Solar energy is taking the world by storm, and that's created an opportunity that could be worth trillions of dollars to investors. But with panel prices plunging and fierce competition among installers, there hasn't been a lot of value generated by the companies who you would think are at the forefront of the industry.
One area that has generated value comprises inverters, the device that turns direct current (DC) electricity from a solar panel into the alternating (AC) current the grid uses today. Here's a look at why these devices are so powerful in the industry and who to watch in the future.
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The brains of the solar system
The inverter is where DC power from solar systems large and small are collected and turned into the AC current the grid can use. In that respect, it's essentially the brains of the solar system.
For utility-scale solar systems, the inverter acts as a hub before power is sent to the grid. Big electric infrastructure players like General Electric, Schneider Electric, and ABB have built large inverter businesses, but solar inverters are a small percentage of their overall sales and none of them are market leaders. According to GTM Research, that title belongs to Huawei and Sungrow, which are Chinese suppliers and rely on their home market for most of their demand.
On the distributed side of the market -- which includes residential and commercial solar systems -- SolarEdge (NASDAQ: SEDG), ABB's products from the acquisition of PowerOne, and Enphase Energy (NASDAQ: ENPH) are the three biggest suppliers that are publicly traded. They play a key role in the operation of solar energy systems around the world. They'll often be the interface customers use when they monitor their solar systems and they are the point at which energy is sent to devices in the home or business or sent back to the meter and then the electric grid.
The fact that the inverter acts as the brains of a solar system helps commoditize the other components, as you can see in the net income chart below.
It doesn't matter if a Canadian Solar, Trina Solar, or SunPower (NASDAQ: SPWR) module is connected to a SolarEdge inverter, so it makes the panel itself less important in any given solar installations. Once an inverter manufacturer has a product or platform that becomes popular, it can tap into the installer market. After all, it's the installers that make the decisions as to which components they want to use for any particular job. That's why inverters hold the power they do today.
Module manufacturers try to break free
To combat their weak strategic position in the solar installation, some manufacturers have tried to develop their own inverter solutions and tie them to panel sales. SunPower is one of the most notable doing this with its X-Series panels that include micro-inverters attached directly to the panel. In both commercial and residential applications, these panels are part of fully engineered solutions called Helix and Equinox, respectively, allowing SunPower to hold the power of the panel and inverter supplier.
In larger-scale systems, panel makers are moving to vertically integrate as well. First Solar's (NASDAQ: FSLR) Series 6 module is part of what it calls a "medium voltage DC Plant architecture," which includes panels, inverters, and even energy storage.
This is a relatively new strategy, but it may be successful in moving the power in solar to vertically integrated manufacturers, especially if energy storage becomes a bigger part of the industry.
Energy storage may change everything
As the solar industry grew over the past decade, installers would piece together the components they needed. One solar panel didn't work better with an inverter or racking, so why not just choose what has the lowest cost with the capabilities needed to make a sale?
But the solar industry is moving toward more solar plus storage applications as residential and commercial customers face lower net metering rates that give them an incentive to use more of their energy production on-site. As a result, everyone from installers to solar module manufacturers are moving to become the "brains" of the solar system. I mentioned SunPower's offerings and Sunrun (NASDAQ: RUN) and Vivint Solar (NYSE: VSLR) are moving to control the energy storage system and inverter through their own developments or partnerships.
If customers and suppliers have an incentive to develop their own control solutions that include energy storage, they could reduce the power and profitability of inverter manufacturers. SolarEdge and Enphase Energy are trying to hold their positions by developing their own storage solutions, but they're not vertically integrated so they'll face a new level of competition as energy storage grows.
Will inverters be a power center forever?
Solar inverters have been where a lot of the investor value has been generated over the past decade, but that may not be true for the next decade. I think we'll see more vertically integrated offerings like what First Solar and SunPower are launching, selling directly to installers and pushing out other inverter manufacturers. Current inverter manufacturers may need to move upstream into panel manufacturing to keep up or develop partnerships with other manufacturers.
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