Enphase Energy - To Boldly Go Where No Storage Has Gone Before!

| About: Enphase Energy (ENPH)

Summary

Enphase's new invention: The AC battery aka "price negotiator".

Residential storage: Understanding a new use for batteries.

Storage companies like Tesla misjudged the residential storage market.

Enphase Energy's residential storage strategy appears to be a winner.

What Enphase did for solar panels, they will do for batteries.

I have a ~20,000-Watt-hour Enphase (NASDAQ:ENPH) microinverter-based solar system and have achieved energy-equality with my utility company through participation in its Net Energy Metering (NEM) program - where excess electricity produced by my solar system is credited to my utility bill monthly at full retail rate, and any surplus is accrued as solar energy credits, also redeemable at full retail rate.

Residential solar PV is only installed on ~1% of residencies in the U.S., which shows what an incredibly huge market exists. Nevertheless, the utility companies' monopoly on power is threatened; utilities will continue to protect their stale business model by imposing higher grid access charges, demand-charge fees, time-of-use rates (TOU), reduced NEM, installation size caps, installation connection delays, changes in billing without grandfathering, and insurance requirement thresholds. If it means maintaining their hegemony, then they will kill solar, but ironically, some of the "red tape" they have improvised to hurt solar like NEM reductions, TOU rates and demand-charge fees, have actually resulted in unintended outcomes for them, giving rise to a whole new market which threatens their monopoly on power even more so. As Warren Buffett, whose company owns NV Energy, was quoted, "People buy utilities not to get rich, but to stay rich".

Feed-in Tariffs (FiTs) have ended in parts of Australia and New Zealand, and in these areas a new market has sprung to life - the residential storage market; in these areas where solar customers are no longer paid for their excess electricity, battery storage will allow them to store their excess electricity for later use. And besides that, residential battery storage will also allow customers to mitigate costs derived from high TOU rates and expensive demand-charge fees. Consider the microcosm that solar systems without storage in Nevada will now be subsidizing the Warren Buffett-owned NV Energy utility, paying $0.021/kWH (kiloWatt Hour) for a customer's solar-generated electricity, then selling that electricity for $0.138/kWH to the public. And Warren Buffett has the audacity to claim that non-solar PV customers are subsidizing solar PV customers. Furthermore, if the utilities treat residential solar PV systems like power-generating utilities, then like the utilities, shouldn't homeowners enjoy the same tax benefits - such as tax write-offs for installation and maintenance costs?

There are 3 markets for battery storage - residential, commercial-industrial (C/I) and utility. In the relatively new residential storage market, batteries are increasingly being used at far greater economy for a not-so-well-understood function. Called by a variety of names (load-balancing, cost-mitigating, load shifting, load-shaving), the concept relies on a residential battery being charged with low-cost power and then delivering this stored power at a time when external grid-based power is very expensive. More and more U.S. utilities are starting to use time of use (TOU) rates with a common theme of charging a higher rate when electricity demand is at the highest. In most cases, this is from 2-7 PM where a kWH of electricity may be two, four or even ten times the morning kWH rate. And this higher rate occurs JUST when homeowners arrive home, turn on the AC and start cooking dinner. By contrast, the late electricity night rate may be only a fraction of the morning rate.

Load shifting uses a battery, charged up either by solar PV panels or from lowest-cost nighttime electricity. Then, it delivers this stored energy at the time when electricity cost is highest. In many cases, electricity is purchased at 2-3 cents a kWH (night) and then delivered when the charge may be 40-80 cents a kWH (2-7 PM). That wide spread in kWH rates allows a battery to save a LOT of money.

The use of TOU rates is widespread in most parts of the world and now U.S. utilities are commonly using it to "reward" consumers that "load shift". This could be setting our electric dryer to cycle at 1 AM or the dishwasher to do the same. However, when we come home on a hot summer day, we want to be cool and the kids MUST be fed. We simply cannot wait to cook until midnight! This is where the Enphase AC battery is a perfect fit because it fills in expensive high-peak TOU electricity with low-cost stored electricity.

Consider the insidious utility billing practice called the "demand-charge fee"; it is in wide use outside the U.S. With demand-charge fees, you are charged minimally for your regular use of electricity, but some 80% of your bill is directly tied to your highest daily usage. Imagine the shock of an eco-conscious consumer that charges up their EV car at night, and then gets socked with a high demand charge - there goes the savings on gas! Again, the Enphase AC battery will save customers money since the battery can eliminate the kWH peak surge and markedly reduce the "demand charge" driven electricity bill. Demand charges are now common in the U.S. for commercial electric accounts, but expect demand charges to be quickly appearing on residential bills in the immediate future. The residential TOU billing concept is only the start of what will become widespread residential electricity demand charges.

This demand charge has been commonplace in Australia-New Zealand for many years which is why over 70,000 Enphase AC batteries have already been ordered. Europe also has both extensive TOU and demand-charge residential rates. Expect the Enphase battery to be a big hit there as well. As the use of TOU and demand rates becomes more commonplace in the U.S., the Enphase AC battery will again demonstrate incredible utility and value for the customer.

In the past year, there has been a lot of hype over residential battery storage; this past summer in Australia and New Zealand, a slew of contenders emphasized the backup capability of their storage product. Enphase Energy, however, realized that focusing on battery backup would not be profitable due to battery power still being more expensive than utility power in terms of $/kWH. With utility companies ending FiTs and NEM incentives, while at the same time, implementing new TOU rate structures and demand-charge fees, the need for solar PV to be combined with storage was the answer to keeping solar as an economically viable energy source; Enphase recognized that "need" and already having technological superiority with its "smart" microinverters, created a "smart" battery which could substitute "cheap" power during high TOU rates and mitigate demand-charge fees - a new invention, a new job for batteries, simply brilliant idea! Think of Enphase's AC battery as a friendly "price negotiator" - whose sole purpose is to aide the unsuspecting customer in dealing with an uncompromising, non-negotiating, bureaucratic, utility monopoly! A string of AC batteries can now be used during high TOU rates, dealing with demand-charge fees, and then recharging during off-peak rates; this clever, new concept of using batteries intelligently to arbitrate costs is a major part of the Enphase Home Energy System.

And although Enphase's AC battery does not provide backup power, Enphase did address the issue, and teamed up with one of the leaders in backup power - Generac (NYSE:GNRC) - because cheap generators are still a homeowner's most economically viable option when the power goes out, and backup power is needed. If anything, Generac's backup power solution can be viewed as just another fine addition to the Enphase Home Energy System.

In its current product revision, the Enphase AC battery's inverter is 270-Watts giving a so-called 0.25C discharge capability. Enphase's battery partner Eliiy Power has just released 30C-capable cells, so Enphase will likely introduce higher-power, modular AC batteries in the future to address market needs. Higher-power, backup-capable, lower-cost, 3-phase balancing - these attributes will all enable future revenue opportunities for Enphase where current storage systems only offer high-capacity, high-power systems that can only be DC-connected to a single phase inverter, which basically leaves 2 other phases unpowered. Enphase's partnership with Eliiy is anything but stagnant, and its AC battery has incredible future potential.

Enphase Energy cannot compete with the Commercial-Industrial (C/I) and utility storage markets with giants like Tesla (NASDAQ:TSLA), Sonnen, et cetera. But, in the residential market, where Enphase already has a base of ~500,000 solar clients, the company already has a great software platform for operations management of its AC battery. Storage competitors like Tesla misjudged the residential storage market thinking people would just buy their big, expensive batteries en masse just because of the sheer storage capacity - and sure, Tesla sold some of its products to green-energy fanatics and people who wanted to be the first on the block to own the newest technology regardless of cost. But, the fact remained that although people desired the technology, it was still too expensive for mass adoption, and Tesla had to discontinue its 10-kWH Powerwall; and don't forget all the hype of some 38,000 reservations which only materialized into 2,500 units sold in Q1 2016. Realize that this market performance casts doubts on Enphase's ability to be successful in the same market, for if Tesla couldn't do it, then surely Enphase wouldn't be able to do it either.

But, you have to understand that Enphase took a different marketing path altogether, offering a modular and safe solution, fully-integrated that could be expanded, possibly upgraded, in the future; its AC technology offers self-consumption and 24/7 cost-avoidance with all-weather performance! Although the name "AC Battery" may not scream out to customers of what the battery's true powers are, the term "price negotiator" surely will, and that is exactly what Enphase's new AC battery product is - a price negotiator with the utility on behalf of the customer.

The Enphase AC battery combines battery, inverter and intelligence into an all-in-one, elegant, lightweight unit which is safe, modular, scalable, has the lowest cost-of-entry over its competition, and is easy to install. Most importantly to the customer, after 10 years of usage, the Enphase AC battery will still hold 80% charge - and this is just not true with the competition - for example, Tesla's 7kW Powerwall, which really should be marketed as the 6.4kWH Powerwall, boasts an 18-year payback for its battery, but other sites state 40 years! The Tesla Powerwall warranty has repeatedly changed and now states that after just 2 years, the battery should still hold 85% charge, so that brings the battery down to 5.4kWH capability, but you paid for a 7,000-Watt-hour unit!

With the Enphase AC battery's low cost-of-entry, the consumer is not financially chained to the technology, and can add more storage later on without incurring any major issues - this is just not true with other storage vendors which use a multi-device configuration - separate inverter and battery - adding more complexities and hidden dangers. The comparison table for residential storage on RenewSolar's web site is simply the best comparison table for solar storage, and it fairly treats all residential storage players, including Enphase.

For a market in its infancy, Enphase is allowing customers to get their foot in the door of residential storage without having to mortgage the farm to do it; its product's modularity and size allow the customer to grow their storage needs as their budget permits. Another attribute which many overlook is that the Enphase AC battery does not have a fan - some batteries out there not only have a fan sucking battery power to provide cooling, but the fan also has an annoying noise - who would have thought you'd have a noisy battery when you purchase a Powerwall? The nice thing about Enphase is it designs an Apple-like product with supreme elegance - very clean and uncluttered industrial design; its all-in-one unit which includes its own inverter weighs only ~20kgs and can be easily installed by 1 person on an upper wall area, out of the way, but still visible so a quick inspection can verify its working condition. Here's a blog from an installer of a competitor's battery product - "The battery unit is heavy (~120kg), so we needed to lay a concrete pad, which doubled the installation costs". Enphase does not have hidden costs!

As Enphase CEO Paul Nahi recently stated - the residential storage market is where solar panels were in 2007; costs in the residential storage market should be reduced 50% by 2020. Key financial points to consider with Enphase's residential storage AC battery are that 1) Enphase has invested over $100M in R&D for the development of this technology, so it is not some fly-by-night technology rushed to market to keep up with the competition - it's a product of long-range vision, and 2) Enphase has already outsold its competitors in the residential storage market by at least a factor of 7 for this year alone - proving that demand for its product definitely exists, and that its product fills a void not correctly addressed by its competitors.

Furthermore, competition selling Enphase's new AC battery is seriously heating up, and that helps create an environment conducive to product sales - (1,2,3,4,5,6,7,8,...). When potential customers can search for pricing from multiple vendors, that instills confidence, and it brings down the price. Enphase is projecting $2M in AC battery revenue for Q3 2016, and for Q4 2016 will "see a very steep ramp" up in revenue. I believe that Enphase's recent OpEx reduction which equates to a ~$20M annual savings and its raising ~$15M in capital through share dilution was truly done because Enphase needed "working" capital to meet the needs of such an unexpected demand for its new product. I could be wrong, but there is something Apple-like about Enphase products, and when you listen to solar installers out there, they prefer Enphase, they like the simplicity and ease of installation of Enphase's products.

In conclusion, for a solar company whose main focus is in the residential solar market, that company must now offer some form of storage with its solar product if it is to survive, and Enphase is already all set with its AC battery. Enphase, the visionary company that it is, saw this future years ahead of time, and thanks to John Berdner, Enphase's V.P. of Regulatory and Policy Strategy, Enphase's products are also well-prepared on the regulations front with NEC 2017, UL 1741 SA and AS/NZS 4777.2:2015 compliance. In 2017, the U.S. will have a new president, hopefully the right president for solar, and Enphase will have a stellar year in the black! And like the old Star Trek, Enphase's AC battery will go where no batteries have gone before!

Disclosure: I am/we are long "ENPH".

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.

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