From pv magazine ISSUE 05/23
Solar supply chains have experienced unprecedented volatility, resulting in broken contracts, project delays, and frayed relationships between module suppliers and buyers. Upstream raw material vendors and global shippers have pressured module suppliers, and buyers have borne the brunt of unwanted consequences just to secure products.
While supply chains have recently shown signs of stability, suppliers are in no hurry to return to more neutral contracts. As such, it’s incumbent upon buyers to take proactive measures.
Suppliers may keep all options open until contract signing date, repeatedly revising terms. This can come as a surprise, particularly to buyers with limited recent procurement experience. The reasons vary from delays caused by over-utilised supplier staff to tactical and strategic considerations. Revisions can range from pricing to small details. Some suppliers accept terms and change them after initial payments. To mitigate such risks, buyers should diversify procurement efforts.
Cash-constrained suppliers may want payment in regular installments rather than the traditional down-payment and balance upon delivery. In the US, they might demand full payment before customs clearance, due to regulatory risks.
Whenever shipping terms allow, however, it’s advisable to avoid paying significant amounts before production or shipment. Buyers should insist on scheduling the last payment for each batch after delivery, as their leverage shrinks considerably once final payment is made.
Contracts usually stipulate products be delivered new and undamaged. This can be verified under the delivered duty paid (DDP) and delivered at place (DAP) Incoterms – terminology used to facilitate international trade – with visual evidence during unloading. However, suppliers may insist on payment even if products arrive damaged or even if the wrong product is shipped.
Buyers should insist on terms that ensure verification that deliveries meet agreed-upon specifications and are suitable for use, before final payment.
Suppliers have begun to require financial guarantees for delivered but temporarily unpaid products. However, it is not as widespread for suppliers to provide financial guarantees to buyers whose project success depends on timely delivery. Even if a supplier offers a down-payment guarantee, it may apply to a limited number of cases and exclude liquidated damages for delivery delay.
Although suppliers may disagree with providing widely applicable financial guarantees, buyers should carefully scrutinise guarantees they receive, including financial and parent company guarantees.
In ever-evolving PV supply chains, buyers may be unconcerned about the production location of their product until the supplier informs them about a delay caused by an original equipment manufacturer. They may not realize their order is the first to be produced at a newly built factory experiencing high defect rates.
It is crucial for buyers and sellers to align their interests to ensure the product is delivered without defects and meets all specifications at the first attempt.
Contracts should identify factories and both parties should verify their suitability, including certification, quality, and licenses, if applicable, before production begins, in order to minimise issues and delays. A detailed technical and quality exhibit should include ways to objectively evaluate quality controls, preparedness of production facilities, and product quality.
Serial defect warranties are now common in larger contracts. The premise is simple: if a certain percentage of modules exhibit the same type of defect from a common underlying cause, all affected modules should be replaced or repaired, regardless of whether the defect has yet occurred. However, some suppliers suggest alternative remedies that do not consider the entire population. They may propose to fix only the defective modules and “monitor” the rest, undermining the fundamental concept of a serial defect warranty.
Buyers should ensure the serial defect clause allows for dependably solving the underlying root cause, regardless of whether a defect has yet manifested, and may require that the remedy include reimbursement for labor costs during replacement.
In recent years, many contracts have included price indexing to address the volatile and generally increasing costs of polysilicon (or wafers or cells) and shipping. However, with cost declines now in progress or on the horizon, suppliers who previously insisted on such clauses have now largely abandoned this practice.
Buyers may now consider proposing price indexing clauses, which could be particularly beneficial for contracts with longer lead times. Suppliers are unlikely to accept indexation mechanisms without a floor, though, as they may pose significant risks.
Both suppliers and buyers must clearly understand – and have evidence of – the composition of the silica-based supply chain. Buyers should consider what remedies are necessary if an audit finds a breach or a shipment is unable to enter a project country. As the situation is continually evolving, both parties should agree on procedures in case of enforcement changes or third-party allegations.
There are two sides to every contract negotiation. Contracts may share certain standard practices but tweaking the finer details is key to minimising your risks. Whether a buyer or seller, taking time to understand the other side’s priorities can help secure a deal that works for everyone.
About the author: Martin Deak is associate director of supply chain management at Clean Energy Associates. Deak graduated from the Willy Brandt School of Public Policy in 2016, with his master’s thesis addressing the sustainable energy transition.
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