While the industry highly anticipated more information about the Uyghur Forced Labor Prevention Act (UFLPA), Inflation Reduction Act (IRA) and Auxin trade case, many questions remain, even after recent updates.
We have yet to see how things evolve. Still, with increasing solar demand and unclear supply, Anza urges customers to assess current and future needs now and build their procurement plans based on the level of risk and reward they’re willing to accept. Here’s a look at what we know now, what may be coming down the line, and how your company can make the best possible procurement decisions based on our current information.
What We Know
President Biden’s UFLPA went into effect in June of 2022 to restrict the import of goods from a specific region of China due to forced labor concerns. While fair labor standards are critical, the act is counterproductive to the IRA. The United States imported 89% of its solar modules in 2020, and China manufactures nearly all of the global polysilicon used to produce solar cells. While the IRA incentivizes solar development, the UFLPA restricts the solar supply chain needed to obtain modules. Since the UFLPA went into effect, U.S. Customs and Border Protection has seized about $806 million in imports. Solar modules with non-Chinese polysilicon are the only ones released so far.
Yet another trade issue was the U.S. Department of Commerce’s (DOC) investigation into whether cell and module suppliers from Cambodia, Malaysia, Thailand, and Vietnam were circumventing antidumping (AD) and countervailing duty (CVD) orders in response to U.S. solar panel manufacturer Auxin Solar’s petition.
In December of 2022, the DOC preliminarily determined that certain exports from Southeast Asia using Chinese wafers were indeed circumventing AD/CVD orders. To avoid AD/CVD tariff risk, you need to have non-Chinese wafers or four out of six non-Chinese components (i.e. silver paste, aluminum frames, glass, back sheets, ethylene vinyl acetate sheets, and junction boxes). So far, the DOC has found that Jinko, Hanwha (Qcells), and Boviet are not circumventing.
The DOC ordered Customs to suspend liquidation and collect cash deposits on imports subject to AD/CVD tariffs. This action also covers imports that entered after April 1, 2022 (and potentially as far back as November 4, 2021) to prevent stockpiling imported cells and modules. To avoid the collection of cash deposits, module importers and exporters must complete forms that the DOC has released.
Biden took executive action to pause these tariffs on modules from Cambodia, Malaysia, Thailand, and Vietnam until June 6, 2024. As it stands now, if you import modules from these countries before June 6th, 2024, and install them by the end of 2024, you will avoid AD/CVD-related tariffs.
A final important piece of solar policy was when President Biden signed the IRA into law in August of 2022. The U.S. Treasury and Energy Departments and the IRS released additional guidance on incentives for investment in underserved and hard-hit coal communities in February of 2023. However, a further definition of the 10% bonus adder for domestic content is what is on everyone’s mind.
We know that smaller companies with projects under 1MW are entitled to the complete 30% Solar Investment Tax Credit (ITC) and are exempt from domestic content requirements. Projects that are larger than 1MW, will receive a 6% base ITC. Then if they meet prevailing wage and apprenticeship rules, they can receive a 24% ITC adder (total of 30% ‘base’ ITC). The projects must meet the to-be-determined domestic content criteria to qualify for a 10% ITC adder in addition.
To qualify for the domestic content bonus, all steel or iron must be produced in the U.S. A “required percentage” of the facility’s total costs of manufactured products (including components) must be mined, produced, or manufactured in the U.S.
The “required percentage” of manufactured products starts at 40% for all projects beginning construction before 2025 and increases to:
• 45% for projects starting construction in 2025
• 50% for projects starting construction in 2026
• 55% for projects starting construction after 2026
What We’re Watching
The government is finalizing rules on what domestic content means and what components need to be manufactured in the U.S. to qualify. Will a module assembled in the U.S. without any American-made materials count—at least for the first year or two— toward the numerator for the 40% calculation? We will have to wait until May to find out. That said, working with a supplier shipping from the U.S. with a domestic factory will help mitigate risk.
Qcells (Hanwha) is currently the only manufacturer with vertically integrated U.S. materials from polysilicon cells up through module assembly. However, these modules will not be available until Q4 2024 and come at a premium. Without a strong U.S. supply chain, the only other choices for the next couple of years include modules that are assembled here. For example, Hyperion will have U.S.-assembled TOPCon modules ready for delivery by the end of 2023.
An exemption does apply to the domestic content provision if it would increase the cost of the system by more than 25% or if the domestic content is not produced in sufficient quantities or of satisfactory quality. Some developers may argue this position to achieve exemption from the domestic requirement. The Treasury Department is expected to make more rulings as laws are implemented in the first half of 2023. We’ll watch for additional clarity on IRA terms, including domestic content.
A final DOC determination on the Auxin trade case is also expected in May 2023. We’re continuing to watch for a possible congressional push to overturn Biden’s Presidential Proclamation, which would cut back time for the U.S. solar manufacturing industry to get its footing even further. We still await China’s response to the DOC’s preliminary determination. With regard to UFLPA, reports show that the Chinese government vehemently denies forced labor accusations. Additionally, China is considering restricting solar wafers, black silicon, and ingot casting technology. Such restrictions would further limit solar material supply.
Advice for Anza customers
Amid a quickly changing solar policy landscape, the Anza team recommends customers consider the following options:
• Buying now: If a project must be completed before the end of 2024 and domestic content is a priority, then U.S.-assembled modules are your only option. The Anza platform has multiple options for modules assembled in the U.S. and continually adds domestic content options as they’re available. There’s a possibility these modules could sell out or increase in pricing, so if you see something that may work for your project, you should purchase it now. The assurance that you’ll have them may be worth paying the extra storage costs to get modules in early. We can also leverage our strong supplier relationships to provide flexible shipping dates.
The Anza platform does not currently assign a dollar value to the 10% domestic content adder to any module unless it is 100% produced and manufactured in the U.S. (including polysilicon, wafers and cells). We instead allow our users to add this themselves in their own project cash flow model. If these modules qualify for the domestic content provision later, your project value will only increase. Some of the most compelling domestically manufactured modules available in the Anza platform utilize TOPCon technology, so even without an ITC domestic adder, these modules are very valuable.
• Choosing non-Chinese polysilicon: To date, only modules with non-Chinese sourced polysilicon have been released from UFLPA-related detention. We expect that modules with Chinese polysilicon will also avoid detention. For the time being, we recommend to clients that you secure modules with 100% non-Chinese polysilicon, though this may require a price premium, and in light of the DOC preliminary determination, selecting modules that use non-Chinese wafers and fewer Chinese components (silver paste, aluminum frames, glass, etc.) will also reduce AD/CVD risk.
Generally, you should aim to feel confident in your supplier’s plan to avoid tariffs before June 2024, especially if you want to receive deliveries between Q4 2023 and Q2 next year. Without exclusions in place, they could be subject to tariffs upon release in the event these modules were to undergo a U.S. Customs UFLPA investigation and detention. Purchasing modules from suppliers detained by the UFLPA and successfully released poses less risk as they have “cracked the code” and are likely to be able to import in the future.
• Reducing risk: Other ways developers and IPPs can further mitigate risk include:
- Third-party traceability audits: Suppliers that can produce third-party traceability audits will provide your best chance of avoiding UFLPA issues. You can ask your supplier if they have performed one internally or had one done by a third party (which you typically have to purchase). At the very least, knowing that the supplier had one done or would be willing to agree to any liability associated with unsatisfactory results is encouraging.
- Contracts: It’s also good practice to include the following terms in your contracts:
- Set limits on the time allotted to the supplier to make it through U.S. Customs detention. This avoids waiting in limbo for months or even a year and allows you to cancel the order with a deposit refund.
- Include language by which your supplier agrees that there is no forced labor, child labor, bribery or corruption in their company or throughout their supply chains.
- Leave yourself the option to cancel the contract and receive a refund of your deposit if you aren’t happy with the results of a supplier’s third-party traceability audits, factory audits or quality and assurance inspections.
- Counterparty risk:
- Negotiate contracts with lower initial deposits followed by a larger payment after delivery.
- Obtain project-level warranty insurance that Anza can facilitate to help shore up other concerns about a smaller, less reliable supplier.
- Require suppliers to provide corporate financials to evaluate how much risk they can absorb before shutting down or passing it to you.
- Purchase from a supplier with U.S. or European assets to ensure you’ll have legal recourse to any unplanned costs.
- Understand a supplier’s history of retrading (changing the price after it’s contracted) to know how a supplier meets or doesn’t meet their contractual obligations.
Our solar module procurement platform and expert team can help guide you through the qualitative and quantitative risks we’ve talked about here to achieve maximum project value. As always, we encourage our customers to use our platform to see their project-specific module options ranked by most financial value and then engage with our experts to evaluate project-specific qualitative risk further.