Grants and tax credits, who doesn’t love them? The Bipartisan Infrastructure Law (BIL) is full of them, and, recent Department of Energy (DOE) Notification of a Proposed Interpretive Rule provides guidance on who will get to benefit from those grants and tax credits. The BIL is a historic investment in U.S. infrastructure, the breadth of which is beyond the scope of this blog. However, thankfully, the DOE Proposed Rule focuses on batteries.

So we will touch on aspects of the BIL, but zoom in on the DOE Proposed Rule and how it impacts the battery industry and the electric vehicle (EV) industry.

The BIL and the DOE Rule

The larger program, the BIL, provides $6 billion to fund the DOE’s “BIL section 40207 Battery Materials Processing and Battery Manufacturing and Recycling Grants Program” (but we can just call it the “Battery Grants Program”).

The narrower DOE Proposed Rule explains how the DOE will prioritize the Battery Grants Program grants and also, through Internal Revenue Code cross-reference, who may receive tax credits. Critically, the DOE Proposed Rule also explains how companies using materials from “foreign entities of concern” (FEOC) will be deprioritized, as well as which foreign entities will be considered FEOCs.

Some of the primary goals of the BIL are to invest in the U.S. battery supply chain and transition the U.S. to EVs. To further the investment goal, the Battery Grants Program focuses primarily on “advanced batteries,” which are batteries used in the electric grid and EVs.

The Grants and Credits

The Battery Grants Program requires the DOE to prioritize material processing grant applicants and manufacturing grant applicants that do not use battery materials from FEOCs. The Program requires the DOE to prioritize recycling grant applicants who will not export to FEOCs. Further, the proposed rule cross-references the Internal Revenue Code to allow EV manufacturers to receive a tax credit when they use batteries in their EVs that do not contain minerals from FEOCs.

Foreign Entities of Concern

Given that so much money can hinge on whether or not a company sources batteries or battery materials from an FEOC, the DOE has used the Proposed Rule to provide clarity to the statutory definition of FEOC. But first, let’s start with what is already clear in the statute. The FEOC definition covers any entities designated as foreign terrorist organizations by the Secretary of State; it covers any entity on OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List); and it covers any entity alleged and convicted by the Attorney General to have been involved in illegal activities like espionage or arms exports. The Secretary of Energy also has the ability to designate an entity as an FEOC when it is determined to be “engaged in unauthorized conduct that is detrimental to the national security or foreign policy of the United States.” After these definitions, the BIL resolution is a bit softer, but the DOE Proposed Rule gives us a better picture of what will be considered an FEOC.

The key area that DOE aims to clarify is the relationship a foreign entity must have with any “covered nation” to be considered an FEOC. The statutory definition states that an FEOC is any foreign entity that is “owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation.” While the covered nations are clearly defined as the People’s Republic of China (PRC), the Russian Federation, the Democratic People’s Republic of North Korea, and the Islamic Republic of Iran, little else is as defined. The statute does not, for example, provide any threshold to determine if an entity is “owned” or “controlled” by these countries, but the DOE Proposed Rule fills those gaps.

Foreign Entity

The DOE’s definition of the most basic term is one of the most expansive definitions of “foreign entity” in recent years. In one regard, it aligns with the Department of Commerce definition for certain programs related to semiconductors: The DOE’s definition of foreign entity includes foreign governments, individuals who are not U.S. citizens or permanent residents, and business entities headquartered or incorporated outside the U.S. But where the DOE definition goes a step further, it also covers entities organized under the laws of the U.S. that are subject to ownership, control, or direction of another foreign entity.

Government of a Foreign Country

The interpretation of “government of a foreign country” combines elements of the definition of “foreign government” from the Committee on Foreign Investment in the United States (CFIUS) and elements from the Department of Defense’s definition of “foreign interest” from its National Industrial Security Program Operating Manual (NISPOM). Pulling from CFIUS, the DOE definition includes national and subnational governments and their agencies or instrumentalities. This part of the definition is there to include all levels of a country’s government as well as entities where the ownership may be unclear. The DOE definition then draws on NISPOM by including dominant or ruling political parties and current or former senior foreign political figures and their immediate families. This portion of the definition recognizes that officials may leave government positions or work through family members to conceal their influence.

Subject to the Jurisdiction

The DOE definition of “subject to the jurisdiction” includes when foreign entities are incorporated, domiciled, or headquartered in a covered nation, but also includes when the foreign entity engages in the battery supply chain within a covered nation.[1] That industry recognizes both the obvious question of jurisdiction and the more nuanced factors related to the battery industry. Of course, a company that is incorporated or headquartered in a country will be subject to the jurisdiction. But also, the rule recognizes that many parts of the battery supply chain take place in covered countries where influence and control can be exercised, regardless of the legal structure of the entity.

Owned by, Controlled by, or Subject to the Direction of

Finally, the DOE sets a 25% threshold in the definition of “owned by, controlled by, or subject to the direction of.” This threshold is analogous to the thresholds we see in the International Traffic in Arms Regulations (ITAR), FinCEN’s Bank Secrecy Act (BSA) private banking regulations, and the Commerce Department’s implementation of CHIPS Act rules. Further, the DOE definition also covers instances where an entity has entered into a licensing arrangement or other contract with another entity that amounts to a conferral of control. The DOE recognizes that this second half of the definition could amount to a much broader scope than the reality of most contract. In response, the DOE has created a safe harbor for evaluating where an entity can demonstrate that it has reserved certain rights to prove there is not “effective control.”

Conclusion

The definitions here are clear, and they are broad. They are aimed at accomplishing the U.S. government’s policy goal of reducing United States reliance on covered nations for its battery supply chain. In light of the fact that DOE requested comment on its interpretation of “controlled by,” it is possible we will see some changes in that section of the definitions, but the definitions are likely to remain expansive. DOE is also considering whether to provide entities with the opportunity to voluntarily request a review of contracts and licensing arrangements, which may provide a bit more certainty for industry players.

In any case, we will remain on the lookout for updates and changes and will, of course, faithfully report what we learn here.

FOOTNOTES

[1] Engagement can range from “the extraction, processing, or recycling of critical minerals” to the “manufacturing or assembly of battery components, or the processing of battery materials.”