FEOC Could Broaden for Inflation Reduction Act
TL/DR –
The energy industry, especially renewables, battery storage, and electric mobility sectors, may lose Inflation Reduction Act (IRA) tax benefits due to their reliance on China for equipment and components needed for energy storage systems. Entities classified as a Foreign Entity of Concern (FEOC), which includes entities/individuals from China, Russia, North Korea, and Iran, are disqualified from certain tax benefits under the IRA. Proposed legislation aims to expand the definition of FEOC to include entities controlled by one or more countries of concern, thus closing existing loopholes and potentially impacting large-scale battery projects, particularly as additional China tariffs are scheduled to come into effect from 2026.
Energy Industry Faces Potential Disqualification for IRA Tax Benefits
The energy industry, especially renewables, battery storage, and electric mobility sectors, might lose Inflation Reduction Act (IRA) tax benefits because of their dependence on China for equipment and components. Entities deemed a Foreign Entity of Concern (FEOC) cannot avail their electric vehicle customers of up to $7,500 tax credit under Section 30D of the IRA, nor access grants for battery manufacturing under section 18741 of the Bipartisan Infrastructure Law (BIL).
Understanding FEOC and How It Affects the Energy Industry
FEOC include entities from China, Russia, North Korea, Iran, or any organization controlled by these countries. Entities where 25% or more of the entity’s board seats, voting rights, or equity interest are held by a foreign entity are considered an FEOC. Companies with Chinese ownership can avoid the FEOC designation if they form a U.S. subsidiary to conduct activities eligible for IRA benefits.
Efforts to Expand the Definition of FEOC
Proposed legislation, the NO GOTION Act, intends to broaden the definition of FEOC. It aims to include “any entity created or organized in, or controlled by, one or more countries of concern.” This is in line with discussions to extend the 2017 Tax Cuts and Jobs Act and retain IRA tax benefits.
The Impact of FEOC Rules on the Energy Industry
The FEOC rules influence supply-demand dynamics and prices of energy-storage cells. There is a potential effect on supply if entities lose out on tax and credit advantages. Congressional members hope to avert the IRA subsidizing the use of a China supply chain.
Future Implications of the Expanding FEOC
Expansion of FEOC might impact large-scale battery projects, especially from 2026 when additional China tariffs come into effect. Energy companies are monitoring these developments and are seeking to identify equipment and component suppliers outside of China. Extending the IRA tax benefits could further incentivize the development of a domestic supply chain.
Advanced Energy Projects and the Impact on Domestic Development
The Production Tax Credit (PTC) provides $35/kWh for domestically produced battery cells and a 10% production cost credit for mining critical minerals. The Investment Tax Credit (ITC) offers tax credits up to 30% of capital investment for advanced energy projects. Both do not currently have a FEOC disqualification clause and help incentivize domestic development.
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