In the coming weeks, REA may tackle:

• Tariffs: IEEPA “reciprocal” tariffs; the Section 232 trade investigation; the new solar AD/CVD case on Laos, Indonesia, and India; and the anode AD/CVD case on battery storage. We will look at legal issues and commercial impacts.

• New FEOC restrictions on equipment components for both solar and storage passed in the One Big Beautiful Bill Act (“OBBBA”).

• Practical guidance regarding choosing equipment suppliers and negotiating supply agreements for renewable energy equipment considering the current tariff/FEOC/UFLPA/domestic content landscape.

• The commercial contract implications as industry finance and tax experts synthesize any upcoming changes to “commence construction” rules as a result of the Trump executive order issued on July 7, 2025 (the “Commence Construction EO”).

To start this first post in the re-launch, I want to cover what I think is the most underemphasized issue right now in the US solar industry: the newly announced Section 232 investigation on: (i) imports of polysilicon and (ii) imports of derivative products (potentially including ingots/wafers/cells/modules) containing foreign-made polysilicon.

This Section 232 case involves silicon products only, i.e., it will not apply to First Solar’s cadmium telluride products. One other important point is that this case covers all polysilicon and derivative products, including semiconductor-grade polysilicon products, and not just solar-grade polysilicon products. Thus, the impact of this case could be far-reaching, and it remains unclear whether and how much the Commerce department and the President will draw distinctions between semiconductor-grade products and solar products in any remedies imposed. That is a point we will come back to below.

The Section 232 case was filed July 1 and announced for public notice and comment a few days ago, but it comes amid a scramble within the industry because of the tax credit changes in the OBBBA, with potentially more regulatory changes to follow because of the Commence Construction EO. Further, a day after the Section 232 case was announced, the solar antidumping/countervailing duty (AD/CVD) petition was filed against Indonesia, Laos, and India.

As a result, I think that the new Section 232 case may not be getting the attention that it deserves. The new AD/CVD tariff case is important, too, and we will cover that in future posts. But many within the solar industry have been anticipating the new AD/CVD case for some time (at least as to Laos and Indonesia – it was less certain whether India would be included).

But this Section 232 case is a different beast, the likes of which the US solar industry has not seen before. One trade lawyer called it “a Section 201 case on steroids.” Solar industry veterans from 2017 can recall the high uncertainty created by the Section 201 investigation. We are at a similar level of impact and uncertainty with this Section 232 case now, as the 201 case created in 2017.

First, I will cover some basics of the Section 232 case and then its implications.

Overview of Section 232

A Section 232 trade investigation is predicated on the grounds that the imported goods threaten national security. The executive branch has very wide latitude to determine whether goods threaten national security, and wide latitude regarding the types of remedies that may result. I call this Section 232 case a “trade investigation” and not a “tariff investigation” purposefully, as that nuance could be critical: the President has the authority under Section 232 to outright ban imports of foreign polysilicon, and derivative products made with that polysilicon (meaning, with respect to solar, potentially ban cells and modules made with foreign polysilicon), from one or more countries. Less extreme than a total ban could be the imposition of a quota, i.e., a maximum amount of imports of certain products from certain countries.

Then, of course, there is the option to impose tariffs. The President can impose the traditional ad valorem tariffs on products – meaning a tariff that is a percentage of the declared value of the product. But a 232 tariff could be formulated in other ways, such as a dollar amount per kg of polysilicon of imported product, as just one example, or a tariff-rate quota.

The President has wide discretion to decide what remedies (including what tariff levels and/or non-tariff remedies, such as a ban or quota) should apply.

The main threat here is that the Section 232 remedies could apply to “derivative products” containing foreign-made polysilicon. There are little, if any, imports of actual solar-grade polysilicon into the US. But “derivative products” means downstream products made with foreign polysilicon. Thus, any ingots, wafers, cells, or modules imported into the United States that are made with foreign polysilicon could be included under the remedies of this Section 232 case.

And to be clear, as it stands right now, this Section 232 case is not just against only Chinese polysilicon and derivative products. It is against all foreign polysilicon and potentially, all ingots/wafers/cells/modules that are imported into the US that are made with any foreign polysilicon, whether that foreign polysilicon is of Chinese origin or of a foreign origin besides China.

That is what makes the case so impactful. The President has wide discretion to impose tariffs, or other even more extreme remedies, and this case could potentially impact every import of poly/ingot/wafers/cells/modules made with foreign polysilicon. I do not have the exact raw data, but I would estimate that 90% or 95% of the solar modules used in the US market are made with foreign-made polysilicon – whether from China, Malaysia, or Germany as the three most prevalent countries of solar-grade polysilicon production outside of the US.

A “blanket” case but with differing risk levels?

An important point here is that all sources of foreign polysilicon are not necessarily at the same risk level of outcomes in this 232 case. As a buyer, a reaction to this case as it has been initiated should not be: “well, almost all crystalline silicon modules are potentially impacted, so there is not much I can do to mitigate this risk.” That view could turn out to be right, but that view holds much potential peril. One should consider the wide presidential discretion available here, and also the wider geopolitical landscape. Indeed, if the whole premise of a Section 232 case is that it is based on US national security grounds, then one might fully expect different countries to be treated differently in terms of remedies, due to the differences of how any particular country impacts US national security, as determined by the President.

Just like under Section 201 tariffs, under Section 232 the President has discretion to cut deals – for example, to exempt specific countries from the trade remedies but not others. The President can also impose different remedies on different countries of origin. Here, the President could also impose different remedies on different downstream products – for example, the President could impose one type of tariff on imports of cells made with foreign poly, and another type of tariff on imports of modules made with foreign poly.

My hypothesis is that there could be different levels of risk to different solar modules under this 232 case, based on the exact country of origin of the foreign polysilicon used for each module.

As a practical matter, at highest risk are products made with Chinese polysilicon. Prior to this case, a bipartisan group of representatives in Congress wrote a letter to Commerce Secretary Lutnick, flatly asking Commerce to “prohibit the importation of products containing Chinese-origin or Chinese-linked polysilicon or impose a prohibitively high tariff to neutralize China’s unfair trade practices.” They explicitly cited grounds of “national security” - the underlying basis of Section 232.

Aside from the high risk attaching to any products made with Chinese poly, the 232 case could still impose trade remedies on products made with non-China sources of poly, such as from Malaysia (produced by OCI) and Germany (produced by Wacker). Wacker is in an interesting position here given that Wacker has solar-grade polysilicon production in the US as well as Germany. So one can speculate whether Wacker could have influence on the domestic US industry side of this case, and whether Wacker can try to steer a more positive outcome for imports of products made with their German polysilicon.

The letter to Commerce Secretary Lutnick anticipated different treatment of different countries as well, with Congressional members stating that an action against China “could be structured to exclude fairly-traded polysilicon from allied countries and—when coupled with U.S. supply—would ensure more than enough polysilicon to satisfy U.S. demand.” So even in the underlying buildup to this case, at least some members of Congress envisioned different treatment for different products, depending upon whether those products were made with polysilicon from an “allied” country or not. I believe that the assertion in the letter is correct that there is enough solar-grade, non-China poly available globally to meet US aggregate demand for solar modules - but of course at what price and after any 232 tariffs are added on top?

Finally, the zero risk products under this Section 232 case are obviously any solar products made with US poly (e.g., from Wacker US facilities, or Hemlock US facilities, and/or REC Silicon US facilities). Products made with US-made poly are not within the scope of the Section 232 case.

Potential 232 Tariff Remedies

What types of tariffs could result from this case? The case is impactful precisely because of the high uncertainty around that question. Although a 232 case is quite different from an AD/CVD tariff case, the two types of tariff cases are similar in that the resulting tariff amounts are . . . anyone’s guess. For example, it could be a 5% tariff on cells and modules. It could be a 30% or higher tariff on cells and modules. It could be a tariff formulated differently, such as a tariff calculated in terms of dollars per watt of product output for finished modules. Different types of measures and different tariff rates could apply to products with poly from different countries. For example, cells or modules could see different types of tariffs. (That would be like the Section 201 tariffs, where imports of modules have a regular (ad valorem) tariff, but imports of cells have a tariff-rate quota.)

Now I have heard third-hand of at least one module supplier telling potential customers that the impact of this case will be small – say, less than $0.01/W impact. All of the sources I have consulted have suggested that remedies could be much higher than that. A tariff equivalent of $0.01/W or less on modules is possible, to be sure. But it also could be $0.10/W. No one knows yet, and we may not know for sure until the official announcement from the President. So, as a buyer, if the supplier tries to tell you that this case will have only minimal impact, then make that supplier take all of the 232 risk in your supply agreement with them — if this risk is supposedly that small, then the supplier should not have a problem taking that risk. Call their bluff.

To return to one point about the scope and ultimate outcome, further uncertainty exists because we do not know yet whether the semiconductor-grade polysilicon remedies and treatment will de-couple from the solar-grade polysilicon side of things.

Section 232 Timing

Finally, the timing of the Section 232 case, and when tariffs could be imposed, injects further uncertainty. Under Section 232, Commerce has 270 days from commencement of the case (here, it was July 1) to issue a report and recommendation to the President as to what, if any, trade remedies should be imposed. That would put the Commerce report due to the President in late March 2026. At that point, the President has up to 90 days to decide what action, if any, to take, and has discretion to adopt the Commerce recommendation or do something different. Then any trade remedies would be put in place within 15 days of the President’s decision.

But note that the above timeline is the maximum timeline. If Commerce and the President want to move faster, they can. The Trump administration has rumbled that it generally wants 232 cases to move quickly, and the recent 232 case involving copper was approximately four months in duration from initiation to the imposition of a tariff. As such, tariffs or other trade remedies under this case could be imposed before year-end, or even sooner.

To my knowledge, any trade remedies or tariffs will be announced and take prospective effect, with no retroactive application.

In summary, this case should gain more industry attention going forward, and it underscores what I wrote over two years ago in the first post of REA:

But import tariff and forced labor investigations are now drilling very deep into the entire supply chain for each module — deeper than we have ever seen before. Issues now get into polysilicon (even quartzite), ingots and wafers, not just the location of cell manufacture and module assembly. As such, different modules and module vendors now have different risk profiles associated with their differing originating supply chains.

What to Do

First, from a commercial perspective, I would counsel buyers to generally avoid purchasing modules containing Chinese polysilicon, outside of buying product already in US inventory or very nearly so. The risk for product made with Chinese polysilicon is now quite high. Even if the seller agrees to bear all 232 tariff risk, a secondary question is: would the seller still perform if a 232 tariff imposed on products with Chinese polysilicon turns out to be incredibly high? Can the seller even perform at all if the products are banned?

Second, every buyer should contractually specify in the module supply agreement as to the country of origin of the poly, ingots, wafers, cells, and module assembly for the modules that they purchase. This is the only way to have any rational bounds around the tariff risk associated with any crystalline silicon modules, unless the seller assumes 100% of all tariff risk of any kind (including retroactive risk).

Further, as a buyer, you must choose your supplier and particular module with tariff risk in mind before your make the final product decision, as tariff risk varies supplier-by-supplier and sometimes even across different products offered by the same supplier. Even a difference in the delivery timeframe of a few months can have a material impact on tariff risk on certain modules in some cases (thinking about the 232 tariff but also more broadly, including the risk of other tariffs too).

If you choose your module vendor first and then hope that the contract negotiations can mitigate the tariff risk, then you could end up paying an extremely high price for modules. The bottom line is that no amount of legal language in a supply agreement can mitigate the tariff risk if a buyer chooses an inherently high-risk product and an inherently high-risk supplier. The tariff risk is essentially baked into the product itself based on the particular product’s supply chain. So you need to choose wisely, and not be afraid to pivot if needed. I know that once a module is chosen for engineering design, there is friction and not insignificant cost to later changing the project design for a new module. But put together a spreadsheet and compare those design change costs to paying, say, a 100% tariff on a high-risk module, and then rationally decide what to do based on the numbers rather than on a psychological block against backtracking on the original module choice.

The best practice in this environment is a carefully-run RFP process, with legal input and management oversight as part of the selection process. If possible, do not select a final module supplier and module for a project and go to full contract negotiations unless you know all three of:

(i) the price;

(ii) the contractually promised component supply chain for the modules, to assess tariff risk for such modules; and

(iii) a simple bullet point, or plain English summary, of how later changes in tariff will be allocated in the final contract.

You should think about part (ii) and (iii) above as an integral part of the price in part (i). If you only know part (i) above, then your price quoted by the vendor is meaningless, because it could bear no relation to the amount that you ultimately will have to pay after new tariffs are later added to the quoted price.

Be aware that in this environment it becomes more likely that suppliers with higher-risk modules will throw out lower prices in a price quote to try to entice buyers who do not concurrently ask about the origin of the module components and the tariff change assumptions that the supplier has built into such the price quote. One simple number, such as $0.22/W or $0.25/W or $0.32/W, is not enough to make an informed decision in the current market.

Len Conapinski is a partner at DCH Law LLP. All views here are my own personal thoughts, are not intended to be taken as legal advice, and are not reflective of the views of my law firm colleagues, our firm as an organization, or of any client of our firm.

Today the Department of Commerce announced its preliminary ruling in the Auxin tariff petition.   Here is the notice (this is a public document that you can get here):

Prelim Affirmative Determinations Unpublished Fr Notice(231416

397KB ∙ PDF file

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The decision is complicated, and I don’t think generalist news articles such as this WSJ article really get to the important nuances.   With the caveat that I am not a trade lawyer, here is a summary based on what I have synthesized so far.

If you are not already aware, the scope of the petition concerns whether cells/modules manufactured in Vietnam, Thailand, Malaysia, Cambodia (call those countries “SE Asia” for short) should have China anti-dumping/countervailing duty tariffs (“AD/CVD”) applied to them. The theory advanced by Auxin in the petition is that because so much of the manufacturing of those cells/modules is still from China, the cells/modules from SE Asia should be considered Chinese for purposes of applying AD/CVD tariffs to them that already apply to cells/modules from China. Note that SE Asia cells/modules account for something like 70% to 80% of US imports currently, which is why this petition and ruling is significant.

In the preliminary ruling document above, the Department of Commerce affirmatively ruled that that some cells/modules made in SE Asia could have the China AD/CVD rates applied to them. One key part to me is the “scope ruling,” found on page 4 of the PDF, which answers the question: which SE Asia cells and modules could get the tariff, and which could not?

Commerce ruled that if the SE Asia cells/modules use wafers made outside of China, then it is out of scope of this tariff (even if the poly for such wafers was from China).

If the SE Asia cells/modules use wafers from China, then it is in scope of the tariff if, in addition, more than two of the following components are also from China:   

(1) silver paste;

(2) aluminum frames

(3) glass;

(4) backsheets;

(5) ethylene vinyl acetate sheets; and

(6) junction boxes.

SEIA called this a “wafer plus” standard in an email to its members this morning, and I think that fits.  If the wafer and enough other components are all from China, then it could draw the China AD/CVD tariff on the cells/modules, even though the cells/modules were made in SE Asia.

Due to Biden’s executive order, any AD/CVD tariffs to SE Asia cells/modules that might apply under the Auxin case are waived until earlier of: (i) June 4, 2024 or (ii) when the Biden administration terminates the waiver (if earlier than June 2024). I see a lot of people still think that the tariff waiver is guaranteed until June 2024. It is not. While I think that is unlikely that the tariff waiver terminates before then, I do not think that either sellers or buyers of modules should draft their contracts for millions of dollars on that shorthand assumption. I have been through enough of these issues in the past 10 years that it is burned into my head to always plan for the unexpected when it comes to tariff issues.

So that is a high-level summary of the ruling. It means that some SE Asia cells/modules could be subject to a tariff when the tariff waiver executive order terminates - likely beginning in June 2024.

In terms of market dynamics right now, the immediate question then is: can manufacturers adjust their supply chains such that when the tariff waiver terminates, the modules imported into the United States will still have no tariffs due to this Auxin ruling? June 2024 is not that far away - I have plenty of pending contracts on my desk specifying 2024 deliveries.

SE Asia cells/modules with wafers from outside China will have no tariffs. Alternatively, manufacturers can still wafer in China but source outside of China for at least four out of the six other components noted above. For some of those components, I suspect it should be easy to do that. For others, I’m not sure one way or the other.

At least at first blush, I do not think that this ruling in the Auxin petition will act as a strong additional catalyst for US manufacturing beyond the subsidies already put in place under the Inflation Reduction Act (IRA). The IRA benefits will remain the strongest impetus for any solar manufacturing to move to the US.

As a prominent trade lawyer mentioned this morning, probably no one is clicking their heels with joy over this ruling. Auxin doesn’t really get strong help from it.   SE Asia manufacturers are not hit terribly, but they still have new headaches to deal with and maybe some supply chain adjustments to make. This ruling is not a strong stick to further push manufacturing here beyond the carrots already laid out in the IRA. Solar modules will increasingly be made with less China content as a result of this ruling, but perhaps not materially. China wafers are still on the table as potentially tariff-free (though they still carry forced labor/UFLPA considerations).

It will be interesting to see what this ruling does to the recent market scramble by some buyers to try to contract for module delivery to US projects before June 2024, to avoid/mitigate any AD/CVD risk of the tariff waiver ending.

Finally, note that this is only a preliminary ruling. The final ruling is due in a few months in 2023, and things could still change. Also, I still believe that sellers and buyers need tariff change language in their supply agreements - just when the industry breathes a sigh of relief that there appears to be certainty on the tariff front, the situation changes again. I think it will continue to be that way for as long as anyone reading this is in the industry. For example, even if you build significant cell and module assembly in the US, you could see new trade petitions covering imports of the other components necessary for the module. Perhaps, like some viruses, each new tariff variant may be a little less severe than the last. But, either way, it is not going away completely.

To close on the big picture, this ruling underscores the trend that I mentioned in my first post of this newsletter:

But import tariff and forced labor investigations are now drilling very deep into the entire supply chain for each module — deeper than we’ve ever seen before. Issues now get into polysilicon (even quartzite), ingots and wafers, not just the location cell manufacture and module assembly. As such, different modules and module vendors now have different risk profiles associated with their differing originating supply chains. 

Buyers of modules will want to know — and specify in the contract — where the major components of the module are produced, and should consider linking that now to any tariff risk language. Tariff risk, just like UFLPA risk, is increasingly individualized to specific vendors’ supply chains.

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Len Conapinski is a partner at DuFour Conapinski Ha LLP. Please note that all views here are my own personal thoughts, are not intended to be taken as legal advice, and are not reflective of the views of my law firm colleagues, or our firm as an organization, or any client of our firm.

As an update, there are reports estimating that 3 GW of modules bound for the U.S. are presently detained by U.S. Customs (CBP) (see also Bloomberg, also citing the 3 GW estimate from Roth Capital).  We don’t know the exact numbers for sure due to the confidentiality of importation proceedings – but I think the broader point still stands that this is presently the critical near-term issue.

In this post, I want to discuss how forced labor concerns are playing out in present negotiations for new module supply agreements.  Among the biggest conceptual issues under negotiation are the following:

• Which party bears the risk of schedule delay if modules are detained by CBP

• Which party bears the cost of delay if modules are detained by CBP (e.g., bonded warehouse storage costs)

• What happens if delays at the border are extended in duration

• Compliance with law (present and future regulations and implementation)

• Third-party traceability audit requests

• Requests by buyers for vendors to turn over traceability documents

One important point I want to make about the below discussion is that it remains to be seen where many transactions will actually sign.  While negotiations are currently active, I think many parties are still trying to figure out these issues as well as others: the potential for a court challenge to the tariff waiver executive order (discussed a bit here), and the implications of the passage of the Inflation Reduction Act, including domestic content incentives (i.e., the ITC bonus for domestic content, impact of solar manufacturing subsidies, etc.).  

CBP Detainment/Schedule Delay Risk

Currently most new supply agreements under negotiation have clauses that suspend the guaranteed delivery dates in the event of a CBP detainment of the modules.  In other words, buyers seem poised to have to bear some or most schedule delay risk, akin to when a force majeure occurs.   That said, I think in almost all circumstances, there is a clause for termination in the event the detainment drags on too long, and for the buyer to receive their money back for undelivered modules (also akin to an extended force majeure).  How heavily this point is negotiated seems to depend in part on specific project delivery needs.

CBP Detainment/Cost Risk

If modules are detained by CBP, there are very high logistics costs of storing the modules in a bonded warehouse at port of entry.   This is likely why there are reports of module vendors not presently shipping to the U.S. at all right now – they are likely trying to figure out if they have sufficient documentation before they ship in the first instance rather than face higher storage costs at the border during a CBP detention.

This remains an open and highly variable point in supply agreement negotiations.

Legal Compliance

Another high-level concept to be covered in a supply agreement by both sides is what I’ll call the “legal compliance” contract clause.   Buyers obviously want the vendor to “comply with all applicable laws,” and obviously as part of that, comply with the Uyghur Forced Labor Prevention Act (UFLPA).   

The thorny issue here, however, is that further regulations and implementation orders could be issued by CBP as part of the UFLPA that are not in existence today/when any particular module supply agreement gets signed.   In other words, the UFLPA should not necessarily be thought of just as one discrete law.  The UFLPA carries with it the possibility of future additional implementing regulatory changes and CBP directives.  This is an important fact that I think many buyers (and even some vendors) do not fully appreciate.

As such, most vendors are essentially taking the view that, “we can comply with what we know today, but not the unknown tomorrow.”   Therefore, a point of negotiation is what happens if new regulations or CBP orders issue.    The negotiation about this issue will hopefully get easier once most major vendors fully crack the code about what precise documentation CBP will require for module entry.   But for now, and probably for at least the coming few months of module supply agreement negotiations, this is still an unknown.

Third-Party Traceability Audits

Some buyers want to have a third-party auditor review the vendor’s traceability processes and systems.   Ultimately, for reasons I discuss below, I think this is where the industry will increasingly land.   Last year, many Tier 1 vendors were heavily resistant to third-party traceability audits.   However, in the past half year or so, resistance to this concept has softened in some corners, and third parties have conducted traceability reviews of at least a few Tier 1 vendors.    

The scope of these audits is still negotiated – most module vendors are not completely vertically integrated, and so they can’t necessarily volunteer their sub-suppliers to an unrestricted supply chain audit that would be obviously desired by buyers.

Third-Party Traceability Requests

In module supply agreement contract negotiations, many buyers want the vendor to turn over the relevant traceability documents for the particular modules they’ve ordered.   At one level, this request is rational and understandable – the best way to determine if the module vendor is going to get the buyer’s modules through CBP is by having that vendor actually show that they could do so, by providing the very traceability documents to the buyer that the module vendor would have to provide to CBP anyway, in the event of a CBP audit/detainment.

Unfortunately, it’s more complicated.  First, many module vendors cannot just turn over confidential records of their sub-suppliers to a module buyer.   Non-disclosure agreements typically allow for a party to turn over documents to the government upon request (i.e., for a vendor to provide documents to CBP upon CBP order, into a confidential CBP inquiry) but turning records over to a private third party is another matter.  Even if a module vendor was amenable to this type of request of a buyer, the vendor’s sup-suppliers don’t want to turn over any more than they absolutely have to, and only to the people (i.e., CBP) who truly need to see it.

Second, the traceability documents for even a few containers of modules can run into the thousands of pages.   Thus, for larger utility-scale orders, the traceability documents could easily be well into hundreds of thousands of pages.   I don’t know of any module vendors who are presently able or willing to perform essentially a costly litigation discovery for every buyer, for every order, and turn over these documents to a buyer, just because the buyer wants to see them to make the buyer comfortable.

So, while I think it is presently infeasible for a buyer to request that the vendor turn over all traceability documents to the buyer upon buyer’s request – obviously the vendor needs the ability to be able to produce such documents to CBP upon the request of CBP.

That’s the catch.  I think that is where third-party traceability auditors could come in – PI Berlin, CEA, STS, etc.    A third-party auditor could audit the vendor’s systems and processes generally, to help a buyer get comfortable answering the question: “can this vendor produce needed documents if requested by CBP?”  without requiring the vendor to go through the whole process for an actual order in the absence of an actual request by CBP for such order.

To be clear, however, these audits are not an iron-clad guaranty of a favorable import outcome – the regulations and requirements could change, and if there is indeed a Nostradamus out there who can discern completely what CBP will require in the future – module vendors would be hiring that person right now to get their presently-detained modules in the door.   But an audit could provide the buyer a much higher level of comfort/diligence on where the vendor stands with respect to their traceability systems generally, which allows the buyer more accurate information to assess risk probabilities.  

Therefore, in current module supply agreement negotiations, I think it is important for both parties to distinguish the concepts of:

(i)  having a third-party auditor (e.g., PI Berlin, CEA) audit a vendor’s systems generally;

(ii)  having a third-party auditor audit the exact documents required for the particular modules to be delivered under the supply agreement; and

(iii) having the vendor provide to buyer the actual traceability documents for the particular modules to be delivered under the supply agreement.

Presently, it is far easier for (i) to occur than for (ii) and/or (iii) to occur.   However, even with (i), the parties need to allow time to negotiate a mutually-agreed audit scope. 

We can cover more details in later posts, but to conclude this one, a few thoughts:

Thoughts for Buyers

First, be wary of FOB (overseas port) or CIF (U.S. port) Incoterms, or any other Incoterms that require you to be importer of record.  If you agree to such Incoterms, the nightmare scenario is that the vendor “delivers” the modules to you overseas, but your modules get detained by CBP, and you cannot get the modules into the country.  But because the modules were delivered in accordance with those Incoterms, you now must pay for modules that you now own but can’t actually bring into the United States.    There is a lot more to be said about these Incoterms presently, but I just want to highlight one big example risk. 

These Incoterms are not impossible to do, but if you don’t hit the bullseye in how you handle it, your supply agreement may not be financeable, and you could be in a really difficult position if you contracted with the wrong module vendor.

I also worry that, as a practical matter, there is a moral hazard here:  FOB (overseas) or CIF terms could incentivize some vendors to throw their least-traceable modules at you as the buyer, if you, as the buyer, must bear all risk of detainment/failure to successfully import.   I personally think that some vendors would not do this, but some would.   So even if you cannot presently get all desired contract terms around forced labor issues, think about how the combination of terms in the supply agreement can help align vendor incentives properly – or not.   

Second, the above-discussed contract terms obviously matter, but diligence matters, too:  understand where the vendor is getting their polysilicon, where ingots/wafers/cells/module assembly will occur.  Can the vendor’s commercial team talk intelligently on UFLPA issues?  Do they have U.S. trade counsel?  Who? If they can’t speak at a very detailed level on these issues, it’s a concern.  

Third, given the issues surrounding tariffs, forced labor issues, and now domestic manufacturing/ITC incentives, if you are a large buyer you should know where all five of the “big 5” manufacturing steps occur for the modules that you plan to order:  polysilicon, ingots, wafers, cells, and final module assembly.  What country is listed as the “made in X” on the module product label is not relevant to these critical issues. The industry is in a state where deeper granularity of supply chain understanding is required than ever before.

 Thoughts for Vendors

First, the issue of forced labor documentation can be thought of as an onerous hurdle, but also as a potential competitive advantage to those who figure it out quickly.  This issue presents both risk but also tremendous opportunity to sell modules at a premium that also give buyers high comfort of the absence of forced labor, and also that such fact can be proven to CBP upon importation, so that the modules are timely delivered.  Some vendors will figure out the documentation and traceability issues more quickly than others.  The vendors who figure it out more quickly could profit immensely in the next year or two.  This is an area of product differentiation.  Undoubtedly there will be (and already is) price premium for the premium product.     

Second, perhaps in conjunction with third-party auditors, consider pro-actively producing a traceability report on any particular modules, akin to a bankability report.   Pretty much every large, sophisticated buyer is asking the same questions and negotiating the same issues, so the more that you streamline this process going forward, the easier it will be to transact.   A traceability report would be useful for forced labor issues, but we will soon see if it may also be needed for proving the percentage of domestic content so that buyers can use it towards the ITC bonus under the Inflation Reduction Act.  Traceability and the source of manufacturing for modules is now a core part of the solar module product itself for the U.S. market.  

Len Conapinski is a partner at DuFour Conapinski Ha LLP. Please note that all views here are my own personal thoughts, are not intended to be taken as legal advice, and are not reflective of the views of my law firm colleagues, or our firm as an organization, or any client of our firm.

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Failure of suppliers to be able to satisfy U.S. Customs (“CBP”) will result in significantly delayed equipment delivery (the product could be detained at the border for weeks or months, at high storage costs), or even equipment that cannot be imported into the US at all.   

In this first post in a series on this topic, I discuss the forced labor issue generally, how it is manifesting in solar, and why this issue will become more of a risk in the second half of 2022.  In later posts, we’ll get into the more advanced, detailed nitty-gritty of how this impacts contract negotiations and specific contract terms under negotiation right now.  

Module contract negotiations are heating up, but forced labor concerns are a wrench in the near-term gears.  I generally agree with Phil Shen from Roth Capital that forced labor law “continues to be a challenging situation . . . specifically, neither side wants the risk, and the parties are having a difficult time figuring out how to share the risk.”  I would add to that: due to the leverage that some module vendors have – particularly the ones willing to take a shot at importing into the United States right now – I think inevitably buyers will have to share this risk, particularly as it relates to delays in delivery.  More on the specifics in follow-up posts.  First, we need to cover the basics.

Forced Labor and Importation

It’s been the law of the United States for a very long time – at least since 1930 – that you cannot import goods that were made with forced/involuntary labor.   CBP is entitled to block importation of any product made with forced labor, and can also seize the goods.  As a lawyer I’m tempted go into the intricacies of what “forced labor” means, but I think most people get the gist of it from the term itself.

The problem on the ground is proving the absence of forced labor in the manufacture of a product.  CBP has a difficult job implementing the law in this regard:  one cannot tell from physically examining any particular product at the border whether forced labor was used in that product’s manufacture.   It’s an issue of documentation. 

Given the complexities and challenges noted above, documentation to prove absence of forced labor does not become an issue unless CBP has some reason to suspect that a particular product, or any of its components, was made with forced labor.  This suspicion could be based on government intelligence and/or reports from third-party organizations. 

Once suspicion about a particular category of imports draws CBP scrutiny, the prospect of potential forced labor in a supply chain generally is like iodine in water – even if the actual amount is very small (and obviously any amount should rightfully be reduced to zero), it can be enough to impact the whole water supply, due to the documentation challenges that become required for the entire industry.

 Because most products being imported into the US are not generally under suspicion of forced labor, intricate documentation about the working conditions of workers making any one specific product (or component of the product) are not generally kept in supply chains in a manner that links the specific labor utilized to make any one specific product.  Even increasing ESG requirements only look at systems and working conditions generally, and not at the granular level of one exact worker tied to one exact product made.

For a solar module, there are many components and manufacturing steps:  polysilicon, ingots/wafering, cell manufacture, aluminum frames, glass, back sheets, junction box, cable connectors, etc.  

Some components of a module are interchangeable (I won’t say “commodity”).  For example, aluminum frames enter into a factory and may look the same but could originate from different suppliers.  The frames could be lumped together in the same pile of inventory on the factory floor before they are put into the final product – and this often has been general practice for certain components in a supply chain, because no one has ever had need to keep them separate, or keep documentation about how they are produced.  Most critically: this is the same with different batches of polysilicon from different suppliers.  

So, in order to address forced labor concerns, the nature and operation of whole supply chains will need to be documented, and often, processes changed. 

The reason I go through all of this is to help highlight the magnitude of the shift required in supply chains to produce the level of documentation that CBP may require.  It requires component procurement contracts to be amended with new requirements, manufacturing processes to be changed, individual items to be traced throughout the system in ways not previously required, and in some cases for suppliers to obtain entirely new sources of components and raw materials.

Solar Industry and Forced Labor Concerns

The issue began to arise in solar due to third-party reports of forced labor in polysilicon, particularly in the Xinjiang region of China.  Roughly half of the world’s solar grade polysilicon is produced there.

In 2021 it became apparent that a few large module vendors – among them, Jinko Solar and Longi seemingly have had significant product detained until they could provide details proving the absence of forced labor.  There could be others that have been detained (and/or have product presently detained), too – import matters with CBP are confidential and so there is no way to check public records to verify these things completely, in the absence of vendor self-disclosure.

Meanwhile, at the end of 2021, Congress passed the Uyghur Forced Labor Prevention Act (“UFLPA”), which was signed into law by President Biden.   The UFLPA implementation just went into effect in June 2022, with CBP publishing guidance for importers.

Realistically, the UFLPA sets a higher bar for supply chain documentation sufficient to satisfy CBP that there is no forced labor in the manufacture of solar modules – and it seems importers were already having trouble with the level of the old bar.   I think the UFLPA is basically a de facto ban on imports containing any content from Xinjiang, because the bar for bringing in goods with Xinjiang-content is now so high that realistically no importer will be able to do it (or will even try, given the costs and potential liability of having their goods blocked from importation or even seized by CBP).

What exact level of documentation will be required from now on for solar modules?  While CBP has released detailed general UFLPA guidance, there is no way for CBP to bless, in a pre-determined manner, all of the different supply chain combinations and formatting of record-keeping processes, for all different suspect products.  In addition, it is not 100% certain that all CBP agents will exercise the same judgment calls on the sufficiency of documents – think baseball umpires that have similar, but not quite the same, calls of balls and strikes.

It’s becoming clearer that not only will an importer of crystalline silicon solar modules need to trace the sources of its polysilicon (and ensure no mixing or matching that makes the poly traceability indeterminate), but the polysilicon manufacturer will need to trace the quartzite (more on this in later posts).

For any Tier 1 module vendor, many do not make their own polysilicon (or even their own wafers).  In turn, polysilicon manufacturers may procure quartzite from another supplier. So, for a module vendor, there could be anywhere from one to half a dozen or so companies in between the quartzite and the final, fully-assembled module.   Until recently, module vendors did not have to request documents like this up the supply chain (or even anywhere in the supply chain), and it’s unlikely all key component procurement contracts had contractually required this documentation to accompany the physical components sold to the module vendor.

Module vendors will likely be requiring this documentation from their sub-suppliers now. But the question is, how long will it take for the supply chains to respond to these documentation needs? 

One could argue that module vendors should have known that this was coming, and have been prepared already, when detentions of products by CBP began last year.   The Solar Energy Industries Association published guidance regarding traceability requirements over a year ago, in April 2021. 

I have empathy for that position – it has some truth. Though to be fair, the exact granular requirements for importation documentation are arguably not yet known even now. But regardless of anything that could have been done in the past, the reality of the present is that many vendors just don’t know what they don’t know.  That is fundamentally why this risk is so big.  Most vendors have never been through something like this before.  Many smaller manufacturers have probably never hired a U.S. trade lawyer to assist them with something as complex as this. They have historically viewed CBP more as the DMV accepting and stamping their import forms, and collecting tariffs when applicable, rather than how they should really look at it:  CBP as the FBI – a federal agency with knowledgeable professionals who can and will investigate and act as strict gatekeepers of federal law and guardians of the policy objective to eliminate use of forced labor.  

Also, the uncertainty around the Auxin petition wrenched the industry and diverted attention from this issue, since most vendors stopped shipping to the U.S. for a time anyway. There is an overlooked interplay here – why go through entire supply chain reform for traceability documentation up and down the entire supply chain – when you don’t even know if you’ll be serving the U.S. market anyway, due to the Auxin tariff?   In that regard, the havoc that tiny little Auxin Solar wreaked on the industry will still be felt for a time to come, even with a tariff waiver executive order. It ripples into this issue, too.

So that’s where we are now:  newer, stricter, maybe-not-yet-100%-clear documentation requirements for importation, requiring traceability of components in a manner than most companies never have had to do, and many of whom don’t know what they don’t know. 

As a lawyer, I often get requests to “draft language” to protect a client on issues like these, whether seller or buyer – and of course, that’s part of my job. 

But clever ink in a contract alone cannot mitigate this risk, due to all of the complexities involved.  Module manufacturers need to reform their supply chain documentation if they want to serve the U.S. market.  CBP, as the gatekeeper, will eventually know who has the proper documents and who doesn’t. 

Buyers need to do their due diligence on a vendor’s supply chain and recognize these complexities.

Final Thought:  Just-in-Time to Just-in-Case

Besides diligence, and doing your best with the contract ink (more on that coming up), what’s the best way for a module buyer to mitigate this risk? 

Time.

Allow for a potential delay of months in delivery.  This is extremely difficult and costly to do in many instances – I get it, this is easy to say but hard to do.  It impacts EPC schedules, financing, company metrics reported to investors, etc.  But the alternative could be worse.

This risk is just one of many data points painting a bigger picture:  the renewables industry is in the midst of a significant shift that many other global supply chains are experiencing – a shift from “just-in-time” to “just-in-case” operation.   Management teams and their lawyers who recognize the full extent of this shift – as it will manifest particularly in solar and storage in the years ahead – can avoid headaches and extra costs.   Management teams who not only recognize this but who have investors and stakeholders who also understand this will do even better – over the long-term, even if the shorter-term metrics don’t initially look as good.

Also, as I noted at the end of my first post – modules are not really commodities.   A module that gets to your project two months late beats a module that gets locked in a bonded warehouse at the border for 10 months, beats a module that never gets there at all.  That is true product differentiation, though it won’t show up as a line on the module spec sheet.

As related examples, we’ve seen persistent global transportation delays, and exogenous events like COVID and war.  It is now more difficult to rely on the concept of your product showing up from a factory Asia to your U.S. project site just when you want it – not too soon (because you’d have to store it and/or pay for it earlier than you would like and/or have product degradation) but also not too late (where delays increase your costs or even threatens the project), and all at rock bottom cost.  

Even when the industry gets over this particular forced labor documentation hurdle – which it will – “just-in-case” will likely be the new normal for years to come.  Maybe U.S. factories spurred by incentives can eventually fix this risk – but even there, as a developer I wouldn’t have my whole project portfolio turn on  yet-to-be-constructed U.S. manufacturing plants being timely built just-in-time to deliver modules just-in-time for my extremely tight project timeline.  Have your lawyer like me load up the ink on the Delivery LD amounts against the vendor, to protect yourself, if you can win those.  But ultimately, the plan may just need some slack, too.

Len Conapinski

Len Conapinski is a partner at DuFour Conapinski Ha LLP. Please note that all views here are my own personal thoughts, are not intended to be taken as legal advice, and are not reflective of the views of my law firm colleagues, or our firm as an organization, or any client of our firm.

In other words, I don’t want to just report what is going on, I want to help answer: “How does this concretely impact deal negotiations?”

The first two topics I hope to cover are both trade-related issues impacting renewable energy equipment supply, which has been my area of daily professional practice for over ten years.  These are: (i) current state of U.S. import tariff issues, and (ii) concerns regarding potential forced labor in the manufacture of equipment, and the risks of delayed and/or blocked equipment from importation into the United States.  

In the past year or so, questions regarding use of forced labor in supply chains has been mostly focused on polysilicon in solar modules, but this is broadening – including to energy storage (see, for example, this New York Times article discussing forced labor concerns in battery supply chains).   

We’ll get to forced labor in future posts – I think that could be the most important issue for the second half of 2022 in solar. But first let’s cover tariff issues.

Import Tariff Solar-Coaster

The industry moves fast, and I’ve had to re-write this first post a few times before publishing it. As everyone has now seen, the Biden administration announced an executive order waiving tariffs for up to two years from Malaysia, Vietnam, Thailand, and Cambodia. That is critical, as imports from these countries comprise in the vicinity of ~80% of U.S. imports.

Since the executive order, and particularly in the past few weeks since we saw the implementing regulations come out, I’ve seen transaction volume for solar module supply deals pick up substantially.  Transactions aren’t generally in fire drill mode, but people are definitely negotiating deals again. 

In the medium-term, many developers will obviously want their modules imported before the end of the tariff waiver in June 2024.  If you run that backwards to when you need to transact for larger projects, that means negotiations starting now through year-end/Q1 2023.  Demand will be even higher in this period if the ITC extension does not pass (probably of which seems rapidly changing), and people will consider Safe Harboring modules (among other methods) for the ITC step-down from 22% to 10% in 2023-2024.  Finally, there is pent-up demand for modules for projects that were pushed out from 2021/2022 due to recent module pricing (owing to tariff risk/Auxin, elevated container shipping costs, etc.).

All of this is to say, I think the second half of 2022 is going to be busy with module supply negotiations and people locking supply down.

As we enter that phase, here are some important things to consider: the waiver of tariffs announced by the Biden administration is an adrenaline shot to the U.S. solar industry.   As the industry comes off the initial celebration of that tariff waiver, however, there are still risks and unknowns. This means that sellers and buyers will still need to contractually allocate certain tariff risks going forward.

Unfortunately, Biden’s executive order does not mean that sellers and buyers can completely forget about import tariff risk.  Tariff change clauses will still need to be a fixture in US module supply deals. Among the risks that must still be considered in new supply agreements:

Tariff Waiver “Up to” Two Years

The executive order does not waive the tariff for “two years,” as widely reported in much of the media; the executive order waived the tariff for “up to two years.”  When you are contracting to buy or sell modules for importation in the US market, that is a big distinction.  There is a risk that this tariff waiver could theoretically be terminated any time between now and June 2024.  

I am not a trade law specialist, but from my synthesis and discussions with trade lawyers and others, I suspect that the “up to” two years language in the executive order was partially meant to help insulate the executive order from court challenge.  By not specifying a guaranteed (and arbitrary) period of “two years”, and instead allowing for at least the possibility that the conditions giving rise to the waiver might theoretically dissipate in less than two years (although realistically I think they won’t change), the President seems to be acknowledging that the authority granted to waive tariffs depends on certain external factors persisting, and those factors are not necessarily arbitrary in time duration. 

I personally think that it is most likely that the “up to” two years language may not be an undue concern for the industry.  Supply chains may shift a lot in the years ahead in response to policy incentives, potential tariff risk, and broader geopolitics. But the high-level supply chain conditions that exist right now in solar (e.g., concentration in Southeast Asia) will still substantially exist two years from now – these things can change, but not completely in a matter of months or even a year or two.

That said, when signing contracts for millions of dollars, sellers and buyers have to consider the risk that my theory, that “up to two years” in the executive order realistically means “two years” is wrong, and this could lead to the executive tariff waiver terminating early.   Supply agreements will need to have language addressing risk allocation if the tariff waiver is terminated sooner than expected/hoped. 

Court Challenge to Executive Order

The executive order waiving tariffs may be challenged in court.   My synthesis to date from trade lawyers about this is as follows:   The President has very broad authority under the statute that was invoked.  That said, this portion of the statute allowing for the tariff waiver is not often used. In addition, the tariff waiver provisions have been invoked more directly in war-time than in circumstances 100% analogous to the solar industry’s present circumstances.   I expect deeper analyses of this issue from trade law experts to emerge if a lawsuit is filed, although the initial thought seems to be that the likelihood of a court challenge actually succeeding is low, but non-zero. 

In other words, the risk seems low — but not to the point that you can just forget about it.  Also, if such a challenge did succeed, it could have major implications for supply contracts, and perhaps even risk of retroactive application of a tariff.  

A lawsuit is possible — Auxin would not have much to lose by at least trying, and that in itself would make headlines and inject some uncertainty into the market, as the market synthesizes if such a lawsuit would have any chance of succeeding.  

So, a court challenge to the tariff waiver represents a “long-tail” risk – meaning it has a low probability of occurring (hopefully low probability, but I want to hear more detailed analyses on this before getting too comfortable) but if it happened, it could be quite high impact.  Solar module buyer and sellers must contractually consider that, for up to the next two years, cells and modules imported into the U.S. from Southeast Asia may be free of tariffs upon importation. That is, no cash will have to be paid to U.S. Customs at that time.

To summarize, the long-tail risk is that all of the following events happen:

(i)                  a court challenge is launched against the Biden executive order waiving tariffs, asserting that Biden did not have the authority to waive the tariffs;

(ii)                that court challenge eventually succeeds; and

(iii)               during the pendency of such challenge, a tariff is announced, either because of the Auxin investigation (which will still continue to proceed despite the executive order, with a preliminary ruling expected in late August) or any other new tariff investigation (which I don’t think are blocked from being at least being brought as a result of the executive order, even if a tariff is not imposed due to the waiver. More on this below). 

If those three things all happen, then there may be risk of a retroactively applied tariff.  I’ve not yet heard any analyses from trade law experts saying that it is completely impossible for a court challenge to result in retroactive application of tariffs.   This could occur years from now, making the period of retroactively application of tariffs quite large, since it may take a long time for a definitive court challenge to wind its way through the court system, including all possible appeals, and we do not yet have any tariffs announced as a result of the Auxin investigation (if any are ever announced).

Much more can and will be said, especially if there is a challenge, but I want to focus on what all of this means for sellers and buyers contracting for supply of modules right now.

Module vendors and buyers will have to consider that at least some non-zero probability of retroactive tariff risk, even with the tariff waiver in place.   This is surprising to some buyers who may have thought that the tariff waiver executive order means that everything is 100% settled re: tariffs.  

How does this risk resolve in contract negotiations?  The good news is that, unlike when the Auxin petition was initiated and we had no tariff waiver, the risks presented right now seem “transactable” — meaning this risk appears to be low enough that it can be allocated in a contract and new large deals can get signed despite this risk. 

One resolution to that risk is simply that module vendors bear such risk, and it is “priced in” to the upfront price of modules to be sold.   I think we will see this in some deals – I don’t think the price premium we are talking about is the same level as what vendors wanted while Auxin was pending and there was no tariff waiver executive order. But there likely would be a price premium for the vendor taking retroactive risk (and all vendors will want a tariff change clause of some sort for anything to be delivered going forward, however).  Otherwise, this risk will likely be put on the buyer, as it is a seller’s market for modules right now. Buyers that want the lowest price may have to take this risk (which is another price itself, of sorts.)

I think this issue will remain a bit fluid for the next month or two, until there is a preliminary decision announced in the Auxin proceeding.  Also, I think it may ultimately be handled differently in different contracts.   The reason I say that is because a unique aspect of the Auxin petition and AD/CVD tariffs generally is that different specific module sellers have different specific risks of tariffs here, depending upon their specific supply chains. 

In addition, different vendors can end up with different AD/CVD tariff amounts assigned to them as a result of Auxin.  So there may not be a “one size fits all” approach that results in contracting around this risk.  I think there may also be other transaction structures that are optimal in this circumstance, after some initial ideas can actually be tested in transaction negotiations.

Either way, one bottom line is that supply agreements will still contain tariff change language in case the tariff waiver is terminated earlier than two years, and/or litigation alters the expected path of tariffs.

Tariff Waiver Implementation by Commerce

The proposed rules implementing the tariff waiver have been announced by Commerce for public comment. I personally don’t see any surprises in it.  One item I was wondering about was whether this waiver would cover what I call a “regular” AD/CVD case against Vietnam/Malaysia/Thailand/Cambodia.   The Auxin petition seeks to apply Chinese AD/CVD tariffs to those countries – but what about a separate investigation seeking to apply AD/CVD to any or all of those four countries independently?  I think the proposed tariff waiver implementing regulations prevents application of those duties during the period of the waiver.  That is an important nuance that I have not seen largely discussed within the industry.   Without that nuance, I think the waiver would not have the desired impact.

There is much more to be said about tariff issues, and I will write further posts as information develops. 

Final Thought - Solar Modules are Not “Pure” Commodities

When I completed an MBA I had a marketing professor at UC Berkeley who would “fine” any of his students (request a $20 donation to charity) if such student ever described any product as a “commodity” in his class.  His point was that even municipal tap water could be marketed as differentiated — if you developed the right marketing strategy.  

Still, I’ve often considered solar modules to be “commodity-like” (and I’ll make a $10 donation for that statement).  There is increasing technological differentiation in solar modules, to be sure. But zooming out, the electricity produced by modules is fungible, module characteristics are often somewhat similar compared to other products (e.g., 90%+ market share for crystalline silicon), and most tellingly, price is often the determining factor in a choice between two “Tier 1” module suppliers.

But import tariff and forced labor investigations are now drilling very deep into the entire supply chain for each module — deeper than we’ve ever seen before. Issues now get into polysilicon (even quartzite), ingots and wafers, not just the location cell manufacture and module assembly. As such, different modules and module vendors now have different risk profiles associated with their differing originating supply chains. 

Modules will increasingly be differentiated on these features, and not just the specific cell technology used, or other technical characteristics.   That’s a new era, and also a new vector of differentiation.

Even the team within any particular module vendor is differentiated – has their team (both in the U.S. and their overseas headquarters) ever dealt with a U.S. Customs inquiry before?  Can they speak intelligently about the UFLPA?  Do they have U.S. trade counsel lined up?

Related to some of those questions, in future posts I will cover the looming topic for solar modules and potentially energy storage:  supply chain traceability to ensure that no forced labor is used in the product supply chain, and proving that to U.S. Customs.   

The teaser here: as a whole, the industry as a whole is not ready for what is probably coming.

 I hope that you found this first post and subsequent ones useful. All feedback and suggestions are welcome.

Len Conapinski

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Len Conapinski is a partner at DuFour Conapinski Ha LLP. Please note that all views here are my own personal thoughts, are not intended to be taken as legal advice, and are not reflective of the views of my law firm colleagues, or our firm as an organization, or any client of our firm.