This article was researched and drafted by Noah Bowman and reviewed by the ELM MicroGrid marketing team.
The federal incentive landscape for renewable energy is changing quickly. While battery energy storage projects remain eligible for valuable tax incentives, qualifying for those incentives has become more complicated than ever.
Recent legislation, including the One Big Beautiful Bill Act (OBBBA), introduces new requirements around project ownership, equipment sourcing, and supply chains that developers, utilities, EPCs, and project owners can no longer afford to overlook.
If you’re planning a battery energy storage system (BESS) or microgrid project, understanding these rules early can help protect your investment and maximize available tax credits.
Why the Rules Are Changing
For years, federal tax incentives have helped accelerate renewable energy adoption across the United States. The newest legislation shifts that focus toward strengthening domestic manufacturing and reducing dependence on foreign-controlled supply chains.
While many renewable energy incentives are being phased out, battery energy storage remains a priority. However, projects must now meet stricter eligibility requirements related to where equipment comes from and who is involved in the project.
What Is a Foreign Entity of Concern (FEOC)?
A Foreign Entity of Concern (FEOC) is an organization associated with countries identified by the U.S. government as strategic competitors, including:
- China
- Russia
- North Korea
- Iran
The purpose of FEOC regulations is to prevent federal incentive dollars from supporting organizations that could present national security or supply chain risks.
The OBBBA expands these rules by creating two classifications:
- Specified Foreign Entities (SFEs)
- Foreign-Influenced Entities (FIEs)
Together, these organizations are considered Prohibited Foreign Entities (PFEs) when determining eligibility for certain federal tax credits.
Understanding SFEs and FIEs
Although the names sound similar, they serve different purposes.
Specified Foreign Entities
These are organizations specifically identified by the federal government as prohibited participants. Examples include certain Chinese military companies, organizations subject to the Uyghur Forced Labor Prevention Act, and other foreign-controlled entities identified through federal regulations.
Foreign-Influenced Entities
A company may also become restricted if a Specified Foreign Entity exercises enough influence over its operations.
That influence may include:
- Significant ownership stakes
- Control of executive leadership or board appointments
- Major debt holdings
- Financial arrangements that provide effective operational control
Even if a company is headquartered outside one of the listed countries, these relationships may affect project eligibility.
The Material Assistance Cost Ratio (MACR)
One of the biggest changes affecting battery energy storage projects is the introduction of the Material Assistance Cost Ratio (MACR).
Simply put, the MACR measures how much of your project’s cost comes from suppliers that are not considered Prohibited Foreign Entities.
For battery energy storage projects beginning construction in 2026, at least 55% of project costs must come from non-FEOC sources. That percentage increases each year until reaching 75% in 2030.
| Construction Begins | Minimum Non-FEOC Content |
|---|---|
| 2026 | 55% |
| 2027 | 60% |
| 2028 | 65% |
| 2029 | 70% |
| 2030 | 75% |
These increasing thresholds make long-term procurement planning more important than ever.
FEOC Compliance vs. Domestic Content
These two requirements are often confused, but they serve different purposes.
FEOC compliance focuses on avoiding prohibited foreign entities within the supply chain.
Domestic Content rewards projects that source equipment from U.S. manufacturers by offering an additional 10% Investment Tax Credit bonus.
To qualify for the Domestic Content Bonus, projects must satisfy minimum U.S. sourcing percentages along with additional steel, iron, prevailing wage, and apprenticeship requirements. These standards are generally more stringent than FEOC compliance alone.
Why Compliance Should Start Before Procurement
One of the biggest mistakes project owners can make is treating FEOC compliance as something to address after equipment has been selected.
Instead, compliance should begin during project planning. Before purchasing equipment or finalizing contracts, organizations should evaluate:
- Equipment manufacturers
- Battery suppliers
- Ownership structures
- Procurement strategies
- Supply chain documentation
Taking these steps early can help identify potential compliance issues before they become costly problems. Waiting until procurement is underway may significantly limit a project’s eligibility for federal tax credits and other available incentives.
What This Means for Microgrid and Energy Storage Projects
As battery energy storage becomes a larger part of grid modernization, utilities, municipalities, and commercial organizations will need to balance technology selection with evolving regulatory requirements.
Successful projects will increasingly depend on more than choosing the right battery system. They will require thoughtful planning around sourcing, documentation, and long-term compliance.
Organizations that understand these requirements early will be better positioned to preserve Investment Tax Credit eligibility, maximize available incentives, and reduce project risk as federal regulations continue to evolve.