Effort to Cut Solar Cost Pits Makers of Boxes of Wires

  • Enphase and SolarEdge make inverters linking panels to grid
  • Inverters are second-biggest cost for rootop solar systems
Source: AFP via Getty Images

Seen prices for solar panels lately? Sure, they’ve plunged two-thirds in the past five years, but the rate of decline has leveled off -- in the past 18 months they’re down just 5.1 percent.

That’s why solar companies are looking at Enphase Energy Inc. and SolarEdge Technologies Inc. to help them wring more costs out of the electronic gadgetry that drives rooftop power systems.

Enphase and SolarEdge are the two biggest suppliers of inverters for U.S. rooftop systems -- a critical yet unheralded component. They’re generally seen as the brains of a system and account for as much as a third of the total cost. The two companies are locked in a technology battle, offering competing approaches and racing to lower prices. They’ll both report results this week, and the numbers will help crown a winner.

“The weakest link in a solar system is the inverter, and it’s a big part of the cost,” said Jigar Shah, a clean-energy investor and consultant. “Anyone who can offer a smart panel at a lower price is going to win market share.”

Converting Current

An inverter is essentially a box full of magnets and wires that converts the direct current electricity that flows from solar panels into the alternating current that’s sent across the grid. As demand for clean power booms, and especially demand for residential solar, the inverter market is on track to increase 15 percent to $7.3 billion this year, and another 9 percent in 2016 to $8 billion, according to GTM Research.

The company to watch is SolarEdge, which is expected to become the top inverter supplier for U.S. rooftops this year, surpassing incumbent Enphase, according to GTM. The Herziliya Pituach, Israel-based company’s growth stems from a design that the company says makes it cheaper than products from Enphase.

SolarEdge introduced a new inverter at the Solar Power International conference in Anaheim, California, in September, that Lior Handelsman, co-founder and vice president of marketing, said reduces weight and uses digital processing to improve performance.

“This is revolutionary,” he said. Those changes translate to more power produced on more rooftops at a lower cost than competing products. “It puts us on a much better improvement curve.”

Inverter Pricing

In the quarter that ended in June, Enphase sold inverters for an average of about 52 cents a watt, compared to SolarEdge’s average price of about 35 cents a watt, based on the amount of megawatts shipped and total sales, said Michael Morosi, an analyst at Avondale Partners LLC in Nashville, Tennessee.

SolarEdge is expected Wednesday to report quarterly sales of $110 million, up 64 percent from a year earlier, according to estimates compiled by Bloomberg. Net income will increase almost fivefold to $12 million.

Enphase sales aren’t increasing as fast. The Petaluma, California-based company is expected to report Tuesday revenue of $103 million for the third quarter, up 3.9 percent from a year earlier, and a loss of $2.64 million, compared with an $813,000 profit.

Market Share

Enphase has lost 76 percent of its market value this year through Monday, the most in the WilderHill New Energy Global Innovation Index of 105 clean energy companies. SolarEdge’s U.S. shares have gained less than 1 percent since they were listed in March.

Those numbers reflect a shift in the market, said Vishal Shah, an analyst at Deutsche Bank AG in New York.

“Enphase remains at risk of share loss against SolarEdge despite benefiting from strong growth of the U.S. market,” Shah said in a note to clients. He downgraded the shares to sell, saying profit margins are under threat from increasing competition and pricing pressure. “Until the company releases new lower-cost products in late 2016, we expect downside risk to margins.”

Rooftop Solar

Historically, solar installers would connect a single inverter, about the size of a laser printer, to a bank of about a dozen or so panels. Smaller rooftop systems typically used a single inverter to control all the panels. A key problem with this design is that if one panel fails, they’re all wired together and they all go down.

Enphase addressed this by introducing in 2008 micro-inverters, smartphone-sized units that attach to the bottom of every panel and handle the electricity from only that one. That can make installation easier, and cheaper, and also help meet tightening fire-safety regulations that require ways to shut off rooftop power systems within 10 feet of the panels. That helped make Enphase the top inverter supplier for the U.S. rooftop market.

SolarEdge entered the U.S. rooftop market in 2012 using a different design: a single centralized inverter to control the system, plus another device called an optimizer, small units that attach to each panel. The setup means individual panels can be monitored and controlled, and the whole thing won’t go down if a single panel has problems.

Handelsman said this approach is more cost-effective than Enphase.

“Value-wise we’re always the best,” he said at the Solar Power International conference.

Lower Costs

“SolarEdge is definitely gaining market share from Enphase in the U.S. residential market,” said Scott Moskowitz, an analyst at GTM Research in New York. “Pricing is a big part of that. SolarEdge has been able to prove their system lowers overall costs.”

Enphase CEO Paul Nahi concedes that his company is losing share in the U.S. rooftop market, and has a plan to expand production and cut costs.

“Solar is going to be a huge part of the energy puzzle and we’re providing the brains that make it much more valuable,” Nahi said in an interview. “Outside of the U.S. we’re gaining market share. We’re seeing dramatic growth globally.”

(Corrects to remove reference to SolarEdge not being part of NEX Index in 12th paragraph.)
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