Foreign entity rules are throwing a wrench in energy storage financing

The One Big Beautiful Bill Act’s foreign entity of concern requirements are making financing clean energy projects more complicated and a lot more uncertain.

The requirements—dubbed FEOC for short—are a condition clean energy tax credit hopefuls must comply with to receive subsidies.

If clean energy projects contain too large a share of materials sourced from specific foreign entities like China, they won’t be eligible to receive the tax credit. For large-scale storage batteries, FEOC currently requires that 60% of the value of materials be sourced from countries that aren’t prohibited foreign entities—and that percentage is set to increase by 5% to 10% each year for the next four years.

The requirements are forcing clean energy manufacturers and developers to take a scrupulous look at their supply chains to make sure they’re sourcing from non-prohibited foreign entities. And doing so is turning out to be quite the headache: Some battery manufacturers say they’re raising prices, while clean energy developers are deciding if the tax credit is even worth the hassle.

A brief history of FEOC

Though last year’s federal budget bill broadened how FEOC requirements apply to clean energy tax credits, it didn’t create them. The National Defense Authorization Act of 2021 established the statutory precedent of prohibiting sourcing from specific countries—at the time with regard to semiconductors—and subsequent laws built on the concept.

“A lot of this was already put in place by the previous administration,” Ravi Manghani, the senior director of strategic sourcing at Anza Renewables, told Morning Brew. “The only difference is that the previous administration had set the framework in the form of carrots and incentives, versus now it being more of a penalty.”

And in any form, the motivation of such requirements is the same: foreign entities playing less of a role in US energy grids, and increasing domestic production of the electrotech historically manufactured in China. Last month, the Department of Treasury and IRS released long-awaited further guidance on how FEOC will be applied, which analysts say will be toughest on battery storage.

“The challenge that the industry faces now is how to meet the requirements as they are written out in the bill from a material assistance cost standpoint,” Manghani said, “or basically just a different way of saying…a certain minimum percentage of the cost should not be tied to prohibited foreign entities.”

Price increases

For some companies, meeting FEOC requirements has resulted in raising prices. Matthew Ward, the president of lithium-ion battery storage company EticaAG, told Morning Brew that sourcing components from non-prohibited entities costs at least 30% to 50% more, meaning the company has had to increase the price of its batteries, too. Because China produces a majority of the lithium-ion battery materials in the global supply chain, Ward said EticaAG is sourcing from a “dramatically” reduced pool of suppliers.

“[Customers] don’t like it,” Ward said. “But we also see that…our customers want the tax credits for their projects, and equipment is the yardstick on how to get compliance.”

In that way, the tax credits—even though they’re attached to FEOC requirements—are a lifeline for companies like EticaAG.

“We’re seeing some of our Chinese competitors continue to drop their prices to numbers that are just less than cost. And that’s always going to be a problem,” Ward said. “We need the tax credits to be able to at least get somewhat competitive.”

But as more FEOC-compliant vendors become operational, Ward said EticaAG’s pricing should level out.

Forsaking the tax credit

Others in the lithium-ion battery space are planning to eschew the tax credit. That’s because it might make more sense for clean energy developers to buy a lower-priced China-manufactured battery than to comply with FEOC for the subsidy, according to Alex Shoer, a managing partner at GridVest Energy.

GridVest is a hybrid battery distributing and financing company that supports customers through the process of buying and paying for battery storage, and Shoer works with developers that are deciding whether they need to use tax credits to make the economics of their clean energy project work.

For those that safe-harbored their projects, meaning developers began construction prior to this year and officially qualify for tax credits, a FEOC-compliant battery isn’t needed to ensure they receive the subsidy. But those that didn’t, Shoer told Morning Brew he recommends “trying to move away from the tax credit.”

“At this point, the value of the tax credit and the risk of the tax credit and the headache of the tax credit—I don’t think it’s really worth it,” he said. “I know it sounds crazy to say, ‘Oh, you’re gonna walk away from 30%,’ but when you look at the increased cost of a FEOC-compliant battery option and the uncertainty of a FEOC-compliant battery option…You just can’t really rely on what the manufacturer is telling you, because no one really has it figured out.”

That uncertainty includes the reality that the first batches of domestically produced, FEOC-compliant batteries “have already been spoken for” by electrotech giants like LG and Samsung, Shoer said. As for when a wider supply will be available, Shoer said he thinks it’s too dubious to depend on.

“By 2028, there will be a more robust domestic cell manufacturing capability here. So I believe at that point, the price for a FEOC-compliant option may not be such a big deal,” he said. “How do you navigate the next two years?”