What Buyers Need to Know About the Solar Supply Crunch
Over recent months, large energy buyers may have found themselves experiencing price increases on active solar procurements as well as commercial operation timeline delays for solar contracts already executed. That's because renewable energy project developers have been facing a severe solar panel and module supply crunch due to several factors.
Large energy buyers should forge ahead. But they should be aware of this solar supply crunch and consider adjusting their approaches pre and post contract signing to best avoid any unanticipated negative impacts on the path to reaching their sustainability goals.
Overview of Factors Currently Tightening the Solar Module Supply Market
Like lumber, appliances, and other goods, solar panels and modules are experiencing supply chain disruptions thanks to the pandemic, resulting in higher solar module prices. Conversations with our industry partners have shown that prices have risen 15-40% since July of 2020. However, there is more to the story. The solar module supply shortage is also driven by the following factors:
- A polysilicon component shortage driven by recent US bans on certain Chinese supply (more on this below)
- Ongoing COVID-19 shutdowns, which in the early days of the pandemic resulted in temporary closures of manufacturing facilities in China but are now impacting facilities in Southeast Asia (e.g., Vietnam)
- Increased buyer demand due to record sustainability and climate commitments
- Additional solar component part shortages (e.g., glass, aluminum)
- Constraints on global shipping that have resulted in both timeline delays and significant cost increases for shipping solar panels to the US
US Withhold Release Order on Solar Imports Deep Dive:
On June 24, 2021, the Biden administration put into place a withhold release order (WRO) on shipments containing silica-based products from five Xinjiang-based companies due to concerns over forced labor in the region. Customs and Border Protection can seize any goods coming into the US that it suspects might be linked to any of the companies, and importers have three months to prove goods are not linked to forced labor of Uyghur Muslims, or the goods will be re-exported to the country of origin.
We believe the solar industry had already begun to implement supply chain traceability protocols that will enable the validation required by the WRO, such as SEIA’s recently published Traceability Protocol, and shift away from Xinjiang-based polysilicon prior to the passage of the WRO. This supply chain shift is likely one of the key drivers behind the solar module price increases mentioned above.
CFR encourages all RE buyers to ask questions related to human rights in the solar supply chain of all developers as part of the procurement process. Our team has incorporated this into our developer due diligence processes. Many buyers expect RE development partners to comply with supplier policies and codes of conduct, which often prohibit supply chains that are tainted by forced labor.
How Does a Solar Supply Shortage Impact Energy Buyers?
Given these ongoing challenges, each with different time horizons, many large energy buyers will undoubtedly be negatively impacted by the solar module supply crunch. How can these impacts materialize for buyers?
- Contract (e.g., PPA) fixed price increases for ongoing competitive procurements (and even for previously negotiated contracts in certain situations)
- Delays to commercial operation dates for currently available and marketed projects as well as for already contracted projects (i.e., Force Majeure declarations)
- Canceled projects due to cost overruns
How Can Buyers Reduce the Risk of Being Impacted by the Solar Supply Shortage?
As mentioned in CFR’s recent Hidden Risks of Project Development article, it is imperative that buyers understand and evaluate renewable energy project-specific development risks to increase the probability for successful outcomes. With this particular solar supply shortage risk in mind, buyers and their advisors should be thinking about how they can adjust their approaches to best navigate these choppy waters ahead and mitigate risk.
- Improve buyers’ due diligence and project screening process to better understand each developer and project’s particular situation as it relates to module supply.
Buyers should ask the following questions:
- How does the developer plan to navigate through the current module supply shortage? Does this sync with the project’s price and expected timeline?
- Does the developer maintain a master module supply agreement with a specific manufacturer? Where are the module manufacturer’s facilities located, and what are the potential resulting impacts? How significant is the developer’s book of business with the likely module manufacturer for the specific project?
- How much flexibility would the project have to switch out module supply for unanticipated events (e.g. ability to switch between a select manufacturer’s facilities or even between manufacturers)?
- Stay mindful about the module supply shortage when negotiating particular language in a buyers’ renewable energy contract (including but not limited to Force Majeure and Change in Law clauses).
- Consider whether a delay in the project’s operation date might be preferable to termination, a lawsuit or changes in terms such as a price increase or an added language giving the seller a future termination right.
A change in operation date might require a “bridge” REC purchase to fill the gap in your organization’s sustainability plans, which might be able to be provided by the seller
- Stay current with a project’s construction progress reports and actively engaging with the project developer in asking questions that could prompt vital action.
If sent a Force Majeure declaration, work with an advisor and counsel to best understand how to respond.
- Consider any impacts to your baseline expectations for a project’s renewable energy credits (RECs) and decide whether you need a standalone supplementary REC purchase to meet your organization’s sustainability goals.
Despite the complexities with this current solar module supply shortage that can result in price increases and project delays, it is our view that buyers should continue to push forward with procurements rather than waiting it out on the sidelines. These supply complexities may stick with the industry for an extended period of time, and waiting could result in additional future uncertainties (around tax credits, tariffs, etc.).
It is imperative, however, that buyers and their advisors are adjusting and improving their approach to renewable energy procurements and contracts to best mitigate against the potential negative impacts from this solar supply shortage.