Shifting Supply Chains Bring Their Own Risks
By Paul Wormser and Travis Secrest
This article was originally published in pv magazine - April 2024 Edition.
Sourcing solar and energy storage locally will reduce some supply chain risks, but it also opens the door to a new set of questions for prospective investors.
The US Inflation Reduction Act could put wind in the sails of US manufacturing, but supply chain diversification has its own challenges.
Buoyed by US Inflation Reduction Act (IRA) incentives, solar and energy storage manufacturers have announced multibillion-dollar investments in production capacity expansion and new factories. At first sight, US-made products typically experience less regulatory and political grief than imports. Tariffs and other trade risks are less of a concern. Logistics avoid costly long ocean voyages and their related geopolitical headaches. Domestic manufacturing can help mitigate project risk. New factories, however, typically experience startup pains that can affect deliveries and quality. Also, IRA incentives do not make new fabs immune to market dynamics that can affect their viability. Solar modules and energy storage systems assembled in the United States may feature imported components, chiefly from Asia. Thus, trade and logistical risks are not removed entirely. For instance, raw materials and components could fall foul of the Uyghur Forced Labor Prevention Act (UFLPA) that seeks to ban materials linked to allegations of forced labor in the Xinjiang region of China from entering the US. The risks associated with US-made panels and storage systems have been identified by Clean Energy Associates and project developer EDP Renewables North America. These can be summarized as choosing the right technology, supplier, supply agreement, and factory oversight.
Top technology
Lengthening delivery times for transformers and breakers that connect solar and storage systems to the grid can add months or years to project timelines. With developers often competing with utilities for such equipment, tightening supply initially affected transformers, but now also encompasses substation breakers and switchgear. Now that demand is exceeding supply, wait times can hit 180 weeks for some high-voltage equipment, up from 40 weeks previously. Many developers are shifting their approach. For example, high-voltage circuit breaker equipment routinely uses a “dead tank” design in the United States, which features the switching unit in a metallic container. Much of Europe and Latin America uses cheaper, smaller “live tanks,” of which there are more suppliers. Switching to live tanks, which are more readily available, requires developers to convince utilities of their equally valid protection claims before they can be included in an interconnection agreement.
HV transformers and breakers can take 180 weeks to arrive
Suitable suppliers
The drive to diversify supply chains can sometimes mean components from dozens of sources are used in solar and storage equipment in different combinations during production. Has each combination been vetted? Investors want the security of a well-tested, stable bill of materials. Do all suppliers meet customer environmental, social, and corporate governance goals? These are likely to go further upstream over time – right up to the extraction of the quartz used in polysilicon.
Appropriate agreements
Suppliers may push back if buyers insist on an exact bill of materials being included in the supply contract – the kind that may be required by financial institutions that insist on extensive testing of all materials and combinations used to make the product. Developers will want in-factory third-party oversight and the right to reject equipment based on that oversight. Such oversight could include an audit of the factory with the findings to be corrected and confirmed prior to the project entering production. Further, a production audit would include monitoring the manufacturing process and selecting a sample of the finished product for additional scrutiny. Non-conformities can be identified, counted, and compared to thresholds that should be clearly stated in the supply agreement. If a threshold is exceeded, the overall population from which the sample was taken could be rejected. As an additional step, measures such as accelerated testing to measure performance degradation, or resistance to severe weather conditions, could be conducted on samples taken from production. In addition, supplier agreements should contain liquidated damage provisions that offer protection against schedule disruption. Given recent enforcement of the UFLPA by U.S. Customs and Border Protection officials, the supplier agreement should offer clarity in terms of what happens if an imported product is detained at a port of entry. Agreements should also be clear regarding responsibility in the event there is a change in tariffs for anything to be imported, after the price has been negotiated. Neither the buyer nor the supplier is keen to manage all of those risks. What results is a process of negotiation. Tight supplies in recent years have tilted the balance in such negotiations in favor of suppliers. Buyers may have more leverage in negotiations as the industry transitions to oversupply conditions with more new-supplier entrants, and more choice.
Optimal oversight
Regardless of where equipment is sourced, a detailed and comprehensive supply agreement sets up a project for success. The definition of product quality standards is critical as it determines which defects will and will not be rejected during in-factory oversight. Ensuring that supply agreement details are met could require third-party oversight inside the factory literally 24/7, at least initially. If such intensive oversight shows that everything is landing “butter side up” and the product quality is consistently meeting the contractual standards, then on-site monitoring can be scaled back. However, if quality issues remain, then the quality assurance monitoring may need to be maintained indefinitely.
Paul Wormser is vice president for technology at Clean Energy Associates. He has worked as an executive at the company since 2017 and oversees all aspects of product management. He has more than 40 years of solar and storage experience.
Travis Secrest joined EDP Renewables North America in 2021 and is associate director of services procurement, primarily focusing on EPC sourcing and strategy for the North American business unit. Prior to joining EDP Renewables, he held roles with multiple renewables- focused general contractors.
