Clean Energy’s Messy Problem: The Solar Industry, the U.S. Government, and the Complex Task of Combatting Forced Labor

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This is the first of three articles on the Solar Industry and Forced Labor. Here we focus on regulation. Articles in the coming weeks will focus on issues facing importers and their suppliers, and on investors and their requirements.

 

Your shipment of solar equipment is stopped by Customs at the U.S. border because of potential use of forced labor.

  • How do you prove that your supply is free of forced labor?
    • What is required by the U.S. government to prove the products’ admissibility?
    • Will your suppliers certify that equipment is free of forced labor?
  • What do your contracts say about delays related to forced labor?
    • What is in your supply contracts?
    • What do your contracts with investors say?
  • The equipment is not being held by U.S. Customs, should you reroute it elsewhere?
    • Could you deploy it to Canada, to Europe, to South Korea?
    • How does that square with your company’s ESG policy?

Clean energy faces a messy problem.

The region at the heart of solar production is rife with forced labor and it is not clear that there is a meaningful supply anywhere else of the materials the solar industry relies on. Further, it is not clear how solar suppliers, importers, developers, or investors can verify that their supply chains are free of forced labor when the Chinese government denies that such practices exist and may punish those who would contradict that position.

Add to that issue the fact that Customs is stopping equipment at the border if the agency suspects there is forced labor in the supply chain, but the U.S. Government has not provided meaningful guidance on how to prove that solar products are free of forced labor and therefor admissible.

The industry and regulators are searching for a viable way to source clean supply chains for clean energy and to verify with some certainty that solar equipment in the United States if free of forced labor.

1. Background

Hoshine Silica Industry Co. is a major supplier to the solar industry and is more or less ground zero for forced labor abuses. The solar industry relies on panels made from silicon. Hoshine is the world’s largest metallurgical-grade silicon producer.

Silicon can be made a number of ways, but the most common steps are to mine quartz, crush and heat that material into metallurgic-grade silicon, then use chemical processing to make polycrystalline silicon. There is obviously more complexity to the system, but the purpose of the explanation above is to point out that a major source for the silica rock, as well as the coal needed for the heat processing, are both found in the mines and manufacturing facilities of Hoshine Silica Industry co. According to reports, those facilities are in the same industrial park as two Uighur internment camps.

The solar industry recognizes the forced labor problem is real, is not going to go away on its own, and must be addressed head on.

2. The Current and Near Future State of Regulation

2.1 U.S. Customs is stopping equipment at the border

As we reported here, the U.S. Government issued a Withhold Release Order (WRO) stating that any products believed to contain silica material produced by Hoshine Silicon Industry Co. and its subsidiaries should be held by Customs and Border Protection (CBP) and not released without evidence that the product’s supply chain was free of forced labor.

It appears that more similar regulation is coming down the pike. We understand that the effort to combat forced labor in the solar industry is being driven by the National Security Council at the White House, and supported by an unusual coalition of China hawks, Labor interests, and NGOs. For that we reason, we believe that there the current administration will pursue more WROs.

Additionally, on June 24, the U.S. Department of Commerce, Bureau of Industry and Security (BIS) added four Chinese entities to the Entity List for accepting or utilizing forced labor in the implementation of China’s campaign of repression against Muslim minority groups in the Xinjiang Uighur Autonomous Region (XUAR). It is very possible those companies may soon be subject to WROs:

  • Xinjiang Daqo New Energy Co., Ltd.
  • Xinjiang East Hope Nonferrous Metals Co., Ltd.
  • Xinjiang GCL New Energy Material Technology Co., Ltd.
  • Xinjiang Production and Construction Corps (XPCC)

According to recent reports, BIS may also issue more entity list designations. Those designations prohibit exports to the designated companies. However, they may be a good indicator of what companies may be targeted for WROs thereafter.

2.2 The U.S. Congress may broaden prohibitions on imports

In parallel, the House and Senate are currently working on two bills, both titled Uyghur Forced Labor Prevention Act. The senate bill has been passed, while the House bill is still in committee. Those bills could establish a presumption that anything produced in the XUAR uses forced labor. That would mean that importers of those articles would then be reqiured rebut that presumption in order to import any goods from the Region into the United States.

2.3 Other agencies may add to the restrictions

There is some speculation that the USTR may start issuing 301 designations – adding a substantial punitive tariff to equipment from the Xinjiang region. Meanwhile, the U.S. Department of Treasury has shown that it is not afraid to use its sanctions authority to entirely cut off U.S. persons from transactions with parties suspected of forced labor abuses.

3. The Opening for Industry: Self-Regulation or Government Regulation

3.1 Customs will need some time to ramp up its enforcement apparatus

The U.S. Customs and Border Patrol agents addressing forced labor are competent and hard-working. However, the agency is understaffed to deal with the overwhelming problem of forced labor in the solar industry. With maybe a couple dozen agents assigned to forced labor, and that force also looking at Xinjiang textile and agriculture imports, it will be difficult for CBP to find bandwidth to clear imports stopped at the border for forced labor issues.

That small group of enforcement officials will face the challenge of tracing supply chains from the base chemical level described above, with documentation in Mandarin. Finally, at this point, there is no clear guidance from the U.S. government as to what evidence would clear a shipment stopped at the border. There is no U.S. Customs checklist for forced labor verification nor a list of acceptable evidence that a supply chain is free of forced labor.

Because no guidance on what constitutes admissible product has been issued, it is unclear what CBP would want to see in order to clear equipment held under a WRO. This uncertainty leaves industry with an opportunity to lead before government imposes requirements (more in Section 5 below)

3.2 Industry can have a voice (for now) in what regulation will look like

As the U.S. Government slowly starts to work on figuring out what constitutes admissibility, the Solar Industry has opportunity to lead the process in a number of different ways:

  • The Solar Industry could create and propose a list of criteria for admissible products.
  • While it is taking steps to identify suppliers accepting or relying on forced labor (on which more in our second article of this series), the Industry could effectively clear a group of suppliers and white-list those in cooperation with the U.S. Government.
  • The Industry could take the Better Cotton Initiative as a template and invest in a third-party verification system that would constitute substantive, auditable evidence of a supply chain free of forced labor.
  • We understand that chemical signatures in the silicon wafer from the silicon rock processing would allow for batch tracing,[1] which allowing the Industry or a vendor to the industry to batch-test and identify the source of the materials rely on.

Any one or a combination of the above approaches could help the Industry support the laudable goal of eliminating forced labor from the supply chain while, at the same time, helping the Industry avoid onerous or inconsistent regulations devised without its input. There is opportunity for solar to continue its spectacular growth, but it will need to take steps to address this messy problem.

In upcoming articles, we will continue our exploration of the forced labor issues facing the solar industry with respect to (1) working with (or against) suppliers, and (2) addressing the concerns of the investors that fuel the industry’s expansion in the United States and globally.

FOOTNOTES

[1] Though the details of the chemistry are beyond the scope of this blog and the understanding of this attorney.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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