Foreign entity of concern (FEOC) effective control is the test a battery storage project can fail through its contracts alone. A license, service agreement or software arrangement that gives a specified foreign entity (SFE) authority over the project can disqualify the Section 48E investment tax credit (ITC), even when the equipment passes the material assistance cost ratio (MACR) test. Effective control by a prohibited foreign entity is a contract review, not a supplier screen.
Most diligence teams read the battery supply agreement and stop. The provisions that fail the test usually sit in documents they never open. The broader rules are covered in Carina’s FEOC compliance guide for BESS.
The hardest case is a U.S.-based integrator whose product runs on a technology package licensed from a Chinese company. The cells may come from a compliant supplier. The integrator may have a clean cap table. The battery management system, power conversion design or controls software may still be licensed from an SFE.
Under the One Big Beautiful Bill Act (OBBBA), any intellectual property (IP) license with an SFE entered into or modified on or after July 4, 2025 is treated as effective control, whatever its terms. The word that catches projects is “modified.” A license signed in 2023 and amended in 2026 to add a new product generation is a new arrangement for this purpose.
The diligence request to the integrator should cover:
An integrator that will not answer these questions has answered the most important one.
The statutory factors read abstractly. In battery storage they show up in specific documents.
Effective control factor | Where it appears in BESS | What to check |
|---|---|---|
| Authority over output, dispatch or who buys the output | Energy management system (EMS) and plant controller agreements; optimization services | Who sets the dispatch schedule, and whether the original equipment manufacturer (OEM) can override it remotely |
| Exclusive maintenance or operations | Long-term service agreement (LTSA); warranty terms; capacity maintenance agreements | Whether the warranty is void unless the OEM performs all maintenance |
| Restricted access to operating data | Cloud monitoring platform terms; data ownership clauses | Whether the owner gets raw cell-level data, or only what the OEM’s portal displays |
| Long royalties or control of sourcing | Technology licenses; augmentation supply terms | Royalties beyond 10 years; augmentation units that only the OEM can specify |
Two patterns deserve attention. The first is warranty conditioning. A warranty that lapses unless the OEM performs all maintenance creates an exclusive maintenance arrangement in practice, even when the LTSA never uses the word “exclusive.”
The second is the power conversion system (PCS). The PCS manufacturer is often a different company from the cell maker and the integrator, with its own parent and its own licensing history. It needs its own ownership and licensing review.
For tax years beginning after July 4, 2027, the credit can be recaptured in full if, within 10 years of placed-in-service, the taxpayer makes a payment to an SFE under a contract that grants effective control. Diligence therefore has to follow money over time, not just signatures at closing.
A battery storage project makes payments to its supply chain for most of its life: LTSA fees, augmentation purchases in years 5 to 10, software subscription renewals and firmware update charges. Each one is a test date. A contract that is clean at commercial operation can stop being clean when:
The working tool is a payment calendar. It lists every counterparty with a foreign ownership link, every recurring payment to it, and the date each payment falls due through the end of the recapture window.
Notice 2026-15 is interim guidance. Treasury has said proposed regulations are coming, and until they arrive, tax equity investors read effective control conservatively. They cover the remaining uncertainty with indemnities, holdbacks or price.
In diligence they ask for:
The practical lesson is sequencing. Effective control problems found at supplier selection cost a substitution. Found at financial close, they cost the deal timeline. Found in year 7, they cost the credit.
Carina Energy is a boutique owner’s representative firm specializing in BESS permitting and development. If you’re reviewing supply, service or license agreements for FEOC exposure, learn more about our approach or get in touch to discuss your project.
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