One Substantial Beautiful Bill Act Creates Uncertainty for US Energy Storage

The US energy storage industry, which has seen substantial growth fueled by federal tax incentives under the Inflation Reduction Act of 2022 (IRA), now faces new challenges due to the One Big Beautiful Bill Act (OBBBA) enacted on July 4, 2025. Whereas the OBBBA spares energy storage tax credits from the accelerated sunsetting applied to wind and solar, it introduces restrictions related to “foreign entities of concern” (FEOC) that could significantly impact the industry.

Impact of the OBBBA on Energy Storage

The OBBBA introduces new limitations on claiming Investment Tax Credits (ITCs) and 45X Credits (advanced manufacturing production tax credits) based on the involvement of a “prohibited foreign entity” (PFE). These restrictions stem from concerns about reliance on supply chains dominated by entities from China and other nations deemed to be of concern. The industry has been focusing on projects exempt from the most restrictive rules, but as those projects are utilized, uncertainty will increase regarding the financing and sale of tax credits until further clarification is provided.

Key Provisions of the OBBBA’s FEOC Restrictions

The IRA initially established ITCs under Sections 48 and 48E of the Internal Revenue Code for standalone energy storage facilities, and the 45X Credits for US production of clean tech equipment, including energy storage components. The OBBBA adds complexity with six categories of restrictions based on relationships to “Covered Nations” – China, Russia, North Korea, and Iran:

• Covered Nation Status: Entities organized under the laws of, or with a principal place of business in, a Covered Nation are considered PFEs and are ineligible for ITCs and 45X Credits.
• Equity Ownership: Ownership by entities or individuals from Covered Nations exceeding 25% (single entity) or 40% (multiple entities/individuals) can designate a company as a PFE.
• Debt Ownership: Issuance of 15% or more of a company’s debt to entities or individuals from Covered Nations can similarly result in PFE status.
• “Covered Officer” Appointment Rights: The ability of a Covered Nation entity or individual to appoint a company’s directors or C-suite executives can lead to PFE designation.
• “Effective Control” Contractual Rights: Contractual relationships granting a Covered Nation entity or individual significant authority over a project or product can trigger PFE status.
• “Material Assistance” Procurement-Based Limitation: If a project or product contains an excessive amount of materials sourced from PFEs, it can become ineligible for ITCs and 45X Credits. This limitation is particularly stringent for the energy storage industry.

Market Reaction and Challenges

Companies began preparing for these FEOC limitations towards the end of 2025, and the challenges are significant. Verifying non-PFE status, particularly regarding equity and debt ownership, has proven difficult, even for public companies. Some companies have implemented ownership restrictions and buyback mechanisms in securities issuances, but their effectiveness remains uncertain. The industry is urging the government for clarifying guidance and safe harbor provisions.

The battery energy storage industry is particularly vulnerable due to its historical reliance on China for battery supply chain dominance. Preliminary guidance released by the IRS and Treasury in February 2026 addressed the material assistance limitation, clarifying how to use legacy domestic content credit “adder” tables. However, critical aspects of the material assistance limitation still require further clarification.

Contractual negotiations surrounding the allocation of risk and FEOC status certification have become complex. Companies are increasingly working with third-party advisors to document compliance for financing and insurance purposes.

A Path Forward

Despite the challenges, the US energy storage industry continues to progress, benefiting from the longer survival of the ITC for energy storage compared to wind and solar. Some battery storage equipment manufacturers are beginning to certify their non-PFE status to assist customers with material assistance compliance. Standardized contracting and certification practices are expected to evolve as additional guidance is released by the IRS and Treasury in 2026 and beyond, which will be critical for unlocking tax credit benefits.