cost under the safe harbor tables. Your cell sourcing decision will determine whether your project can pass the material assistance test. Identify your cell supplier’s corporate ownership, manufacturing location, and any licensing arrangements with Specified Foreign Entities. If cells are manufactured by a PFE, your project will not qualify for the ITC under the 2026 thresholds — regardless of what else you do.
Evaluate the full PFE chain, not just assembly location. A system assembled in the US using PFE cells fails the MACR. A system from a non-Chinese integrator using PFE-sourced sub-components also carries risk. Ask suppliers specifically: where are the cells manufactured, who owns the cell manufacturer, are there any licensing or technology-transfer arrangements with entities in China, Russia, North Korea, or Iran?
Secure FEOC-compliant supply early. The FEOC-compliant cell supply base is growing but constrained. LG Energy Solution, Samsung SDI, and SK On are the primary non-PFE cell manufacturers with US production capacity, and their near-term output is being absorbed by large anchor contracts. Developers who wait until 2027–2028 will face a more competitive supply landscape. Begin procurement conversations now.
Model the economics both ways. For some projects, particularly smaller systems or those without tax equity partners, forgoing the ITC and using lower-cost Chinese equipment may be viable. Run the numbers: compare the 30–40% ITC value against the FEOC-compliant equipment premium and make a deliberate economic decision rather than assuming compliance is always the right path.
Collect supplier certifications now. Under Notice 2026-15, developers can use a Certification Safe Harbor where suppliers attest under penalty of perjury that their products are not manufactured by PFEs and that they have no knowledge of upstream PFE involvement. These certifications must include the supplier’s EIN and be retained for at least six years. Build certification requirements into your procurement contracts before execution.
Use the safe harbor tables. For grid-scale BESS projects, the IRS safe harbor tables from Notice 2025-08 provide a standardized, pre-approved method for calculating your MACR. This is simpler than tracking actual costs and reduces audit risk. The tables are available for solar, onshore wind, and battery storage projects.
Document everything. The IRS has six years — double the normal statute of limitations — to challenge MACR calculations. Maintain complete records of supplier certifications, equipment purchase orders, cost allocation worksheets, and any corporate ownership research you conduct on suppliers.
Structure FEOC representations and audit rights into supply contracts. Supplier representations about PFE status should survive through the 10-year recapture period. Include audit rights that allow you (or your tax equity partner) to verify compliance documentation on an ongoing basis.
Scrub service agreements and warranty arrangements. Long-term service agreements, exclusive maintenance arrangements, and restrictive warranties with SFE counterparties are potentially disqualifying under the effective control provisions. Review all post-commissioning contracts for the red-flag provisions identified by Norton Rose Fulbright (exclusive operations, data access restrictions, royalty terms exceeding 10 years).
Plan for 10 years, not just COD. FEOC compliance is a lifecycle obligation. If your maintenance provider, software licensor, or warranty counterparty changes corporate ownership or is reclassified as a PFE during the recapture period, payments under existing contracts could trigger full ITC recapture. Build FEOC change-of-status provisions into contracts that allow termination or renegotiation without penalty.
Carina Energy tracks FEOC compliance, manufacturing presence, and product lines for 50+ BESS OEMs as part of our market intelligence practice. We combine this supplier data with regulatory intelligence from our BESS Moratorium Monitor — tracking local restrictions across 150+ jurisdictions in 17 states — and project pipeline data from our ISO Queue Tracker monitoring BESS projects across all seven US power markets.
This three-dimensional view — where you can build (moratoriums), who is building (queue tracker), and what they’re building with (OEM tracker) — helps developers navigate the intersection of regulatory risk, supply chain compliance, and market opportunity.
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Need help navigating FEOC for an active project? Carina provides Development-as-a-Service and Owner’s Representative services for BESS projects, including procurement strategy and regulatory navigation in restricted jurisdictions.
The information on this page reflects Carina Energy’s assessment based on publicly available sources as of April 2026. FEOC classifications, tariff rates, and regulatory guidance are subject to change. This content is for informational purposes only and does not constitute legal or tax advice. Developers should conduct independent due diligence and consult qualified tax counsel and legal advisors for project-specific FEOC compliance guidance.
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