Foreign Entity of Concern (FEOC) rules now directly determine whether battery energy storage system (BESS) projects qualify for federal tax credits. Starting in 2026, energy storage faces higher compliance thresholds than solar or wind projects, reflecting the concentrated role of covered nations in global battery supply chains.
This article summarizes the key FEOC rules that apply specifically to energy storage, including the legislative framework, compliance thresholds, and timeline for increasing restrictions.
FEOC restrictions for energy storage operate through the Investment Tax Credit (ITC) under Section 48E and the production tax credit under Section 45Y of the Internal Revenue Code. Projects that receive “material assistance” from Prohibited Foreign Entities (PFEs) become ineligible for these credits.
Material assistance is defined through the Material Assistance Cost Ratio (MACR). The MACR measures the percentage of a project’s manufactured product costs that are not attributable to PFE sources. If the MACR falls below the required threshold for the year construction begins, the project loses its entire ITC.
Energy storage is treated differently from other clean energy technologies. The OBBBA applies higher MACR thresholds to energy storage starting immediately in 2026, recognizing that battery supply chains are more concentrated in restricted jurisdictions than solar or wind components.
The One Big, Beautiful Bill Act (OBBBA) introduced the Prohibited Foreign Entity (PFE) framework that governs current FEOC compliance. PFE status can be triggered by several factors: direct ownership by a covered nation government, significant debt holdings, covered officer appointment rights, effective control, or material assistance from other PFE-type entities.
The OBBBA also preserved energy storage tax credits from the accelerated sunset applied to wind and solar generation credits. However, it imposed stricter FEOC compliance requirements. For energy storage, ITC eligibility now depends on demonstrating compliant supply chain sourcing throughout a 10-year credit period.
Treasury Notice 2026-15, published in February 2026, provides the operational guidance for implementing FEOC provisions. It establishes MACR calculation methods, safe harbors, and supplier certification procedures.
FEOC compliance thresholds for energy storage increase annually:
2026: 55% of manufactured product costs must be non-PFE sourced. 2027: 60%. 2028: 65%. 2029: 70%. 2030 and beyond: 75%.
For comparison, qualified facilities such as solar and wind face lower thresholds: 40% in 2026, rising to 60% by 2030. The gap reflects the higher concentration of battery manufacturing in covered nations.
Non-compliance carries severe consequences. Projects that fail the MACR test lose the entire ITC, not a partial reduction. Additionally, a 10-year recapture provision means that if a project falls out of compliance during the credit period — for instance, through a warranty replacement using PFE components — the full credit may be subject to recapture.
Audit your supply chain now. Map every manufactured product and component to determine PFE exposure. Focus on cells first — at 52% of BESS cost under the safe harbor tables, cell sourcing is the single most important compliance variable.
Secure supplier certifications. Under the Certification Safe Harbor in Notice 2026-15, supplier attestations provide a defensible compliance position. Request formal FEOC certifications from every battery and inverter supplier.
Plan for rising thresholds. A project that passes at 55% in 2026 may not pass at 65% in 2028 if construction is delayed. Build compliance margin into procurement decisions.
Document everything. Maintain cost attribution records, supplier certifications, and MACR calculations throughout the 10-year credit period. Third-party validation from legal and accounting advisors is becoming a market standard for financing.
For a comprehensive breakdown of FEOC compliance for BESS — including MACR calculation methods, safe harbor options, and the full supplier landscape — see Carina Energy’s FEOC Compliance Guide at carina energy.
Carina Energy is a boutique owner’s representative firm specializing in BESS permitting and development. If you need help navigating FEOC compliance for your energy storage project, visit our FEOC Compliance Guide at carina energy.
The guide above covers the fundamentals. Subscribers to our BESS Permitting Intelligence Newsletter get the operational detail: BESS FEOC compliance updates, OEM manufacturing moves, supplier landscape shifts, and tariff developments. The Carina Dispatch also includes BESS moratorium tracking across 150+ jurisdictions and interconnection queue trends across all seven US power markets. One newsletter, three intelligence layers.
READ BY HUNDREDS OF BESS PLAYERS
