Petaluma’s Enphase Energy strives to survive as solar industry transforms

New opportunities are expected to shine soon on the world’s solar industry, and Petaluma’s Enphase Energy is striving to survive long enough to enjoy them.

The energy tech company with 350 employees has reported annual losses every year since it went public in 2012, including nearly $67.5 million worth of red ink last year. Since September, it has gone through two rounds of layoffs and raised about $26 million by issuing new stock and bringing in two major investors.

Enphase officials say with confidence that a turnaround is underway and the company is on track to make a profit in the second half of 2017. Its employees have worked to significantly cut the cost of producing its signature devices, microinverters that take DC, or direct current, power from solar panels and transform it into AC, or alternating current, power for homes.

And one of its recent products, an encased home battery system, is making its U.S. debut just as the rules governing solar energy rates are changing in California, home to half the nation’s solar production.

Due to the rate change, new rooftop solar owners are expected to make less money than their predecessors for the power they sell to utilities in the Golden State. As such, energy storage systems and rate-savvy monitoring technology could one day help future solar owners take advantage of the best times to buy, sell and store power.

“The way people are approaching the solar business today will look antiquated in just a couple of years from now,” said Enphase President and CEO Paul Nahi.

Residents won’t simply buy solar panels, but complete energy packages that include storage and operating systems managed in the cloud, he said. And Enphase has the products and software technology to maximize efficiency.

How soon this shift happens in California remains to be seen. The experience in Hawaii, which has the largest concentration of solar energy systems per capita, suggests that a change in solar rates can bring a period where solar energy systems make less financial sense, even when adding storage.

Indeed, earlier this month the head of the California Solar Energy Industries association told the Los Angeles Times that 2017 will be the first year since 2008 with a zero growth rate for solar installations in the state. The reason is that with the change in rates and the end of a state solar subsidy, many consumers question how they’re going to save enough money by installing a rooftop system.

Even so, major battery makers such as Tesla and German-based Sonnen see great opportunity in supplying energy storage to American homes, businesses and communities.

For rooftop solar owners, storage one day could prove a better option than simply selling daytime electricity to the grid for next to nothing and buying power back in the evening at peak prices, said Blake Richetta, Sonnen’s vice president of sales for the Americas. Moreover, storage is a better solution to meet evening energy demands than building and operating more carbon-emitting natural gas plants to be used for just a few hours each day.

“This is why storage is the future,” said Richetta. It fits with the reality that solar systems provide power in the daylight when most residents aren’t home, but not in the evening when demand spikes.

In the past seven years, Sonnen has installed 16,000 residential battery systems, mostly in Germany. For communities to build the most sustainable energy systems, he said, “you want to store sunlight.”

Enphase began in 2006 and touts itself as the inventor of the microinverter, a paperback-sized device that installers typically attach beneath each rooftop solar panel. The alternate approach is to install a single large inverter that converts the DC power from all the system’s solar panels.

After the company went public in March 2012, Enphase stock ended its first day of trading at $7.34 per share. It peaked at $16.79 in September 2014 and ended Friday at $1.24.

Enphase received ?$322.6 million in revenues last year and reported an annual loss of $1.34 per share.

In the past two years, the company’s losses were partly due to a decrease in market share and a drop in the price paid for microinverters. To address that, Enphase worked to cut the production costs, and by dropping prices the company was able to increase its U.S. market share to 30 percent by Dec. 31 from 20 percent in the year’s first quarter.

In the company’s Feb. 28 earnings conference call, Enphase CFO Bert Garcia told analysts and investors, “We acknowledge there is substantial doubt about our ability to continue as a going concern.”

But company officials made their case for why they expect to be profitable in the second half of this year. Key among the reasons is their work to cut the cost of producing microinverters at a time of fierce competition among solar component makers.

In an interview last week, Nahi said the cost of the device’s production will drop almost 50 percent in two years. By early next year, the cost for a microinverter will compute to about 10 cents per watt of solar power, he said. It was closer to 80 cents a watt four years ago.

Another source of revenue is expected to come from major solar panel makers, including LG, SolarWorld and Jinko Solar. Those companies are attaching Enphase microinverters directly onto their panels in what is being called an AC module. The complete package means solar installers don’t need to separately order and attach the microinverters.

Company officials also tout the superiority of their self-contained AC battery, with “plug-and-play” ease of installation and a modular design that allows them to be easily combined together to meet the varying storage needs of each solar customer.

“We turned storage into an appliance,” said Raghu Belur, an Enphase co-founder and a vice president of products and strategic initiatives.

Enphase is just gearing up to sell its batteries in the U.S. But those who watch the industry say the energy storage sector is in its fledgling stage, similar to that of rooftop solar systems in 2000. In the coming years, acceptance is expected to grow and prices to come down as companies make further advances in manufacturing and technology.

Nahi acknowledged “it’s been brutal” weathering the past few years for both Enphase investors and employees. The company had layoffs of 11 percent of its workforce in September and another 18 percent in January.

But the restructuring was necessary and has helped the company move forward, he said.

“We feel like we’re on a good path to profitability,” Nahi said. This year will be an important one for the company and turning a profit will be “a seminal moment.”

Brad Meikle, an analyst with investment banking firm Craig-Hallum, last week issued a report in which he recommended buying Enphase stock.

He noted that current investors did have the value of their 60 million shares diluted by the issuance of 23 million more at the end of last year. Also, he said, the company failed to meet analysts’ earnings targets for five straight quarters.

But the company is substantially cutting the cost of production for a new generation of microinverters and its AC module amounts to “a huge new product for the company.”

“I think they’re going to turn it around,” Meikle said.

Part of his reasoning is the local solar contractors who purchase Enphase products can attract customers and compete well on price against the large national players like SolarCity, a part of Tesla.

He also suggested that Enphase’s storage system has “some really promising potential,” partly because it’s so simple to install either as one or a combination of several units. In his report, he estimated the systems, which already are selling in Australia and parts of Europe, will bring Enphase nearly $102.7 million in revenue in 2018, compared to $6.5 million last year.

Nahi said the rectangular units, which measure 19.2 by 14 inches, cost in the neighborhood of $1,000 and produce 1.2 kilowatt hours of capacity.

California has a storage incentive program for eligible homeowners that will provide a subsidy currently set at 50 cents a watt hour, or equal to about $600 for the Enphase battery, said Patrick Doherty, a senior analyst with the state Public Utilities Commission. However, he added the state over time will decrease the amount of incentives, so interested residents should consider whether the storage system still remains an affordable purchase with an incentive as low as 30 cents a watt hour, or a $360 subsidy for the Enphase system.

The commission will meet April 6 in Santa Rosa and consider essentially doubling its incentives for home energy storage systems to a total of nearly $400 million.

The meeting will begin at 9:30 a.m. at the Santa Rosa City Hall Council Chambers.

Rate setting will continue to play an important role in the economics of both solar and energy storage systems.

Pacific Gas & Electric has reached its cap of customers who are grandfathered into the most favorable structure, known as net energy metering. More than 275,000 rooftop customers essentially buy and sell electricity for the same price throughout the day. But new system owners will have the rates vary by time of day. Under this structure, the rates are higher during the evening hours and lower during the day.

At some point, the amount of those rates and the spread in the power cost between daytime and peak periods could justify installing solar panels with storage systems.

Brad Heavner, policy director of the trade group California Solar Energy Industries Association, said he now spends about half his time talking about energy storage, compared to virtually no time spent on that topic three years ago.

He acknowledged the industry faces a time of transition as the state wrestles with how to offer incentives and set rates that encourage both solar and battery systems to store energy. His view is “we are absolutely going to need a lot of storage in the next few years.”

Heavner noted the 10-year warranty of the Enphase storage system “is especially good” among the industry and the device is unique due to its modular nature that allows them to easily work together.

But he suggested the path forward for the energy storage companies is far from certain. Pennsylvania-based storage system maker Aquion Energy this month filed for bankruptcy protection.

“Some of those companies are going to go big,” Heavner said. “Some of them are not going to make it.”

You can reach Staff Writer Robert Digitale at 707-521-5285 or robert.digitale@pressdemocrat.com. On Twitter @rdigit.