Chinese BESS players still hope to supply US in FEOC policy environment

Under the new foreign entity of concern (FEOC) rules, US downstream projects or upstream manufacturing cannot benefit from material assistance from prohibited foreign entities (PFEs) above certain thresholds, if they want to receive tax credit support.

China is among the countries on a list that includes Russia, Iran and North Korea. The latter three are already largely cut off from accessing the US market.

More pertinently, China’s dominant position of involvement in almost every aspect of the supply chain bar software—from which it is already prohibited—means the question of what happens next realistically only applies to China.

At this year’s RE+ solar PV, BESS and EV trade show last week in Las Vegas, ESN Premium was briefed behind the scenes by representatives of Chinese companies and discussed the situation further with analysts and developers.

In Energy-Storage.news’ coverage of the show last week, we reported on the emphasis on domestically made products for the US market, evident from US-headquartered companies like Fluence and South Korean players like Samsung SDI. This time out, we ask: what’s next for China’s incumbent suppliers?  

The Chinese company representatives we spoke to preferred to do so on condition of not being named or directly quoted for this article, as this would require a longer lead time to clear from their head offices.

FEOC ‘will definitely have a big impact on energy storage’

“Storage can keep tax credits until 2033 at the full rate, although there are some caveats around new restrictions on the prohibited foreign entities, namely around material assistance from Chinese companies or working with China,” Isshu Kikuma, energy storage analyst at BloombergNEF (BNEF), told ESN Premium.

The restrictions on material assistance from PFEs apply to everything from materials to finished products, investment and even service agreements for operations and maintenance (O&M). That makes it a big challenge for the industry, Kikuma said.

“Basically, three-quarters of the import value of lithium-ion batteries in the US comes from China. Having that restriction for projects starting after 2025, when it comes to the construction year, will definitely have a big impact on energy storage,” Kikuma added.

FEOC thresholds are 55% for projects beginning in construction in 2026 and go up to 75% for projects starting after 2029.

It is important how ‘in-construction’ rules are defined. They refer to the date when either physical work began or 5% of capex spend was incurred. Again, solar and wind lost this 5% rule, whereas storage and other technologies retain it, explained BNEF policy expert Derrick Flakoll.

“The FEOC rule is obviously still an issue, but if you can begin construction on your project before the end of this year, you don’t have to worry about that,” Flakoll said.

Safe Harbour represents immediate opportunity

In other words, projects in the pipeline that are already advanced enough can carry on as before. This Safe Harbour status is thought to apply to a significant capacity of supply deals signed by Chinese players.

A member of US-based senior management from one Chinese vertically integrated BESS technology provider told ESN Premium that it has signed contracts on Safe Harboured projects for completion over the next two to three years, totalling around 10GWh.

Flakoll said that rules still need some final clarification from the Trump administration, but in all, the OBBBA’s final passing into law will likely spur activity for projects that can begin construction as soon as possible.

Kikuma said that, based on the law’s language, the US will be a “difficult market” for Chinese players going forward, but Safe Harbour represents a significant potential “last-minute opportunity.”

Players talk up chances of overcoming ‘very difficult’ situation

Another representative of a Chinese company ESN Premium spoke to, which is involved in system integration but not battery cell manufacturing, said that while it had yet to secure a definitive roadmap to compliance with non-FEOC rules, “there was no doubt” that it would do so.

Perhaps the cell and non-cell question is pertinent: lithium cells still comprise the most significant part of a BESS project’s Capex. Therefore, compliance with some Chinese equipment may be possible, but compliance using all-Chinese-made cells is challenging.

Following industry announcements throughout this year, it seems Chinese companies are also chasing non-US markets like Europe and the Middle East harder than ever before, perhaps to de-risk exposure to US policy, including FEOC and import tariffs.

Nonetheless, the companies we speak with appear determined to meet eligibility criteria somehow, even if those plans themselves are not fully formed.

When asked if corporate restructuring on the part of Chinese players could help them achieve this goal, BNEF’s Derrick Flajkoll said it is a “very difficult situation for them to figure out.”

“In terms of corporate structure and debt, there’s a series of very complicated, overlapping tests that mean you would have to go through a very tough obstacle course to be compliant and claim tax credits,” Flakoll said.

“You would have to reduce Chinese ownership share, which includes not just the share from the government, but the share from any Chinese citizens who are not also US permanent residents or citizens. You also have to make sure your debt is structured properly so you haven’t issued 15% or more of it to Chinese citizens or entities.

“That said, theoretically speaking, you could perhaps arrive at a certain small enough collective Chinese ownership share that a joint venture (JV) would qualify. However, it’s then on a facility-by-facility level, and is fairly likely to get hit by prohibitions either related to supply chains or related to intellectual property, EPC and other service contracts.”

It would take what the policy analyst called a “very thorough scrub” to be compliant, while compliance for the 45X manufacturing tax credit is determined yearly, based on when a component is sold.

“It is theoretically possible that they could go from non-compliance to compliance, or vice versa, but keep in mind, we have a fairly short window on these remaining tax credits. They start phasing out in the early 2030s and by that point, that’s only a little bit of your amortisation of your factory that’s going to cover,” Flakoll said.

“So, it’s a difficult situation for them to figure out. I have no doubt that some of them are trying, but it’s tough, and you can imagine why some of them might be looking to sell to other players for that reason.”

One workaround beyond Safe Harbour that a Chinese company we spoke to was considering is the establishment of manufacturing facilities outside China, such as in Southeast Asia or the US itself.

ITC: Not the only game in town?

There are reasons why China’s position in the battery storage supply is so dominant.

Chief among them is that China can deliver much cheaper products, partly through technology innovation and largely through the sheer scale of manufacturing that its companies have often achieved.

Indeed, our contact at the vertically integrated Chinese BESS manufacturer tells us that it hopes to sell products into the US for projects that don’t have any ITC strings attached.

This may be especially true for large projects like data centres, which have an economic imperative to come online quickly and, therefore, have less cost-sensitive developers.

Kikuma said his team at BNEF are currently checking this, although he has some doubts.

“If their products are cheap enough, maybe their projects don’t need investment tax credits to be economically cost-competitive, so possibly there might be opportunities for non-ITC projects,” he said.

Kikuma said going the non-ITC route sounds like a disadvantage. Still, his colleague Flakoll added that there may be a “wedge” of projects in the market that turn to unsubsidised Chinese supply chains, rather than as a mainstream option.

“Isshu did some modelling, and basically the projected US storage build in 2035 can be almost, but not quite, met by production from Southeast Asia to South Korea and the US combined. There’s a little wedge there that needs to be filled by somebody, and the Chinese manufacturers have the expertise,” he said.

“The costs are going to keep declining. They have the scale. They’re locked in fairly deadly competition with each other that none of them wants to lose. They want access to a valuable market like the US.”