Eligibility for Billions in Battery Tax Credits Depends on FEOC Compliance

The U.S. Treasury Department's latest guidance on restrictions for "Foreign Entities of Concern" (FEOC) will determine which battery projects qualify for billions of dollars in federal tax credits, and which will be entirely disqualified.

The point of contention centers on eligibility for two major federal incentives: the Section 45X Advanced Manufacturing Production Tax Credit for domestically produced components, and the Section 48E Investment Tax Credit for clean electricity projects. Under the new rules, projects or products that include "substantial assistance" from prohibited foreign entities may lose eligibility. The latest guidance (N-26-15) clarifies how this determination must be made. As a result, FEOC compliance has been elevated to a core driver of procurement, financing, and competitive positioning.

The FEOC provisions were enacted in 2021 to restrict organizations from designated countries such as China, Russia, North Korea, and Iran from holding ownership interests in suppliers of energy systems within the United States.

Three major changes brought by the new rules are most critical.

1. FEOC is now a cost line item in storage project economics

For storage projects claiming the 48E Investment Tax Credit, developers must now calculate a "substantial assistance cost ratio." In simple terms, this ratio compares the total direct cost of manufacturing equipment used in the project against the portion of costs attributable to prohibited foreign entities. If the compliant share falls below the threshold set for the year the project begins construction, the project will be deemed ineligible for the credit.

This is not a supplier-level certification, but a project-level calculation. Developers must identify the key manufactured products and components within the battery energy storage system (BESS), determine their direct costs, and assess whether these components are produced or sourced from prohibited entities. This transforms FEOC from a policy add-on into a cost-accounting exercise, making procurement strategy inseparable from tax equity outcomes.

This also means compliance work must be conducted earlier in the development timeline. Ownership structures, manufacturing locations, and supply chain risk exposure must be evaluated before equipment selection is finalized, rather than after contracts are signed.

A common misconception is that domestic content compliance and FEOC compliance are the same thing. They are not. These two types of compliance are governed by entirely different rules and thresholds, and confusing them carries real risks. A system may satisfy domestic content requirements yet still fail the FEOC test, causing valuable tax credits to be lost and fundamentally altering project economics.

For developers, the practical impact is that procurement timelines will lengthen in the near term, as teams need to build deeper due diligence around supplier structures and component sourcing.

2. Battery compliance is more complex than solar

The new guidance also affects manufacturers claiming the 45X Advanced Manufacturing Production Tax Credit. For battery modules and packs, eligibility depends on a separate substantial assistance cost ratio calculated based on the direct material costs of the product's internal components. This means tracing which constituent materials (such as battery cells and other subcomponents) come from prohibited entities and ensuring the compliant share exceeds the applicable threshold.

In practice, this may mean a battery manufacturer sources compliant cells domestically but relies on upstream materials linked to prohibited entities. Even if final assembly occurs in the United States, this situation could put 45X eligibility at risk.

The battery supply chain is multi-tiered and global. Critical minerals, cathode and anode materials, cell and module assembly may each have different sourcing and ownership characteristics. In some cases, determining compliance may require tracing upstream beyond direct suppliers.

By contrast, solar manufacturing benefits from more standardized supply chains and established safe harbor tables, simplifying component identification and sourcing processes. Storage does not yet enjoy the same level of simplification. Consequently, battery manufacturers will need to implement more granular cost accounting systems, stronger supplier certification, and stricter documentation controls than many solar manufacturers currently require.

Meanwhile, domestic supply is expanding rapidly. A recent report from the American Clean Power Association projects that U.S. battery manufacturing capacity could exceed domestic demand by over 100%, driven by more than $100 billion in planned investments and rapid expansion of the storage supply chain.

However, this growth will not automatically translate into FEOC-compliant supply. The ability to document ownership, sourcing, and cost structures at a granular level will determine how much of that capacity is actually usable for projects eligible for tax credits.

This additional compliance burden is significant. The 45X credit is designed to accelerate domestic battery manufacturing, but if the certification process proves too complex or slow, it could temporarily constrain the pace of compliant supply expansion and ultimately hinder growth in the domestic storage market.

3. Procurement strategies will segment the market

Storage buyers are no longer evaluating only price, performance, and lead times. They are underwriting compliance risks that could swing project returns by tens of millions of dollars.

Because the substantial assistance cost ratio is calculated at the project level, developers need to understand not just whether a supplier claims compliance, but how much margin the system has above the threshold. Too narrow a margin creates audit risk or the risk of credit recapture if supplier data changes.

This is driving procurement in three directions:

• Earlier supplier engagement.Developers must assess ownership, effective control protections, and supply chain status before finalizing equipment selection.
• Scenario-based modeling.Eligibility depends on the start-of-construction date and annual threshold percentages. Developers are increasingly needing to model different project development timelines and procurement mixes to understand how compliance affects project economics. Some developers may choose to deploy non-compliant products and forgo the investment tax credit based on their project economics.
• Supplier consolidation.As compliance requirements tighten, the pool of clearly low-risk suppliers may shrink. Large manufacturers that can provide detailed cost traceability and certification will gain an advantage, while smaller suppliers may struggle to meet documentation requirements.

The impact will not be uniform. Well-capitalized developers, especially those serving data center and AI-driven load growth, may be able to absorb higher costs. Others, particularly those relying on tax equity to make project economics work, will face a narrower path to viability. Over time, this dynamic may concentrate market share among developers and suppliers best able to manage compliance complexity.

Clarity helps, but friction is real

There is reason for cautious optimism. The new guidance provides a clearer framework, offering developers a defined path to eligibility rather than operating in uncertainty. But clarity does not eliminate friction; it redistributes it into procurement, documentation, and supplier selection.

In the near term, FEOC compliance will slow decision-making and introduce cost premiums. In the long term, it will reward developers and manufacturers that can scale compliant operations. This shift comes at a time of rising electricity demand, geopolitical pressure on energy supply chains, and increased urgency to reduce reliance on fossil fuels. Grid-scale storage sits at the center of this transition, and policy is now directly shaping how and by whom it is built.

The result is structural differentiation. Projects that can navigate FEOC requirements will capture the full value of federal incentives, while those that cannot will see their economics eroded. In this sense, FEOC compliance is no longer just a regulatory hurdle; it is becoming a key factor determining who wins in the U.S. battery market.