Microinverters: A Solar Market That’s “On Fire”

Building clean-technology companies with real revenue on relatively little investment is increasingly possible, and it's happening in the small-but-exploding market for electronics that boost the power output of solar systems.

Several venture-backed companies are rushing in with new products as they play catch-up to the sector's leader, Enphase Energy Inc. Whether the competitors will be able to gain ground on Enphase - and what will happen once bigger corporates swoop down on the space - remains to be seen. "The market is on fire," said Jason Matlof, partner with Battery Ventures, which backed SolarBridge Technologies Inc., an Enphase competitor, in 2007.

All solar panels produce power in direct current, which must be converted into alternating current used on the grid. This is typically done by central inverters, made by companies like Satcon Technology Corp., SMA Solar Technology AG and Power-One Inc., which deal with DC current that is pooled from a string of connected solar panels. The advantage of central inverters is that they are cheap.

The problems with this method of power conversion, however, include relying too much on individual panels. If one panel is shaded, for example, the output of the entire string of panels drops. A malfunction of the central inverter, which is considered the weakest link in the entire solar system, also would cause output from the whole system to disappear. Finally, there's lots of wiring and installation time required, as well as fire hazards associated with high voltage central inverters.

Companies like Enphase are addressing the shortfalls of central inverters by making microinverters, which go on the back of individual solar panels, and do the conversion at that level. There are also companies that make small converters, again located at individual panels, that smooth out the current and help boost the output, but then connect to central inverters.

The entire solar inverter market last year was about $3 billion, according to Ash Sharma, research director with IMS Research. Of that total, microinverters represented just $20 million. This year, he said, he expects the total inverter market to nearly double, with microinverters and converters taking up about $80 million to $90 million in sales.

"Overall in five years it [the new technology] will be less than 10% of the overall [inverter market], but the market itself is growing so quickly it will become a fairly large industry," said Sharma.

Enphase Chief Executive Paul Nahi sees an exact reverse of that vision.

"I think that central inverters will be a small niche in the next four-five years," said Nahi. "It's clear that the movement toward a microinverter is a directional shift in the industry that cannot be stopped," he said.

Enphase began shipping its product in volume in July 2008, and has now sold more than 400,000 units, said Nahi. The company, backed by more than $100 million in venture funding from Kleiner Perkins Caufield & Byers, Bay Partners and others, has seen a meteoric rise in product sales.

In California, for example, the largest U.S. solar market, the share of residential solar installations that have Enphase inverters was at 16% as of September 2010, according to state data, up from about 5% a year ago. That's "quite staggering in my view," said Jeff Osborne, analyst with investment bank Stifel Nicolaus.

In a recent report, Osborne listed about a dozen makers of microinverter and converter technologies, many of them venture-backed start-ups with products about to hit the market, citing SolarEdge Technologies Inc., of Israel, and Petra Solar Inc., which serves the utility solar market, as prominent examples. Sharma, of IMS Research, said that he knows of several others that will appear in the next 12 months.

The growing competition doesn't daunt Nahi.

"Our tremendous success will spawn imitators and others that will try to copy what Enphase does," he said. But with a fourth generation of product, developed distribution, brand and technical knowledge, Nahi expects Enphase to hold ground.

The company is also branching into offering home-energy management, like electronic thermostats, that can build upon the software it has for monitoring solar panel performance. The interest in using inverters as gateways to home-energy management seems to be behind the move by central inverter maker Power-One Inc. to purchase Fat Spaniel Technologies Inc. this week.

Other companies, meanwhile, are trying their own ways of tackling the market. SolarBridge, for example, is selling directly to solar panel makers, which will incorporate the microinverters into the manufacturing of panels and then sell to installers and distributors. This includes a 25-year warranty, backed by the panel manufacturer, which is not something Enphase can boast of.

Most of the companies in this space are leveraging outsourced manufacturing, to major manufacturers of electronics such as Flextronics, and can therefore scale quickly, said Sharma.

Currently Enphase sells its microinverters for about $1.10 per watt, which is more than twice as much as a central inverter. The start-ups say that though the upfront cost is higher, solar output is higher, and that the product quickly recoups the initial investment.

This is true in residential installs but is not as immediate in commercial and utility scale plants, said Osborne. Nahi said that a substantial part of the company's pipeline is with commercial projects.

"The holy grail would be to make a micro inverter cheaper than a traditional one. That's a couple years away - that's the disruptive technology," said Osborne.

For venture investors, meanwhile, as the competition increases there's more of an opportunity for exits. SMA bought a microinverter designer, OKE, last year, National Semiconductor has made acquisitions, and Power-One said it's developing an in-house technology.

This type of technology "is a strategic asset to module companies who are suffering from margin compression," Matlof said, and could use the inverter to differentiate their panels and sell these panels at higher prices.

Sharma said that he expects several microinverter and converter companies would be able to survive and compete in the market. The central inverter market, for example, which is much older, has about 60 players. "There's lots of supply, lots of competition, and lots of opportunity," said Sharma.

http://www.enphaseenergy.com

A host of start-ups are jockeying for position as they try to provide alternatives to central inverters, which are cheaper than microinverters but can be prone to problems. It's a key moment in the space, as the overall solar inverter market is growing rapidly and the start-ups try to seize the momentum.

The Hidden Cost of Going Green

As the manager and producer of a traveling vaudeville show, Amy Warnke was driving constantly, running up huge gas bills and leaving a Sasquatch-size carbon footprint. So buying a hybrid—in her case, a 2007 Saturn Vue—was almost a no-brainer. And it felt like a solution to her highway woes, until the day the battery died. A body shop near her New Jersey home couldn't keep the car running; neither could two different dealerships. "Apparently, you have to be a mechanical neuro surgeon to figure out where the battery is on a hybrid," says the 32-year-old Warnke. A spokesperson for General Motors, which owns the now-discontinued Saturn brand, says it stands by the quality of its products, and points out that some of Warnke's repair problems are covered by her warranty. But she's still flabbergasted by her final bill: more than $1,300. And that's not counting the cost and inconvenience of having her car in the shop—for what turned out to be three months.

Even in tight-wallet times, a surprising number of consumers have shown they're willing to pay a premium for environmentally friendly products. Hybrid cars have more than doubled their market share in the U.S. since 2005. And spending on energy-related home-remodeling projects has been resilient, despite the housing downturn; it totaled $49 billion in 2009, up 29 percent since 2003, according to Harvard University's Joint Center for Housing Studies. But having paid a little extra to go green, many consumers are now encountering an unexpected irritation: They have to pay more than their neighbors to stay green. The price of maintaining, repairing and even getting insurance for green products can often be higher than for their ordinary counterparts. "There are hidden costs that people don't think about," says Tim Haab, an environmental economist and a professor at Ohio State University. And with many tax credits for energy-efficient upgrades likely to expire soon, some consumers are finding themselves having to recalculate the cost of being eco-conscious.

Industry experts say that in many cases, higher expenses are just the price to be paid for owning an upscale, niche product. Parts and expertise for upkeep can be in short supply—few neighborhood handymen are likely to have a spare hybrid battery or green-certified home-coolant system lying around, for example. "It's not like they are making a million of them and selling them all at Home Depot," says Lino Carosella, an EPA-certified renovator in the Philadelphia area. Then again, just because a product becomes more popular doesn't mean its cost of ownership will drop. Insurance rates for hybrid cars, for example, are likely to rise in the near future, now that more people are driving them (and wrecking them).

To be sure, many people don't put dollars and cents first when going green, basing their decisions instead primarily on ethics and their desire to help the plaqnet. And given the potential for long-term energy savings, many buyers will still probably come out ahead financially. But some green advocates fear that in a sluggish economy, even minor extra costs could bog down the green movement's momentum. We take a look at how some of these hurdles are tweaking the ownership math for cars, home improvements and appliances.

Home Improvements

Energy-efficient home upgrades are the textbook example of green economics. Take solar panels: The typical solar-power installation costs about $24,000; as sun power kicks in and utility bills shrink, the systems generally pay for themselves in a decade. But many homeowners have found this equation doesn't account for other incidentals. Three years ago, former marketing executive Rob Saffer started building a certified green home in Woodstock, N.Y., complete with an advanced solar electricity system. Just as he expected, Saffer hasn't had to draw power from the local utility since he flipped the solar switch. But he's still paying a bill to the power company—to his surprise, he's learned there's a service charge of $240 a year for residential customers to stay connected to the grid. Saffer also saw annual insurance premiums for his home rise by about $100 after his insurer decided that the system increased the house's value by $60,000, and he has to periodically plunk down another $100 to apply cleanser and antifreeze to the water-heating apparatus. "I still think the system will pay for itself," says Saffer, "but it will pay for itself more slowly than I was led to believe."

Certainly, all kinds of home power systems require regular maintenance; an upkeep contract on a traditional heating and air-conditioning system, for example, can cost up to $400 a year. But for many green homeowners, the cost of replacements and repairs is still a blank slate—simply because the products don't yet have much of a track record. Solar power, which has been around for a few decades, offers a reminder that costs go beyond installation. Lyndon Rive, chief executive officer of Foster City, Calif.–based solar panel installer SolarCity, says the biggest replacement cost is often the inverter, the circuit that converts solar energy into usable electricity. It costs $2,500 to replace an inverter, and a homeowner is likely to have to swap it out once or twice after their warranty expires. It's "the weak link," says Rive.

Many homeowners assume that green improvements will pay off by adding value to a home. So far, though, there hasn't been evidence of a "green premium," says Kermit Baker, director of the Remodeling Futures Program at Harvard University's Joint Center for Housing Studies. That's partly a function of the housing meltdown, which has kept a lid on real estate prices in general. In addition, because many green materials and products are still relatively new, the quality and durability is untested. Bamboo flooring, for instance, is a favorite among eco-friendly builders, in part because it's considered sustainable. But it can sometimes scratch more easily than hardwood, says Carosella, the Philadelphia remodeler. Mark Elwell, owner of Bamboo Flooring Hawaii, says high-quality bamboo that's at least five years old when harvested is stronger than some traditional hardwoods, like some oaks and maples. But he adds that due to lack of regulation and a rush of producers entering the business, "there's a lot of product out there that's young, and it's softer. You get what you pay for with bamboo."

Hybrid Cars

When hybrids first started to gain some traction, people who bought them became awfully popular with auto insurers. Early adopters were seen as model customers, more responsible on the road than the average driver, says Greg Horn, vice president of industry relations at Mitchell International, a provider of information services to insurance companies and body shops. As a result, many auto-insurance providers gave discounts of 10 percent off premiums.

That honeymoon, alas, may end soon. As gas prices went up and more people bought hybrids, the number of accidents and tickets rose too, making the hybrid-driver profile riskier. Horn estimates that premiums for hybrids could rise by 20 percent over the next six months to a year. Not only will hybrid owners lose their discount, but they'll actually pay about $100 a year more than the average driver.

If insurance does rise, it won't just be because of bad driving. It'll also be because it's more expensive to repair a hybrid. On average, claims for collision-damage repairs are $182 more than on a nonhybrid car—a difference of 6.5 percent per job. Engine problems can be pricier too, because many mechanics aren't familiar with hybrids' high-voltage drive systems, says Bob Rodriguez, manager of special testing programs at the National Institute for Automotive Service Excellence, a trade group. Consequently, hybrids are likely to wind up getting worked on at a dealership, where overhead costs are often higher than at independent shops.

Maggie Gilliam, a child-services supervisor in Orange County, Calif., always takes her 2007 Honda Civic hybrid to the dealer, but contrasting her bills with those for her husband's nonhybrid compact can be fairly painful. Over one stretch, Gilliam says, the bill for three repair trips for her Civic was $1,745; for the nonhybrid, it was less than $500. Still, Gilliam says she's glad to do her part to help the environment: "I wanted to be part of the big change." A Honda spokesperson says that once the company's warranty is taken into account, "hybrids do not cost more to repair than a regular vehicle."

Home Appliances

Eco-consciousness and water don't always mix. Carol Bevins bought a front-loading LG high-efficiency washing machine three years ago in hopes that she could cut down on water usage for her family of three. These days, though, the Lebanon, Va., sleep-disorder lab technician says she pines for the days of her old water guzzler. Not only was the eco-friendly washer $500 more expensive than the standard washers she looked at, but she says stores near her home tend to charge at least $2 more per bottle for the special detergent it requires. All that might have been worth it, of course, if the eco-friendly washer were getting the job done. But instead, Bevins says, "it spurts a little water in there, and you can't get your clothes clean." Bevins says she has to wash each load multiple times to get stains out.

A spokesperson for LG says Bevins's problems could be the result of her washer being installed or maintained improperly; the company says the machine's drum has to be cleaned once or twice a month. And manufacturers say many stores don't charge extra for green detergent. But complaints like Bevins's are common among owners of eco-friendly washing machines and dishwashers. Most of these devices lower their environmental impact by using less water per load, but that can leave owners uncertain about how best to get their clothes and dishes clean. Suzanne Shelton, president and chief executive of Shelton Group, an agency that specializes in sustainability and energy efficiency, says problems with cleaning products are one of the biggest concerns in consumer focus groups—in part because eco-friendly detergents are also proving to be less tough on dirt than their traditional predecessors. "Do I pay more for the totally natural cleaner and then use twice as much water because I have to wash everything twice?" wonders Shelton. "Or do I save by using the chemicals and only doing the wash once and using less water?"