55%
For the energy storage project to commence in 2026, at least 55% of the direct costs must exclude PFE.
52%
Based on the Safe Harbor Form, the cost proportion of battery cells in grid-side energy storage systems
2036
The year when the tax credit for 48E energy storage investment was abolished
American battery energy storage developers are facing a trade-off between minimizing costs and complying with the new rules on tax credits. These rules restrict business dealings with prohibited foreign entities (PFE) or enterprises associated with four countries including China. The use of both PFE and non-PFE components can provide flexibility, but also comes with risks. Complete domestication of the supply chain can offer higher regulatory certainty, but comes at a higher cost; transactions with PFE-related entities have lower costs but higher compliance risks.
Starting from January 1, 2026, energy storage projects must meet the increasingly stringent requirements for the proportion of material assistance costs in order to be eligible for the 48E tax credit. This limits the degree of dependence of developers’ supply chains on PFE.
As long as the relevant threshold requirements are met, projects that use both PFE and non-PFE components can still receive tax credits. This provides flexibility in procurement, including the continued use of Chinese batteries, but also involves a trade-off between low cost and high policy risk. The procurement strategy is more dependent on the risk preferences of each developer.
Cost, policy and technical risks are closely related. The PFE system usually has a lower cost, but it has higher risks in terms of tax credit eligibility, tariffs and regulatory changes. A fully domestic system can reduce policy risks, but due to higher production costs and limited scale, it is more expensive. A hybrid strategy can serve as a compromise solution, but it may increase complexity.
The main regulatory uncertainties remain unresolved, particularly regarding debt, equity ownership, and the definition of “actual control”. Moreover, the future anti-avoidance rules and the strictness of compliance are still unclear. This poses risks to the project architecture design. The responsibility for verifying that the supplier’s “PFE compliance” statement is true lies with the project owner.