FEOC compliance for BESS is a decade-long obligation

Effective control exposure does not wait until a project enters service. A developer who signs a warranty, software licensing, operation and maintenance, or other service agreement that gives a Specified Foreign Entity authority over key aspects of the project, may have already created a disqualifying arrangement before construction begins or an ITC claim is filed.

For developers who do claim the ITC, a separate 10-year recapture provision applies, meaning any payments made during the subsequent decade to a Specified Foreign Entity exercising effective control trigger 100% repayment of the credit claimed. This applies to tax years beginning after 4 July 2027. FEOC compliance does not end at procurement; it runs through every contract the project touches, from the first agreement to the last.

IRS Notice 2026-15, which is interim regulatory guidance from February 2026, clarified how to calculate the MACR by establishing safe harbors, which are pre-approved methods that let developers rely on supplier certifications and existing IRS cost tables rather than building every calculation from scratch.

But the notice left critical questions around other FEOC provisions unresolved, including how to evaluate intellectual property arrangements, what kinds of debt are considered, and whether assistance in commissioning would violate effective control provisions, which are details key to determining whether a manufacturer qualifies as a Prohibited Foreign Entity at all. And while further guidance from Treasury is due by the end of 2026, it is not clear whether this guidance will answer all or any of these outstanding questions.

A FEOC assessment moves inward through layers of the manufacturer’s corporate structure and supply chain. The outer layers yield most readily, while the inner layers require information that not every manufacturer will provide, and some may face legal constraints on providing at all.

Manufacturer designation asks whether the manufacturer qualifies as a Prohibited Foreign Entity, with two categories mattering.

A Specified Foreign Entity is one directly tied to a covered nation through government ownership, control, or sanctions listing.

A Foreign-Influenced Entity is a manufacturer not itself state-controlled but over which a Specified Foreign Entity exercises meaningful influence through holding 25% or more of the company, 40% or more in aggregate across multiple Specified Foreign Entities, supplying 15% or more of its debt, or holding the right to appoint an executive or board member. A manufacturer meeting any of these criteria qualifies as a Prohibited Foreign Entity, meaning its products cannot count toward the MACR threshold and will not be eligible for Section 45X tax credits.

Cell sourcing and the MACR add another layer. Under IRS safe harbor tables, battery cells account for approximately 52% of total BESS equipment cost. Even a manufacturer that clears the Prohibited Foreign Entity analysis will likely fail the 55% threshold if its cells come from a prohibited source, which is the layer that forecloses the most options for most developers today.

Effective control is the most far-reaching and complex restriction. The OBBBA also designates a manufacturer as a Foreign-Influenced Entity if a Specified Foreign Entity exercises effective control through contractual arrangements or intellectual property and licensing agreements, meaning a manufacturer with clean ownership on paper can still carry disqualifying exposure through its contracts. Notice 2026-15 provided no guidance here, leaving many open regulatory questions about how effective control gets determined in practice.

Many developers have asked manufacturers to attest under penalty of financial damages that their products meet FEOC requirements. That language carries legal recourse but limited financial protection, as no manufacturer will indemnify a loss of this magnitude, and developers have been unable to find counterparties to underwrite the risk.

The market has already surfaced cases where manufacturers presented documentation packages which may have been designed to appear FEOC-compliant while obscuring disqualifying relationships. Independent assessment evaluates what the documents actually support and where the gaps lie.

A completed FEOC assessment opens a new manufacturer relationship while leaving the compliance requirement open.

The product evaluated at procurement must remain the product delivered and installed. If a manufacturer quietly changes cell sourcing between contract signing and shipment, the product that arrives may not match the one that passed assessment.

Contracts should lock in the bill of materials, encompassing every component, its source, and its cost, and ongoing quality assurance oversight should verify that sourcing remains consistent after signing.

As the pool of FEOC-compliant products narrows, throughput pressure on qualifying manufacturers increases, and with it, quality risk. Factory audits and inspection programs should be treated as essential, rather than optional, when selecting new or unfamiliar manufacturers.

Hardware procurement does not exhaust the exposure. Warranty arrangements, replacement parts contracts, operation and maintenance agreements, and software licensing, including battery management systems that monitor and control cell performance alongside operational dispatch platforms, can all trigger the 10-year recapture provision if they constitute payments to a Specified Foreign Entity exercising effective control.

The effects on project finance have already surfaced. Tax equity investors who fund projects in exchange for tax credits rather than cash returns, along with project finance lenders, increasingly require documented FEOC compliance before committing capital. Unresolved FEOC exposure has pushed some projects past investor risk thresholds entirely.

The OBBBA created a sustained responsibility that begins with the first question about a manufacturer’s ownership structure, runs through product delivery and installation, and extends across every operational contract for a decade after the project enters service.

Developers who treat FEOC vetting as a one-time product screen carry risk they may not see until the IRS does. The ITC continues to reward storage developers generously, but only those who build the due diligence infrastructure to protect it at every stage, rather than just the first one.