Currents Podcast Episode 163

Andy Klump, CEO of Clean Energy Associates, joins Currents to discuss solar supply chain traceability. We get into the concerns over polysilicon that many financiers and developers have due to their ESG-minded stakeholders, the work that CEA has been doing on supply chain traceability, its expansion into downstream engineering services work in the US, the challenges that Klump sees as more multinational corporations and financial institutions shift to renewables and more.

Podcast Transcript:

Todd Alexander:

Welcome to Currents, a Norton Rose Fulbright Podcast. I’m Todd Alexander, your host, and a partner at Norton Rose Fulbright projects group. Today, we welcome back Andy Klump, and he's the CEO of Clean Energy Associates. He's here to discuss the increasing focus by financiers and sponsors on the sourcing of solar panels from parts of China and elsewhere, which is a very topical thing that even us in the projects group at Norton Rose, where we're constantly comparing notes to see what the latest and greatest technology is. So Andy, welcome back to the podcast and hopefully you can enlighten us here. 

Andy Klump:

Hi Todd, excellent! Thanks for having me back in the podcast and I'm very happy to talk with you and your listeners. And I think judging from the interest in the market on the supply chain topics, I'm sure we're going to be talking again in the future. 

Todd Alexander:

Yeah, I'm sure. So, let's first, for those who are not following it as closely as the two of us are, describe the big picture, what the concerns are, and what it is that people are trying to measure. 

Andy Klump:

Certainly. So, first and foremost, just a little background once again. Clean Energy Associates is a technical advisory company that I founded 13 years ago in 2008. And so we've been providing comprehensive engineering solutions for both the solar and storage industries since then, but, we do a lot of work around supply chain and quality assurance on the upstream side, but we also have a downstream team in the US, and the broader concern with the market right now is that there are a number of products that are being manufactured in the crystal and solar supply chain in Xinjiang that makes up roughly 50% of the overall market.

And there's also some concerns about labor practices there that would lead many folks with very strict ESG standards to not want to buy from Xinjiang-based polysilicon manufacturers. So we've been following this topic for the last year plus, we started getting inquiries from our clients in mid-2020, and so we have a strong team with actual deep expertise throughout the whole solar supply chain, so we've been working on a number of engagements to help support the traceability of the solar supply chain for those who are interested in this topic.

Todd Alexander:

First, what type of people are coming to you asking you to do this kind of tracing?

Andy Klump:

So first of all, our clients consist mostly of downstream entities. So once again, we are a supplier agnostic platform, so we don't work for any of the manufacturers and our core clients are effectively downstream developers; IPPs, EPCs. We also work with global fortune 500 companies and other corporates who are buying on these projects. But we also work with financiers who are engaged and are even providing equity or debt to these projects as well as the tax equity side. So those are our sets of clients, and I'll also comment that we work with clients around the globe. We actually have had either clients or client projects in 62 countries. So we actually have a team of 145 professionals in 13 countries. But our dominant market is the US - that’s where we have 40 plus professionals. 

So all the downstream companies are really approaching us and asking us about supply chain traceability, and they want to understand the providence of the polysilicon and the crystalline products that they're buying. So, this is kind of where things are coming about. I'll say the largest folks interested in this tend to be those with a strong ESG commitment, and they want to know the S in the ESG is still compliant with overall global standards. So, I think what's really triggered a lot of interest in the market more recently is the legislation that's in Congress that likely has bi-partisan support and will be adopted, and so we've really been able to work with a number of these downstream companies and help to work with the suppliers of their choosing and make sure that their products are made with with international standards according to what the market wants.

Todd Alexander:

How do you actually go about doing this kind of tracing?

Andy Klump:

So I guess, first of all, I'd say there's really a two part process. So first of all, all suppliers who are worth their salt, and I would just definitely say that there's a Tier 1 list on BNEF that many have been looking at, and there are several dozen players. But understand, I think within that sub-segment, there's a number of manufacturers that are larger and more well-established. They have clearer advanced technology practices internally and they've adopted MES, which stands for Manufacturing Execution System, and that traces all their sub-components throughout the value chain. So many of these folks are vertically integrated in getting to wavering to cells and modules. So they're directly sourcing polysilicon from many manufacturers throughout China or globally. And so consequently, the manufacturers themselves, need to have a system in place. 

So the first piece of work that we do is to go into a supplier and actually validate that these systems are operational. They do have a clear traceability program in place, and that's something that's core to the work we're doing right now. And secondarily, we also have a practice which we've been actually deploying for the last 13 years since we've been in business, which is really having someone on the ground in the manufacturing facilities at the time that our client's product is being manufactured. Historically focused on more areas of cells and modules, particularly, we saw our practice grow quite substantially when a lot of the trade issues were happening between the US and China. So dating back to 2013 and 14, we started to see interest in manufacturing facilities in Southeast Asia. So our teams are deployed at dozens of factories throughout Asia, doing this work, and just checking and validating module quality. 

And now we're getting the request to go upstream. And I'll say, this is also just one of the benefits of having a large team with over 115 inspectors and engineers in-house. We have folks around the world, including the US, who are actually looking at US facilities as well. So, among that group in the US, we have three PhDs, all with manufacturing expertise and experience working for polysilicon, and getting waver cell and module manufacturers. So we have a really strong depth throughout the supply chain. And I think the additional point I'll just add, if you saw the news from SEIA, SEIA was selected as one of the CF partners to help identify the proper process for a protocol in place for the industry. So that industry of protocols has been released, in that the recording is on the SIA website and anyone's able to go and download that. 

Todd Alexander:

Yeah so when I listened to you, it sounds like when I started working on solar, you know, 15 years ago, 10 years ago, you'd get people wanting independent engineers or somebody with technical expertise to say; “Yes, these modules are up to snuff. They're tier one, tier two, whatever this quality and here's how they were manufactured”. And this is really an extension of it, so you already had the knowledge of all the parts that were going into the panels in order to measure their quality and workmanship. And now you're really also now, because of that information that you have available, able to look at the sourcing as well. Is that pretty much what you're saying? 

Andy Klump:

Yes, so once again, a little background on myself so your listeners are aware. I actually worked in house at Trina Solar from 2006 to 2008. I was actually part of Trina Solar's IPO on the New York stock exchange. And I dealt with many investors on quarterly earnings calls as well as the IPO and secondary call and offering in 2006 and 2007, respectively. So I'm very familiar with the capital markets and how the … come about. But I started CEA really with the intention of helping being a more effective bridge between China and the rest of the world, because many Trina clients were a challenge, not just with issues related to Trina, but just sourcing in general. And so when I established CEA in 2008, yes, we effectively helped folks buy from manufacturers, structure those contracts, and then do the follow-on work around quality, which is an extension of that core service.

So that actually is the work we've been doing, as I said, before it was really more focused around cells and modules. But effectively every time we have an engagement, we go through a long set of checklists to make sure that the manufacturers and the buyers are both aligned in terms of inspection work that we do. There's only a limited number of folks, I think that have the capabilities of our team, but we absolutely go through and validate what are the building materials, the BOM, and how are those materials sourced? And then once again, the processes throughout the manufacturing process. So really this inquiry into polysilicon is a little unique in that it requires not just the existing module manufacturer to cooperate, but also the upstream polysilicon manufacturer.

I will comment, just for the sake of those who are less familiar with the polysilicon industry, once again, I also had the good fortune, whilst I was at Trina, to lead a team for two years, sourcing polysilicon at that time. The industry was in an extreme shortage and polysilicon pricing jumped all the way up to $475 per kilo on the spot market. Since then, pricing has dropped by more than 95%, so it's a dramatically different industry. But in 2020, there was over 550,000 metric tons of polysilicon or effectively, just call it in the range of 180 gigawatts more or less of overall capacity. Now what's happened is, we've seen some modest increases this year - there's actually a shortage - so we may sit around 600,000 metric tons. But there's a massive expansion that's happening in 2022 up to, we expect, about a 50% increase of the 900,000 metric tons. In 2023, 1.2 million metric tons.

And almost all of that capacity is happening outside of Xinjiant, so different provinces and trying to relate it to low cost electricity, which is a key input, particularly around hydro. We've seen more and more facilities popping up in Sichuan, in Yunan, inner Mongolia, and we're going to continue to see that market growth. So, based on today's polysilicon supply, there actually is literally three times the amount of polysilicon that can meet the needs of the US market on a macro basis, the entire US market. And we see this massive expansion. So the market's already moving in that direction of having polysilicon from different sources. And so once again, CEA's team is well positioned to help validate that. We just need to enter an agreement that allows the module supplier and the buyer of the modules to assign us as a third party and go in and validate that work. 

Todd Alexander:

And so when you're doing this validation, let's say you're working for a sponsor who's buying, thousands of megawatts of panels per year, and they want a certification from you or verification from you, I should say, so that they can feel comfortable that they're complying with their own ESG requirements and also make those representations to their investors and debt financiers, what are you actually providing? Do you provide some kind of report that says “we've audited what they're doing, and based on what we've seen, this is how it works”, or is there some international certification standard yet? What do people actually get if I'm on the other side diligencing this? What do I want to see from you?

Andy Klump:

So you're absolutely correct that there is no broad international certification, per se, on this particular component that's in question. We are absolutely providing a report from an independent third party entity. Once again, we are a hundred percent owned and operate as a US entity. I founded the firm 13 years ago and I'm still the sole shareholder. And we have a whole host of folks who want that independent third party to provide this validation. So our teams have been growing and ramping through the years, but I will say we've established a very strong international culture within the company; ‘Do the right thing’ is one of our core eight values. And we have reinforced the message that our teams are entirely independent of suppliers and doing this work on a holistic basis for us. 

So we have many folks, our team have been with us five, seven, one going on nine years, that have been with us and seen the growth of the company. But one of the things we've also been very proud of is, over the last five years, we implemented a practice of a hundred percent FCPA checks. So a hundred percent of our team members have gone through validation of FCPA training, and know the importance of being an independent third party, and that's what makes us unique.

But absolutely, the buyer of the models will receive a report from us with our team, once again, seeing the facilities and actually validating that. I want to just highlight the challenge with once again, just a one-off certification. And then once again there are many certification bodies that operate in this industry, but, a one-off certification is a point in time at which someone will see, ok yes, this did exist at the time that supplier allowed the third party inspector to go in and visit the facility, but then what happens the next day? And that's part of my experience on a personal basis is I saw how Trina was definitely above the board, had a lot of independent third parties come and visit, they flew in from different countries, they did a great job when they were there.

But then the question was, what happens if the team is a little more lax or something doesn't happen the next day where, you know, what's the reality? So really, of the 85 gigawatts of solar engagements we completed, and 4 gigawatt hours of energy storage, in all those cases when our team does inspections, we're there on a continuous basis, on a daily basis. And we really make sure that we see and validate what's going on on the ground while our client's products are in manufacturing. So rest assured, there is a solution that folks can know what the providence of their core materials are, and we're in a really strong position to do that. 

Todd Alexander:

All right, let me use the end here to ask you a couple related but more rapid fire questions on something a little different. One, since I've got the benefit of having you here, to the extent you have any insights into it, what do you see happening here with pricing for solar panels going forward? In the US there's all kinds of talk now about inflation generally, shortage of raw materials, historically solar prices have gone down, and then now they kind of leveled off, and then there were tariffs that maybe bumped them up a little bit. What should people be thinking about in terms of pricing for panels globally here and for the next 6 to 12 months?

Andy Klump:

Yeah, so that's an excellent question. And we get a lot of inquiries on this. We have a broader market intelligence platform, we've been tracking pricing and costs throughout the whole supply chain. I've been doing that for quite some time, and we have a forward-looking price forecast that we share with our clients, and that helps them tremendously as they go through the procurement process. So if I had to back up just a few months, I'll say it's important to understand that at the end of 2020, there was a lot of stimulus from a number of governments around the world, but obviously a very strong amount of installations that have been in China. We actually saw roughly almost 30 gigawatts actually installed in the final quarter in China in 2020. So effectively, China became a 48 gigawatt market last year, which is incredible, it's just off the charts to have so many installations in one quarter. 

But there was a shortage of glass and EVA, and at that point in time, we saw prices start to rise and pick up. There was also a lack of capacity that was allocated to solar, as some of the manufacturers of glass have limitations in terms of how much solar glass they could manufacture. We also saw the big shift towards bifacials, so all of a sudden the industry needed twice as much glass as they had previously. So there was an extreme shortage of glass, and we did see pricing rise for those who were buying modules from China and also from Southeast Asia. And in Q1, there was also an announcement about China's commitment to carbon neutrality by 2060, and with that was a strong growth in the Chinese solar market.

So the previous record of 53 gigawatts of installation capacity actually happened in 2017 in China, and then 2018 and 2019 were slower years. The start of 2020 was obviously slow due to COVID. But now with this new announcement of carbon neutrality, China is definitely committed to having a 60, 70 maybe even a 75 or 80 gigawatt market this year. So we're expecting, even though new capacities come online, very strong demand in the second half of the year.

That's also led to an increase in demand and caused some flattening of the price decline curve. But once again, as I talked about the glass shortage, now more solar glass has been allocated, new permits have been given to other factories in the industry. So as we've seen solar glass decline in price and the potential for some of the other shortages, such as EVA, to come back in the market norms, we've also seen the counter demand for polysilicon.

And once again, this is not just polysilicon in China; this is polysilicon demand just globally. So there is a shortage and unfortunately polysilicon, once again, is made in a massive petrochemical facility. These facilities can be billion dollars or more for a base load. And they just take time to build and to expand.

So the polysilicon shortage has driven up polysilicon pricing as much as 70% or more just in the last several months. So this can have an impact of a penny a watt or more on module pricing. And so once again, that has more or less taken up some of the cost savings driven by more EVA and more glass. So, the reality is I think a bit of tightness is definitely gonna stay with us through the remainder of 2021.

As we get into 2022 and beyond, there'll be more polysilicon that's coming. But once again, the demand scenario also seems very strong as a number of bull economies are also committed to carbon neutrality, and we see more and more solar installations. So I would still say we're going to see a tightness in 2021 that's definitely atypical. And as we get into 2022 and 2023, it really depends on how strong the demand comes.

There's also a lot of supply coming on the solar cell and module capacity, particularly in Southeast Asia. But once again, that is compensated by this upstream price squeeze, which is really hurting some of the price decline that we've seen on the module side. So this is a trend that we're going to continue to watch and report on to your audience as well as others in the market.

Todd Alexander:

How about, you touched on it, the next question is how big of a diversification do you see away from manufacturing in China? I know a large percentage of all the modules that are used globally are manufactured in China. I've seen reports that there's more and more being produced outside of China, just for diversification or maybe supply lines within China are stretched, or for whatever reason. How big of a trend is that?

Andy Klump:

So I think it's important to split up the value chain a little bit, because, if you look at the various facets of the value chain, there obviously is some polysilicon capacity that's outside of China. Wafering capacity is still dominated within China; it's roughly 97% of the global capacity that’s inside China. But for cells and modules, you already have roughly 20 to 30% of the overall global market outside of China. And a lot of that is in Southeast Asia. So once again, almost all the products that are going to the US are coming from either Southeast Asia, South Korea, some other smaller facilities in other countries outside of those that I just mentioned. But all of these facilities have been operational and running for the last several years, some five or six years now, and selling to the US market because of the current tariff regime.

So our teams are actually in a number of these countries on a full-time basis. We have over 12 folks in Vietnam right now, and are executing on a lot of QA engagements currently. We see that growth ramping up, and that is going to continue. I will just kind of build off your question here, saying what's actually happening in the US. And so we have seen in the last several years, some new facilities come up, namely Hanwha Q cells, and Jinko and couple other facilities. Those are primarily module facilities in the US. But I will say, since the Biden administration has been very keen to expand solar capacity in the US and lead to more manufacturing jobs, there are a number of folks who have actually contacted us to get insights about that.

As I mentioned, we do have three PhDs, all with manufacturing experience, both in the US as well as Asia throughout the whole value chain. So I do think there will be more capacity that comes online in the US in the coming years around modules. I think that certain folks are actually looking at, wafering and cells. As I noted before, there are major polysilicon manufacturers, such as REC and Hemlock, even Wacker, with polysilicon facilities in the US. Some of those have been shuttered, but it's very possible that those facilities take increased interest and attention. So I do think there's actually room for some of the U S market to actually choose US-manufactured products, so I do think there's potential for some growth there. So once again, there are diversification strategies in place in the industry, but it really varies based on where you are in the value chain. 

Todd Alexander:

Alright, so closing question for you. What type of growth areas do you see, either in engineering services, energy storage, other aspects that are related to what you've been doing, but you see as big growth opportunities?

Andy Klump:

Yes, absolutely. I would definitely highlight our downstream engineering services team because we have been operating in the US really since we started. I'd say since 2013, we had hired an engineering team and built out a practice focused on both independent engineering, owners engineering, and technical due diligence. We've had a massive uptick in demand for those services the last several years, but now we have a 40 person team. Most of those folks are really engaged in actually executing engineering services engagements in the field.

So we have worked with many large publicly traded companies and helped to complete hundreds of rooftop installations and utility scale ground mount facilities. The aggregate market cap of our clients is over 3 trillion; some of those are some of the top Fortune 100 companies, so you can guess who they are. But we've completed numerous engagements for them, and many other downstream developers and financiers of the whole solar and storage. I will say that, I think particularly there's a strong number of developers that are in massive growth mode.

We are going to see a long-term trend of ongoing demand for solar in the US, even that's independent of a potential new additional policy supporting solar from the Biden administration - we still see dramatic demand on that front. But also just particularly to highlight, there's also, as you're well aware, there have been a number of stories and reports about underperformance, and so one of the key trends I would just highlight to all those financing solar projects is, one has to look at absolutely the credentials of the independent engineers that you engage, and who's actually doing the work. 

Once again, the CEA team has collectively over 1000 years of solar and storage experience. And a lot of that is field-based work, so we actually have a great reputation in the market, and I'd say there's increasing demand for those services. We have other teams, you know, you asked about other growth areas. I mean, on the energy storage side, we've also had a massive amount of engagements, as you're also well aware.

Many of these solar installations have storage coupled with them. So we've actually split out a separate energy storage team in the last several years. We've been engaged in building our energy storage practice since 2015. So in addition to actually doing QA work on both modules, inverters, racking, and then now energy storage systems, particularly around battery cells and modules, and also the overall system, we also have a separate team in the US that's really supporting a lot of the energy storage growth. So once again, the demand for those services, we actually had more than a tripling of our business in 2020. We also see more than doubling this year. So a lot of high growth, really driven by overall optimism and a need for solar and storage in the US. 

Todd Alexander:

Great, so when you're doing well, that probably all of us are doing well in the renewables business, at least. So that's a good sign! With that, I’ll leave you and thank you for being back on the show again.

Andy Klump:

Absolutely Todd. I think there's plenty of work to keep you, your team, and the whole industry busy. So we look forward to supporting that