Of PV and ‘Buy American’

The recently passed American Recovery and Reinvestment Act of 2009 included a controversial "Buy American" clause, which specifies that "none of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance or repair of a public building or public work unless all of the ... manufactured goods used in the project are produced in the United States."

In an industry such as PV that has significant global supply chain flows, the provision has generated much debate and discussion, and the phrasing of the statement retains sufficient ambiguity so as to leave the specifics of its application open to interpretation. What, for example, is the manufacturing origin of a module that is assembled in the U.S. (Solon Arizona); made from cells manufactured in Europe (Q-Cells); uses wafers processed in China (LDK); made from polysilicon produced in the U.S. (Hemlock)? Similarly, what is the eligibility of a CdTe module produced in the U.S. (First Solar Ohio), but where feedstock was obtained from Canada (5N Plus)?

A softer interpretation would require some fixed percentage of the cost of the module or the finished system to come from U.S. raw materials and labor. At the very least, the provision may require installers and developers to source modules from U.S.-based facilities in order to qualify for the cash grant on installations, SEP funds and other stimulus-driven demand-side incentives. Given that balance-of-system components can easily be obtained and produced domestically and that installation labor cannot be outsourced, the BOS aspect of the equation is not a cause for concern. As regards the issue of module sourcing, the negligible feedstock costs and integrated manufacturing process of thin film could make the calculation easier for the installer, giving the bevy of domestic thin-film firms a material advantage as concerns uptake and increasing their market share in the U.S. only further.

This leaves the question of crystalline silicon PV, which has considerably more moving parts. The way out here, while more complex, is far from intractable. Many foreign manufacturers already procure polysilicon from U.S.-based facilities, such as REC, MEMC, and Hemlock, since the U.S. exports roughly nine times as much polysilicon as it consumes. To ensure that the remainder of the module cost has a sufficient domestic share, the logical decision for a foreign manufacturer would be to construct a module assembly line in the U.S., since this is the closest step to installation, and doing so would minimize sometimes-hefty glass shipping costs. Indeed, this reasoning has driven recent decisions by droves of foreign PV manufacturers to construct module assembly facilities in the U.S. (Isofoton, Suntech, Yingli, Wanxiang, Solar Enertech). To the extent therefore that even a looser definition of the term "manufactured goods" is applied, it will likely result in continued investment in domestic c-Si module manufacturing by Asian and European firms – and the recently introduced 30 percent manufacturing tax will only make these decisions easier.

On the other hand, the ramifications of a more protectionist interpretation of the clause that requires all components and feedstocks to be domestically produced could be severe. Notwithstanding the complexities involved in enforcing such a requirement and the loopholes that can be exploited (it can be avoided if the cost of U.S.-produced goods increases the project cost by more than 25 percent, for example), it seems unlikely that such an extreme version will be adopted. The House version of the bill that originally added the clause generated an outpouring of disapproval from both American politicians and the international community, which led to the insertion of an amendment into the final version of the bill. This amendment, added by the Senate at the behest of the White House, watered down the original provisions, stipulating that any government procurement policies comply with World Trade Organization rules and existing trade agreements. Additionally, the Obama administration has also sought to assuage such fears, continuously reiterating that it will not engage in "protectionist behavior."

Perhaps most importantly, however, is that almost no PV manufacturer has fully vertically integrated operations (feedstock to module) in the U.S. The few that do are smaller-scale producers that employ only a small fraction of the domestic PV workforce. Imposing such a stringent requirement, therefore, would in all likelihood be counter-productive with regard to the aim of the ARRA by negatively impacting the thousands of PV workers employed by global firms such as First Solar, United Solar, Sharp, Sanyo and Solarworld in the U.S. – which constitute the vast majority of U.S. PV manufacturing output and are frequently used in domestic installations. And at the end of the day, stealing production share from low-cost Asian manufacturing locations with generous tax holidays, heavily subsidized utility rates and no labor rate floors may not be a battle that can be won, leading one to think that perhaps the U.S. would be better served concentrating on incentivizing high-value, innovative manufacturing, IP development, and R&D, as well as construction and installation jobs – the latter of which can never be outsourced.

It is worth mentioning that the "Buy American" clause is still evolving in the larger context of the global macroeconomic environment and the resulting increase in protectionist policies around the globe. Thus, it is likely to be subject to further modification and refinement over the course of the year; in particular, sector-specific details will need to be introduced to add much-needed nuance. Given how globally interconnected the PV supply chain is, an overly protectionist version of this clause would affect the domestic manufacturing industry very adversely indeed, and is likely to be extremely unpopular at all levels of the value chain. And for good reason – it does not make a whole lot of sense.