Enphase Energy Is Not Your Average Solar Company

| About: Enphase Energy (ENPH)

Summary

Enphase Energy is a major player in the distributed solar, module-level power electronics arena.

Enphase and SolarEdge are competitors with entirely different architectures.

Enphase's reputation has been unfairly tarnished with reports of device failure under high temperatures.

Enphase's latest Analyst Day strategized how it would not be priced out of the market.

Enphase's new AC Battery storage solution will diversify the company into a whole new market segment.

In the residential solar PV system market, there are 2 types of systems available to the customer: one which uses devices called "micro inverters" with each solar panel, and the other which uses devices called "power optimizers" with each solar panel, and then also has to have a device called a "central inverter" for all the power optimizers to pass their energy through. It is this single device which is the crux between the 2 systems - one being a completely decentralized system and the other being a centralized system. With a centralized system, the failure of the central inverter will bring the whole system down, but with a decentralized system, a failure of any micro inverter will just cause the loss of a single panel in the system while the rest of the system continues to function fine. What customer out there wants to find out that there system is down and then has to deal with getting it repaired? What is the length of time the system will be down for? Will they have to find out that there is a problem with their system by receiving an electricity bill which is triple from what they normally are used to receiving?

Since 2006, Enphase Energy's (NASDAQ:ENPH) main product has been a device called a micro inverter, a device invented to improve the fault tolerance of the solar PV system so that there would not be a single point-of-failure, and customers would never have to deal with their solar PV systems being completely disabled for an unknown period of time. Enphase is now in its 5th major revision of its micro inverter device (1st - M175/released 2008, 2nd - M190/released 2009, 3rd - M215/released 2011, 4th - M250/released 2013, 5th - S280/released 2015). Enphase's product history alone is a statement to both product improvements and maturity - other micro inverter manufacturers such as SMA (OTCPK:SMTGF), ReneSola (NYSE:SOL), Enecys, or Chilicon Power cannot compare, for Enphase was the first company to successfully commercialize the micro inverter.

Currently, there is a lot of talk about which product is better - the micro inverter or the power optimizer. An average 7-kilowatt solar PV system using SolarEdge (NASDAQ:SEDG) power optimizers and central inverter will cost the residential customer about $1,500 less than an Enphase system (Note: this pricing was done fairly using a distributor that sells both Enphase and SolarEdge at Renvu.com). This approximate cost difference must takes into consideration the following points: 1) Difference in architectures - with SolarEdge, the customer will still have a system with a single point-of-failure, and when that failure occurs, the entire system will be down for some time; that is not true with an Enphase system. 2) Warranty - with SolarEdge, its inverter products are warrantied for 12 years from all defects; with Enphase, its micro inverter products are warranted for 25 years. To extend SolarEdge's warranty to match Enphase, you must pay an additional $500. 3) Installation - Enphase is a simpler and safer system to install since the installer does not need to install a central inverter device, nor does the installation require any dangerous work to be done using DC electricity. 4) Tests by PV Evolution Labs, an independent testing facility, showed that Enphase systems consistently produced 1.1% more energy than a SolarEdge system. There are many installers out there who prefer to use Enphase products in their solar PV system installations, but their main complaint is cost of Enphase versus the competition, kind of analogous to the cost of an Apple MacBook Pro verses a cheap Windows laptop!

There are also a lot of false truths about Enphase components failing due to high temperatures. A technical brief by Enphase showed that in Australia, the capital city of Adelaide set a record for extreme temperatures with 12 days of 40°C or above. The previous record of consecutive days over 40°C had stood for 117 years. Melbourne had its hottest 24-hour period, with an average temperature of 35.5°C, and Perth had its hottest ever night and its second hottest summer on record. Data was collected from more than 2,000 Enphase micro inverters across 170 system locations in Australia, and no micro inverter shut down due to high temperature.

Enphase's share price is currently at historic lows. This low share price in the market has proven that price does matter, regardless of slight architectural prowess, warranty durations, faster installation times, favorable laboratory tests, and even installer preferences. On 11/5/2015, Enphase held an in-depth Analyst Day presentation by key members of the senior management in order to address how Enphase was going to deal with its latest threat of being priced out of the market. In that presentation, CEO Paul Nahi stated that the company's goals would be to reduce pricing by 25% by the end of 2016, and then by another 25% by the end of 2017, and finally reach an incredible ten-cents-per-Watt cost thereafter. Through product component reduction, miniaturization, assembly improvements and cost reductions, et cetera, Enphase demonstrated exactly how it would accomplish its price reductions and triumph over its competition, and for those who were able to listen to these presentations, as I was able to, they were quite convincing.

It is important to note that in the past year, Enphase has struck deals with some major solar panel manufacturers. On 12/3/2015, LG Electronics (OTC:LGEAF) and Enphase signed an agreement to integrate Enphase's micro inverter technology into LG Electronics' new generation of AC solar panels (ACM) for the global solar market. The ACM will incorporate Enphase's next-generation S-series micro inverter with LG's high-efficiency NeON 2 solar panels. Shipments are expected to begin in the second half of 2016. The LG NeON 2 recently won the Intersolar 2015 Award for excellence in the PV module category with panel efficiencies of almost 20%. Also, on 9/14/2015, SolarWorld (OTCPK:SRWRF), the largest U.S. solar manufacturer, and Enphase agreed to jointly develop a new generation of AC solar modules for the worldwide market.

Sunrun (NASDAQ:RUN), the largest dedicated solar company in the U.S., entered into a strategic supply agreement on 7/28/2015 for Enphase to provide its solar energy systems for Sunrun's home solar installation business. On 6/2/2015, Enphase and REPOWER signed an agreement which established Enphase as its primary solar energy system supplier. According to GTM Research, "Enphase and REPOWER are the vanguard of a new generation of solar solutions categorized as Solar-Plus. The Solar-Plus ecosystem includes solar packaged together with building automation, energy management and load control, energy storage and electric vehicle charging stations. These integrated offerings will reshape the U.S. solar market".

In the past few years, Enphase has spent almost $100 million on research and development, more than SolarCity (NASDAQ:SCTY) and SolarEdge combined, which has resulted in a new, modular, scalable, easily-installed, lightweight battery storage product called the "AC Battery". This storage system will create a whole new market for Enphase Energy, a market which is relatively untapped. Enphase has partnered with Eliiy Power of Japan and produced a new, safe storage system which uses Lithium-Iron-Phosphate for its battery and Enphase's new S-series micro inverter for its smart electronics. Enphase will do for batteries what it has done for solar panels, and this being the integration of smart electronics with devices which used to be, as Enphase's co-founder Raghu Belur states: just "dumb box solar"! In the olden days, the customer had very little control over their solar panels or batteries, and without a technician, they really had no way of knowing if every component was working fine. With the new Internet of Things or "IoT" trend for household devices, customers are now able to monitor their Internet-ready devices and using their web browsers, email, et cetera, are able to visually see that their Internet-capable devices are working 100%. This gives customers better control over their Internet-capable devices without the need for a service technician to tell them that everything is working, and thereby improve and simplify their living environment.

With Net Metering contracts being modified (California) or phased out entirely (Hawaii, Nevada), and Feed-in Tariffs being phased out (Australia), solar PV system customers are going to have to turn to storage, otherwise their solar PV system will literally be giving electricity away for free or at seriously reduced prices. Enphase has taken a bold move to address this bureaucratic and economical issue by integrating smart storage with its smart micro inverter product, and it has given the home residential solar system owner a viable alternative to dealing with the utility companies. In the coming years, solar PV systems will need to be sold with some form of storage in order to make the system a viable option to the residential customer. The beauty of an Enphase AC Battery system is that, like its micro inverter architecture, it is modular so that if one of its 40-pound batteries does fail, the entire storage solution is not disabled; furthermore, since it is lightweight and plug-n-play, the home customer does not need a team of technicians to install it, remove it, nor will the customer incur expensive shipping costs to ship it, as would be needed with a 220-pound Tesla (NASDAQ:TSLA) PowerWall. Furthermore, its modularity and scalability will allow customers to enter the market at the lowest cost-of-entry, and then grow their battery storage system as both budget becomes available and need arises. With installation time taking literally a few hours, the reduced costs of installing an Enphase AC Battery home energy solution compared to competitor solutions will be a major selling point.

Investors wondering whether Enphase's AC Battery and its home Energy Management System will be successful need only turn to Enphase's reservation system - yes, its 330,000 member reservation system called "Enlighten", which is growing by more than 400 customers daily! Tesla boasted it had a reservation list in the thousands for its Powerwall battery system, but none of these reservists had laid down any real money. With Enphase, Tesla's enlightened customers are just as likely, and in fact, more than likely to invest in an Enphase storage solution, especially as Feed-in Tariffs and Net Metering contracts are scaled down or phased out entirely. If a customer currently has a working solar PV system using Enphase's micro inverters, then isn't it more likely that this customer will seriously consider Enphase's AC Batteries when deciding whether to add storage to their Enphase solar system? My home's solar system uses Enphase micro inverters, and I am anxiously awaiting the Enphase AC Batteries to go on sale, so that I can further increase the power of my home energy system. Furthermore, any solar system, not just Enphase solar systems, can be retrofitted with the AC Battery storage solution, and no modifications to existing solar systems will be required; this is an important aspect to Enphase's AC Battery storage solution, for it will not limit Enphase's market audience.

It is true that some utility companies have been threatened by distributed solar systems - see Nevada PUC's recent decision on ending Net Metering and NV Energy. But, it is also true that some utility companies have embraced solar - see articles on NextEra Energy's (NYSE:NEE) HECO and its relationship with Enphase Energy. In Hawaii, an estimated 17% of rooftops have solar systems, and that market is set to more than double in the coming years, according to HECO's spokesperson, Darren Pai. In just a single day in early 2015, Enphase, working with Hawaiian Electric Company, performed a remote service on over 800,000 of its smart micro inverters and saved the utility company millions in service expenses. That event alone helped propel Enphase as a leader in the distributed solar module-level power electronics (MLPE) arena. Although HECO ended Net Metering at the end of last year, HECO has grandfathered in all existing Net Metering contracts. All new solar systems will need to have storage integrated in order to connect to the utility - considering Enphase's relationship with the utility and its new storage product, this can only bode well for Enphase and its AC Battery product.

Enphase is not just your average solar company selling a single micro inverter device. Maybe that was true years ago but no longer. Enphase has a serious future in not just the solar energy market, but in the entire home energy solution market. With its new line of products being released now, including its AC Battery, Enphase has created a whole new market for the company, thereby ensuring its survival in a highly competitive arena. Since last quarter alone, Enphase has seriously addressed its most pressing crisis of being priced out of the MLPE market. With its powerful relationships forged with renowned solar panel manufacturers this past year, as well as large solar system installers and newer home energy system designers and installers, Enphase is positioning itself for the long term. Furthermore, the recent extension of the federal investment tax credit (ITC) for the next 5 years through 2021 will definitely promote the residential solar PV market which in turn will ensure that company's like Enphase will be successful.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ENPH over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am a solar installer who has worked in the solar field for 16 years, and I discussed my views with many solar technicians and installers.

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