The Treasury Department’s new guidance on Foreign Entity of Concern restrictions could determine which battery projects qualify for billions in federal tax credits and which lose them entirely. 

At issue is eligibility for two major federal incentives: the Section 45X advanced manufacturing 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 “material assistance” from a prohibited foreign entity can lose eligibility. The latest guidance (N-26-15) defines how that determination must be made. In doing so, it elevates FEOC compliance into a central driver of procurement, financing, and competitive positioning.

FEOC was enacted in 2021 to restrict organizations from China, Russia, North Korea and Iran, among other named countries, from having an ownership interest in companies that supply energy systems located in the United States. 

Three shifts created by the new rules matter most.

1. FEOC Is now a line item in storage economics

For energy storage projects claiming the 48E ITC, developers must now calculate a “material assistance cost ratio.” In simple terms, this ratio compares the total direct cost of manufactured equipment used in a project with the portion of those costs attributable to prohibited foreign entities. If the compliant share falls below a threshold set for the year construction begins, the project is deemed ineligible for the credit.

This is not a supplier-level certification. It is a project-level calculation. Developers must identify key manufactured products and components in a battery energy storage system, or BESS, determine their direct costs, and assess whether those components were produced or sourced from a prohibited entity. That shifts FEOC from a policy overlay to a cost-accounting exercise and makes procurement strategy inseparable from tax equity outcomes.

This also means moving compliance earlier in the development timeline. Ownership structures, manufacturing location, and supply chain exposure must now be evaluated before equipment is selected, not after contracts are signed.

One common misconception is that domestic content compliance and FEOC compliance are the same. They are not. These compliance distinctions are governed by entirely different rules and thresholds, and conflating them creates real risk. A system can meet domestic content requirements and still fail FEOC tests, leaving valuable tax credits on the table and shifting project economics entirely.

For developers, the practical implication is that procurement timelines will lengthen in the near term as teams build in deeper diligence around supplier structure and component sourcing.

2. Battery compliance is more complex than solar

The new guidance also affects manufacturers claiming the 45X advanced manufacturing credit. For battery modules and packs, eligibility depends on calculating a separate material assistance ratio based on the direct material costs of the components inside the product. That means tracing which constituent materials, such as battery cells and other subcomponents, were sourced from prohibited entities and ensuring the compliant share exceeds the applicable threshold.

In practical terms, this could mean a battery manufacturer sourcing compliant cells domestically but relying on upstream materials tied to a prohibited entity. That situation could put 45X eligibility at risk even if final assembly occurs in the United States.

Battery supply chains are layered and global. Critical minerals, cathode and anode materials, cells, and module assembly may each have different sourcing and ownership profiles. In some cases, determining compliance may require upstream tracing beyond the direct supplier.

Solar manufacturing, by contrast, benefits from more standardized supply chains and established safe harbor tables that simplify component identification and sourcing. Storage does not yet have that same level of simplicity. As a result, battery manufacturers will need to implement more granular cost-accounting systems, stronger supplier certifications, and tighter documentation controls than many solar manufacturers currently require.

At the same time, domestic supply is expanding rapidly. A recent U.S. Energy Storage Coalition report projects that U.S. battery manufacturing capacity could exceed 100% of domestic demand, driven by more than $100 billion in planned investment and rapid scaling of storage-focused supply chains.

However, that growth does not automatically translate into FEOC-compliant supply. The ability to document ownership, sourcing, and cost structure at a granular level will determine which portion of that capacity is actually usable for credit-eligible projects.

That added compliance burden matters. The 45X credit is intended to accelerate domestic battery manufacturing, but if substantiation becomes too complex or slow, it could temporarily constrain how quickly compliant supply scales and ultimately hinder the growth of the domestic storage market.

3. Procurement strategy will separate the market

Storage buyers are no longer just evaluating price, performance, and delivery schedule. They are underwriting compliance risk that can swing project returns by tens of millions of dollars.

Because MACR is calculated at the project level, developers must understand not only whether a supplier claims compliance, but how comfortably a system clears the threshold. A narrow margin creates exposure to audit risk or credit recapture if supplier data changes.

This is pushing procurement in three directions:

• Earlier supplier engagement. Developers must assess ownership, effective control protections, and supply chain before finalizing equipment selection.
• Scenario-based modeling. Eligibility depends on when construction begins and on annual threshold percentages. Developers increasingly need to model different project development timelines and sourcing mixes to understand how compliance affects project economics. Some developers may choose to deploy a non-compliant product and forgo the ITC based on their project economics.
• Supplier concentration. As compliance requirements tighten, the pool of clearly low-risk suppliers may narrow. Larger manufacturers capable of providing detailed cost tracing and certifications will have an advantage, where smaller suppliers may struggle to meet documentation demands.

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

Clarity is helpful, but friction is real

There is reason for cautious optimism. The new guidance provides a clearer framework, giving 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. Over time, it will reward the developers and manufacturers that can operationalize compliance at scale. That shift is happening against the backdrop of rising electricity demand, geopolitical pressure on energy supply chains, and renewed urgency to reduce reliance on fossil fuels. Grid-scale storage is central to that transition, and policy is now directly shaping how, and by whom, it is built.

The result is a structural divide. Projects that can navigate FEOC requirements will capture the full value of federal incentives, while those that cannot will see their economics erode. In that sense, FEOC compliance is no longer a regulatory hurdle. It is becoming a defining factor in who wins in the U.S. battery market.