Last Thursday, the IRS released Notice 2026-15, the first detailed framework explaining how energy storage projects will be evaluated under the new Foreign Entity of Concern (FEOC) rules. For storage developers, this is an important policy development since the One Big Beautiful Bill Act (OBBA) introduced technology-neutral incentives under Sections 45Y (the production tax credit) and 48E (the investment tax credit), alongside Section 45X (the advanced manufacturing credit).
When FEOC restrictions were first enacted, developers had limited clarity on how to comply. The new guidance outlines how to evaluate supply chain exposure to prohibited foreign entities, but it also introduces complexity on sourcing.
This blog explains the new rules, and how energy storage developers should prepare in response to ensure that they do not lose their federal tax credit eligibility.
What the FEOC rules are designed to do
FEOC rules limit supply chain dependence tied to foreign entities such as China and Russia. For battery energy storage, that can be challenging. Battery supply chains are global, and while mining is diversified, refining remains heavily concentrated in China.
In addition, system integrators bundling multiple cost elements into a single cost line can no longer be treated as a black box. The underlying components and vendors need to be disaggregated.
Material Assistance Cost Ratio
Notice 2026-15 introduces the Material Assistance Cost Ratio, which determines whether a project relies too heavily on equipment supplied by prohibited foreign entities. The material assistance cost ratio is a fraction: (A – B) ÷ A, where A is the direct cost of all the equipment used in the project, and B is the direct cost of the equipment supplied by prohibited foreign entities. The share of total equipment costs attributable to allowable sources becomes a percentage.
Storage projects beginning construction in 2026 must have at least 55 percent of equipment costs come from allowable suppliers, increasing to 75 percent for projects starting construction in 2030 or later. Energy storage projects face more stringent thresholds than solar and wind projects, which begin at a 40 percent requirement. This difference means that storage developers will need to diversify supply chains more quickly than other sectors.
Despite initial industry concerns, the scope of the analysis is narrower, focusing on “manufactured products” and components identified in agency guidance rather than full traceability to raw materials. Certain items (i.e., steel, iron, and main power transformers) are excluded entirely. For storage developers, this shift in compliance efforts focuses on core system components, including battery systems, power conversion equipment, and control software.
The guidance tries to make the framework workable in real-world procurement networks. Developers may rely on supplier certifications confirming that vendors are not prohibited foreign entities. This reduces the need for deep audits while still placing significant emphasis on documentation and supply chain transparency.
Another important clarification is that compliance must be evaluated at the level of each “qualified facility,” meaning independently operable portions of a project may require separate calculations. For hybrid projects, this raises the possibility that different segments of the same project could have different eligibility outcomes under FEOC rules.
The guidance also introduces a potential complication for projects that include network upgrades. If these upgrades use different suppliers and contractors linked to prohibited foreign entities, the costs associated with those upgrades could affect whether the project meets FEOC requirements. In PJM, upgrades may represent a significant share of total project costs and is a red flag.
On the whole, FEOC compliance is driven by those who manufacture and control critical components. A battery system assembled in the United States may still rely on battery cells, power conversion systems, or software sourced from prohibited foreign entities, and those elements and their location determine compliance. Developers must evaluate supply chains at the component and integrator level.
FEOC new filter for storage projects moving forward
Notice 2026-15 reshapes how energy storage projects will be evaluated, financed, and ultimately built. The supply chain is now a checkpoint influencing financing timelines, procurement outcomes, and project competitiveness. Projects with well-documented, compliant sourcing will move through financing more quickly, while those with uncertain vendor relationships may face delays and higher costs.
These dynamics may also influence competitive procurements, as developers try to meet FEOC thresholds and reduce risk. In PJM, where interconnection timelines and queue dynamics already shape deployment schedules, vendor changes or procurement restructuring driven by FEOC compliance could slow down projects.
The key takeaway is that supply chain strategy is no longer just a procurement decision; it is becoming a central determinant of project viability, and developers who integrate FEOC considerations early into design, contracting, and vendor selection will be best positioned as the market adapts.
What’s next?
Additional guidance is expected around ownership structures, contractual relationships, and supply chain compliance. Uncertainty will continue as the compliance framework evolves.
Developers should watch how FEOC requirements appear in state procurement programs and utility solicitations.
Finally, as supply chains respond, effects may be seen in vendor competitiveness, pricing structures, and deployment timelines. How quickly alternative supply chains adjust will play a major role in determining whether FEOC requirements accelerate domestic diversification or introduce near-term constraints on storage deployment.