Impacts of IRA's new FEOC rules on global energy storage supply chain

The Biden administration on December 1, 2023 issued proposed guidance on the clean vehicle provisions of the Inflation Reduction Act of 2022, providing a statuary definition of “foreign entity of concern” (FEOC), affecting the EV industry significantly. 

According to the stepped-up rule, batteries containing any critical minerals that were extracted, processed, or recycled by an FEOC will not be eligible for full tax credits, with the covered nations of FEOC being defined as China, Russia, North Korea, and Iran. This measure deals a blow to China, the cell manufacturing power. Some Tesla EVs comprising CATL batteries lost eligibility for the USD 7,500 tax credit starting January 1, 2024. The following paragraphs examine its impacts on Chinese businesses and the energy storage industry. 

Definition of “foreign entity of concern” (FEOC)

 

Define “FEOC”

To determine an FEOC, the guidelines consider not only shareholding but an entity’s share of board seats, voting right, or equity interests. The highest percentage shall prevail. 

As shown in the above table, parent and subsidiary companies incorporated or based in covered nations qualify as FEOCs. Holdings of the subsidiary are FEOCs if a) the subsidiary holds 50% or more of board seats, voting rights, or equity interest, b) the subsidiary holds 25-50% or more of board seats, voting rights, or equity interest, whilst the parent has more than 50% of control over the subsidiary. Holdings of the subsidiary are not FEOCs if the subsidiary holds less than 25% or more of board seats, voting rights, or equity interest. 
 

Impacts on the energy storage industry 

Whilst new FEOC guidelines impacted on the clean vehicle tax credit up to USD 7,500, undermining Chinese EVs’ advantage in the U.S., the 30% Investment Tax Credit (ITC) for energy storage systems (ESS) remains sound. Starting 2024, the credit is only applicable for buyers of EVs comprising batteries produced locally in the U.S., with liquid electrolyte, separator, battery cell, etc. being FEOC-compliant. Restrictions applied to critical minerals such as cathode electrode, anode electrode, copper foil and aluminum foil, etc. will take effect in 2025. Unspecified components during cell production are free from regulation. 

Also intact is the Production Tax Credit (PTC) for cells, including $35/kWh for cells, $10/kWh for battery packs, and 10% of critical mineral and material costs. 

The chart below compares production costs of China-made and U.S.-made cells. Grey areas indicate the coverage of IRA’s Advanced Manufacturing Production Tax Credit (45X MPTC). Overall, cell production costs will continue decreasing, though with limited room for further declines after 2024. Having been costing more than production in China, U.S.-made cells see production costs significantly reduced, especially during 2026 and 2027, thanks to IRA’s $35/kWh tax credit, which will potentially endow higher cost competitiveness to U.S. production. 

The FEOC rules affect supply-demand dynamics and prices of energy-storage cells as its impact on the Clean Vehicle Tax Credit wavers the willingness of overseas cell manufacturers to set up factories in the U.S. since EVs account for 80% of the nation’s cell demand. 

China-made, U.S.-made cell prices before and after IRA’s 45X MPTC
 

FEOC compliance of Chinese giants 

The table below outlines overseas investments of leading Chinese manufacturers, such as CATL, EVE Energy, and Gotion High-tech. All three have co-investment plans with U.S. enterprises. 

CATL announced a plan to build a battery plant in Michigan with Ford Motor last February. CATL will license its technology to Ford. For the co-established facility to be defined as a non-FEOC, Ford must operate, maintain, and repair manufacturing equipment independently while attesting to U.S. House of Representatives committees that CATL holds less than 25% of control over the facility. 

EVE Energy in September 2023 established joint ventures with Electrified Power, Daimler Truck, and Paccar. Each of the three U.S. companies holds 30% of shares. EVE Energy also holds 10%, lower than the 25% benchmark, thus not classified as an FEOC. 

Gotion High-Tech announced in September 2023 the establishment of a battery production plant in Illinois. Volkswagen Group China, a major shareholder of Gotion, holds 24.7% of the plant. While other shareholders each hold less than 10%, most of them are Chinese enterprises or individuals. Therefore, the plant is likely to qualify as an FEOC. 

From a demand point of view, the U.S. raised the threshold of acquiring the Clean Vehicle Tax Credit. From a supply point of view, the U.S. can hardly wean itself off Chinese cells despite the 45X MPTC, given technology and cost advantages of the latter. Even with production expansions in the U.S. going well, the U.S. will not catch up with China until 2026. 

Production expansions of major Chinese manufacturers in the U.S.