How ‘FEOC’ Rules Are Reshaping Energy Storage Tax Credit Eligibility

The US energy storage industry has experienced year-over-year growth, buoyed in significant part in recent years by the federal income tax credit benefits enacted under the Inflation Reduction Act of 2022 (IRA). Energy storage was one of the major beneficiaries of the IRA’s new rules on both the deployment and manufacturing sides.

However, the One Big Beautiful Bill Act (OBBBA), enacted on July 4, 2025, has been one of the policy-related factors posing headwinds for energy storage deployment and equipment manufacturing into 2026 and beyond.

While the OBBBA does spare energy storage industry tax credits from the accelerated sunsetting applied to the wind and solar generation industries, it introduces new “foreign entity of concern” or “FEOC”-type restrictions on claiming investment tax credits (ITCs) and “advanced manufacturing” production tax credits (45X Credits). These new restrictions have the potential for a significant impact on the battery energy storage industry, in particular given the longstanding domination of the battery supply chain by now-restricted producers.

As of the date of this article, Treasury and the IRS have released one set of guidance addressing the application of certain aspects of the FEOC restrictions. Nonetheless, many critical aspects of how these and other unaddressed FEOC restrictions apply remain uncertain, which provides challenges for those newer and proposed projects that will be ineligible for grandfathering conventions that avoid some or all of the FEOC limitations.

The industry has thus far been focusing on projects that are exempt from the most onerous of these rules. However, as the inventory of those projects is utilized and fully affected projects come to market, this uncertainty will present significant challenges to sell and finance tax credits until more clarity is provided on the application of these new rules.

OBBBA’S ‘FEOC’ RESTRICTIONS

The IRA enacted the long-sought ITC under Section 48 and 48E of the Internal Revenue Code for standalone energy storage facilities. It also introduced the 45X Credits for US production of a variety of clean tech equipment and critical minerals, which includes energy storage equipment and underlying materials and minerals. Moreover, the IRA broadly introduced new monetization methods for these and other clean tech industry tax credits of transferability and direct payment.

The OBBBA introduced new limitations on claiming ITCs and 45X Credits based on the involvement of a FEOC-type entity defined as a “prohibited foreign entity” (PFE). There are six general categories of restrictions that apply based on a relationship to the “Covered Nations” China, Russia, North Korea, and Iran. The below describes these categories of FEOC restrictions at a high level:

1. Covered Nation status. For example, an entity that is organized under the laws of a Covered Nation or that has a principal place of business in a Covered Nation is a PFE. PFEs are ineligible for ITCs and 45X Credits.
2. Equity ownership by Covered Nation status entities and individuals. Ownership by one violating entity or individual of at least 25% of equity, or by more than one violating entity and/or individual of at least 40% of equity, can cause the issuer to be a PFE. PFEs are ineligible for ITCs and 45X Credits.
3. Debt ownership by Covered Nation status entities and individuals. An entity’s issuance of 15% of its debt to one or more violating holders can cause the issuer to be a PFE. PFEs are ineligible for ITCs and 45X Credits.
4. “Covered officer” appointment right of Covered Nation status entity or individual. A violating entity or individual’s ability to appoint an entity’s director or “C suite” executive can cause the entity to be a PFE. PFEs are ineligible for ITCs and 45X Credits.
5. “Effective control” contractual rights for a Covered Nation status entity or individual. A violating entity or individual may be treated as having “effective control” over a person, project, or product under a contractual relationship providing the violating entity or individual with specific authority over key aspects of the applicable person, project, or product. Effective control can cause ineligibility for ITCs and 45X Credits.
6. “Material assistance” procurement–based limitation for PFE sourced materials. Occurs when, based on a prescribed numerical calculation, too much of a deployment project or storage product is composed of PFE-produced materials. Material assistance causes ineligibility for ITCs and 45X Credits.

MARKET REACTION

While the OBBBA was enacted in the summer of 2025, most companies and projects potentially subject to these FEOC limitations were impacted significantly until 2026 given the way the OBBA’s effective date phase-in rules operate. Nevertheless, market participants began preparing for FEOC limitations in earnest at the end of 2025 and are now continuing to work through these rules to best ensure compliance.

These efforts have proven challenging for many in the energy storage industry and the clean tech industry at large. Various aspects of how OBBBA’s FEOC restrictions apply remain uncertain and will require governmental guidance to clarify.

For example, many market participants, especially public companies, have found it extremely challenging, if not impossible, to verify their own non-PFE status with certainty under the equity and debt ownership restrictions mentioned above. Certain public companies in the market have been working with investment banks to establish controls to prevent problematic FEOC equity and debt ownership.

As a result, certain securities issuances have included issuer buyback mechanisms and nominally recited ownership restrictions, although in practice it is unclear how effective these provisions will be in protecting issuers from PFE status. The market continues to insist to the government that it will require clarifying guidance and likely safe harbor reliance conventions to be able to comply with these rules.

In addition, the battery energy storage industry is especially sensitive to the material assistance limitation given the China-dominated legacy supply chain for battery energy storage equipment. This challenge is magnified under the OBBBA by singling out the energy storage industry with more stringent material assistance standards than those applied for other technologies.

The IRS and Treasury released preliminary guidance in February 2026 that largely addresses the material assistance limitation. This guidance helpfully clarifies some aspects of the material assistance limitation rules as applied to the energy storage industry, including how to use legacy domestic content credit “adder” tables to conduct a material assistance limitation calculation. Nevertheless, certain critical aspects of the material assistance limitation remain subject to further clarification.

Given the uncertainty surrounding how certain of the FEOC rules apply and complications in parties verifying their own FEOC status, contractual negotiations around the allocation of risk and certification as to FEOC status matters has been challenging for the industry.

A PATH FORWARD

Despite the complications and uncertainty posed by the OBBA’s new FEOC limitations, the US energy storage industry continues to progress in a manner assuming eligibility for ITCs and 45X Credits. On the deployment side, the now longer survival of the ITC for energy storage as compared to wind and solar generation is one of the factors attracting more interest for US buildout of both transmission- and distribution-grid sized and situated energy storage facilities.

Certain battery storage equipment manufacturers are now also beginning to certify their non-PFE status to provide customers with comfort on material assistance compliance. Market conventions on equipment vendor and service provider and financing party contracting and certification practices continue to evolve in real time. Market participants are also beginning to work with third-party accounting and legal advisors to document their FEOC-compliant status to provide to their financing parties and/or customers and for insurance underwriting.

It is expected that many of these fluctuating aspects of contracting, certification, and substantiation in the market will standardize as additional guidance is released by the IRS and Treasury in 2026 and beyond. This additional guidance and resulting standardized practices will be critical for unlocking tax credit subsidizing benefits for the US energy storage industry.