Overview: Why Notice 2026-15 Matters
Foreign Entity of Concern (FEOC) compliance now determines whether a battery storage project secures its federal tax credit.
On February 12, 2026, Treasury and the IRS issued Notice 2026-15, providing operational guidance for implementing the Foreign Entity of Concern provisions enacted under the One Big, Beautiful Bill Act. For teams procuring Battery Energy Storage Systems (BESS) in the United States, this notice moves FEOC from conceptual risk to measurable compliance.
The guidance introduces detailed mechanics for calculating the Material Assistance Cost Ratio, or MACR. It clarifies how projects must evaluate supply chain exposure, how safe harbor tables may be used, and how compliance must be documented.
For the first time, Treasury provides defined pathways for proving that a project does not receive material assistance from a prohibited foreign entity.
For developers and asset owners, FEOC compliance is now a core bankability issue.
What Are FEOC & PFE Rules?
The FEOC provisions were established to prevent certain foreign entities from materially supporting U.S. clean energy projects that claim federal tax incentives.
In Treasury and IRS guidance, FEOC is often discussed through the term Prohibited Foreign Entity (PFE). FEOC is the broader statutory concept, while PFE is the compliance label used in the rules to identify the entities whose involvement can trigger a material assistance issue.
Under the updated framework, a project may lose eligibility for credits if it receives “material assistance” from a prohibited foreign entity. This applies to:
- §48E Clean Electricity Investment Tax Credit
- §45Y Clean Electricity Production Tax Credit
- Certain §45X Advanced Manufacturing credits
In simple terms, if too much of a project’s cost is attributable to PFE-produced or PFE-sourced inputs, the tax credit can be disallowed.
The guidance clarifies how material assistance must be calculated under the existing statute.
The key metric is the Clean Electricity MACR, which measures the share of total direct project costs not attributable to prohibited foreign entity inputs.
If the ratio falls below the required threshold for the project’s construction start year, the credit is at risk.
What February’s Notice 2026-15 Changes
Notice 2026-15 establishes how projects demonstrate compliance.
The guidance introduces several important clarifications:
- Formal implementation of Clean Electricity MACR mechanics, including calculation structure and cost attribution rules
- Integration of the 2023-2025 Safe Harbor Tables into the FEOC framework for standardized cost allocation
- Identification Safe Harbor rules governing how PFE exposure is determined
- Cost Percentage Safe Harbor methodology using assigned cost allocations
- Certification Safe Harbor parameters defining acceptable supplier attestations
- Clear distinction between PFE-produced and PFE-sourced inputs for attribution purposes
- Look-through treatment for resellers to prevent indirect PFE exposure
- Timing rules tied to “specified periods” when sourcing changes during a tax year
For developers, this means FEOC compliance must now be modeled and documented. It is no longer sufficient to rely on high-level sourcing assurances.
| Before Feb 12 | After Notice 2026-15 |
|---|---|
| FEOC defined conceptually | MACR calculation mechanics defined |
| Limited calculation guidance | Safe harbor and actual-cost methods clarified |
| General sourcing awareness | Formal documentation framework required |
BESS Specific Implications
Battery Energy Storage Systems present unique challenges under this framework.
Containerized systems combine multiple manufactured products, including battery modules, enclosures, thermal systems, inverter assemblies, and electronic controls. Each of these can introduce PFE exposure at different points in the supply chain.
Printed circuit board assemblies in inverters are an increasing area of focus due to upstream sourcing complexity. Battery modules may also carry separate compliance implications under §45X at the manufacturing level.
Most importantly, the assigned cost tables used in the safe harbor framework allocate significant cost weight to battery cells in grid-scale systems. While manufacturer-specific percentages can vary, the IRS safe harbor tables assign 52% of total direct cost to cells in certain grid-scale configurations. That weighting means cell sourcing decisions can materially affect MACR outcomes.
Under Notice 2026-15, these exposures are now measurable and auditable.
Understanding the Material Assistance Cost Ratio (MACR)
The Material Assistance Cost Ratio is the mathematical test that determines FEOC compliance.
It applies at the facility or energy storage technology level for §48E and §45Y projects. A separate Eligible Component MACR may apply under §45X for manufacturers.
The calculation follows five steps:
- Identify system components using applicable safe harbor tables or actual cost accounting.
- Determine which components are PFE-produced or PFE-sourced.
- Calculate total direct costs, either using assigned cost percentages or actual costs.
- Subtract the PFE-attributable portion.
- Compare the resulting ratio to the applicable annual threshold.
MACR = (Total Direct Cost – PFE Direct Cost) ÷ Total Direct Cost
For projects beginning construction in 2026, the minimum Clean Electricity MACR is 55%. The threshold increases by 5% annually until reaching 75% in 2030 and beyond.
This annual escalation increases supply chain discipline over time.
Safe Harbor vs. Actual-Cost MACR
Notice 2026-15 outlines two primary approaches to calculating MACR. Importantly, one methodology must be used consistently within a given calculation. Assigned and actual cost percentages should not be mixed.
Upstream sourcing and cost attribution determine MACR outcomes, not where the system is assembled.
| Assigned Cost Safe Harbor | Actual-Cost MACR |
|---|---|
| Uses IRS percentages | Uses real cost data |
| Simplified modeling | More precise modeling |
| Strong audit defensibility | Higher documentation burden |
| Standardized assumptions | Reflects product-specific sourcing |
Assigned Cost Percentage Safe Harbor
This method uses Treasury’s assigned cost percentages from the 2023-2025 Safe Harbor Tables. Developers map their BESS components to standardized APC and MPC categories, then apply the assigned percentages to determine the non-PFE share.
This approach offers consistency and audit defensibility. It does not require granular cost accounting. However, it reflects standardized assumptions rather than manufacturer-specific cost structures.
Actual-Cost MACR
Under this method, developers use real direct costs attributable to the project. PFE-attributable costs are calculated using actual supplier pricing and documentation.
This approach can more precisely reflect a given system’s sourcing profile. It also requires stronger documentation, internal controls, and supplier traceability.
Timing and Specified Periods
The guidance also clarifies that sourcing changes during a tax year may require MACR to be calculated across specified periods.
If a supplier changes origin mid-procurement cycle, documentation must reflect that shift.
How Developers, Asset Owners, and Procurement Teams Can Ensure FEOC Compliance
For developers and EPC firms, compliance must be integrated into procurement strategy.
1. Component-Level Supply Chain Mapping
Start by mapping each BESS component to the APC and MPC structure used in Treasury’s tables. This typically includes:
- Battery cells and modules
- Enclosures and container structures
- Battery management systems
- Thermal management systems
- Inverter assemblies and PCBAs
This mapping forms the foundation of MACR modeling.
2. Structured Supplier Certifications
Notice 2026-15 allows reliance on certification safe harbor provisions when structured properly.
Procurement contracts should require:
- Written PFE production attestations
- Confirmation of constituent material sourcing
- Ongoing update obligations
- Clear documentation retention
Certifications should be supported by reasonable diligence. If the information is inaccurate, safe harbor reliance may be jeopardized.
3. MACR Modeling Discipline
MACR calculations should be modeled before final procurement decisions.
Developers should:
- Run preliminary MACR scenarios using assigned cost percentages
- Stress test sourcing assumptions
- Evaluate exposure under rising annual thresholds
- Document methodology clearly
Waiting until project financing closes to evaluate MACR risk increases financial exposure.
4. Align FEOC and Domestic Content Analyses
Domestic Content bonus eligibility and FEOC compliance are separate tests.
A project may satisfy Domestic Content requirements yet fail MACR thresholds if PFE exposure remains too high. Both analyses should be performed in parallel.
5. Engage Tax Counsel Early
Notice 2026-15 introduces interpretive nuances that can affect project economics.
Engaging tax counsel during procurement, not after construction begins, reduces risk and increases clarity.
How EticaAG Is Ensuring FEOC Compliance in BESS Projects
As regulatory expectations evolve, manufacturers play a central role in supporting developer compliance.
EticaAG approaches FEOC compliance through four primary pillars.
Strategic Sourcing
Supply chain decisions are structured with awareness of PFE exposure and evolving MACR thresholds. Multi-region sourcing strategies and supplier transparency are prioritized to support compliance modeling.
Vertical System Integration
Control over module integration, battery management systems, and containerized architecture increases traceability. Greater engineering visibility supports cleaner mapping to Treasury APC and MPC classifications.
Procurement Documentation
Structured supplier certifications, traceability frameworks, and documentation packages are being developed to support both safe harbor and actual-cost MACR approaches.
U.S. Manufacturing Strategy
EticaAG’s U.S. manufacturing strategy strengthens supply chain transparency and supports long-term compliance as MACR thresholds scale upward through 2030. Domestic manufacturing enhances traceability, documentation discipline, and alignment with evolving federal requirements.
EticaAG helps developers protect credit eligibility and preserve the integrity of their financial models as FEOC requirements grow more rigorous.
Compliance Is Key
Battery Energy Storage Systems sit at the center of the energy transition. FEOC compliance now directly influences whether those projects remain bankable.
Financial Implications of Non-Compliance
If a project does not satisfy the applicable MACR threshold, the financial ramifications extend across tax equity, debt, and operating agreements. It can result in:
- Loss of 30% or more of Investment Tax Credit value
- Reduced or eliminated Production Tax Credit revenue
- Strained debt structures
- Increased lender scrutiny
- Insurance underwriting concerns
- Disruption of Energy-as-a-Service agreements
Tax equity providers are increasingly reviewing supply chain documentation as part of diligence. FEOC modeling is becoming part of financial review.
Compliance is now financial risk management.
What to Watch For
Developers and procurement teams should monitor:
- Proposed regulations following interim guidance
- Potential updates to safe harbor tables
- Annual increases in MACR thresholds
- Broader supply chain scrutiny across clean energy sectors
As thresholds rise from 55% in 2026 to 75% in 2030 and beyond, sourcing discipline will become more stringent.
Projects that proactively integrate MACR modeling into procurement will be better positioned.
Conclusion
Battery Energy Storage Systems are essential infrastructure for a resilient grid. Regulatory frameworks will continue to evolve, but the direction is clear.
Developers need storage partners that structure supply chains intentionally, provide documentation transparency, maintain engineering control, and protect financial models.
EticaAG’s system architecture, sourcing strategy, and immersion-based thermal management platform are designed to support compliant, high-performance battery energy storage deployments across the United States.
The regulatory landscape may be tightening. With the right approach, compliance can be managed with clarity and confidence.
