Good morning, thank you for joining us today for Enphase Energy's Analyst Day. We are providing an accompanying handout with today's presentation that can also be accessed in the investors section of our company's website at www.enphase.com. During the course of this presentation, Enphase management will make forward-looking statements, including, but not limited to, statements related to Enphase Energy's future products, ability to drive down costs, market demands for its microinverter systems, competitive position, advantages of its technology, market trends, ability to derive new revenue streams, and future financial performance. These forward-looking statements are based on the company's current expectations and inherently involve significant risks and uncertainties. Enphase Energy's actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties.
Factors that could cause results to be different from these statements are described in the reports filed by the company with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. We encourage you to review our filing carefully, especially the sections entitled Risk Factors in our quarterly report on Form 10-Q for the quarter ended September 30th, 2015. Enphase Energy cautions you not to place undue reliance on forward-looking statements and undertakes no duty or obligation to update any forward-looking statements as a result of new information, future events, or changes in its expectations. I will turn it over to Enphase Energy's President and CEO, Paul Nahi. Paul.
Thank you very much. Good morning, thank you very much for attending Enphase Energy's Analyst Day. We have a lot to go over. I think it's going to be a very instructive, a very informative day for everybody. We have much of the management team here. That's going to allow you to see and have a deeper insight into the organization that will hopefully give you the same confidence that we have in our ability to execute upon the critical initiatives that we have, as well as execute against the broader vision, both of which I'm going to go into in a moment. Presenting today will be, as I mentioned, a host of Enphase executives. First off will be our CTO and Co-Founder, Martin Fornage, who's going to talk to you about the technologies that we're working on towards cost reduction and others.
Gregory Steele, our Vice President of Engineering, will go into the execution of those technologies against the product roadmap, the delivery therein. Darin Spencer, VP of Operations, will talk to you a bit about what we're doing on the manufacturing and operations side. That has implications in quality, in cost, really amongst the whole product line. At that point, Stefan Schietinger , who is our Vice President of Product Management, will give you an overview of our roadmap. The roadmap covers all of energy. Raghu Belur, who's the Vice President of Strategic Initiatives and also a Co-Founder, will dive in and give you a more descriptive view of what a home energy system means to Enphase. Finally, Stefan will come back up and give you a demo of Enlighten, which is our cloud-based application.
I'm just going to start with a couple of quick slides that really address what our focus and priorities are. For Enphase right now, our focus and our distribution of resources is along two key areas. One is cost reduction. There was a period of time where our customers and installer partners were willing to pay more for an Enphase system, considerably more, because of the value we brought, because of the extra energy production, because of the simplicity, because of the O&M simplification. We certainly recognize that in today's environment, our customers are in a far more competitive position, and that does not allow them the ability to pay the premium that they once had. We recognize that, and understand that that's a phenomenon that's occurring in the U.S. and around the world.
Therefore, we have adjusted the allocation of our resources to focus on cost reduction at the system level. We're going to go into details as to what that means. I'm going to talk more about the specific targets in a moment. We're addressing both the cost of the hardware itself, as well as simplifying and cost-reducing the installation process. Now, as important as cost reduction is, it is not enough. The industry is moving away from just selling a solar system to selling an energy system. It's that larger energy market where our vision lies, in the creation of an energy system that has all elements of energy tailored for an individual user, whether it's a business or a homeowner.
If I go into more of the specifics, our target is to reduce our costs by 50% over the next 24 months and approaching $0.10 per watt. This is a very ambitious target. It's a very ambitious goal. We're going to share with you why it is that we have the confidence that we can achieve that. What that does is not only does it allow us to take a stronger position in the markets we're in, but it opens up whole new markets that we haven't been able to address because of price and because of string inverters. Our target right now is to be at or around the price of a low-cost string inverter, therefore open up really 100% of that market to Enphase.
We talked about energy and how solar is an important component of energy. It's one component. We believe that in a short period of time, somebody will be buying an energy system, not a solar system. That energy system must consist of solar for the generation, consumption monitoring, consumption management, in other words, knowing what the building is using at the time, load management, which is how the energy is being used, and storage. Now, all that has to be wrapped into an energy management system that is looking at that system every day and managing that energy. It's very different than anything that's been done before.
What the energy management system has to do is look at what's being generated, what's being consumed, what the tariff structure is, what the rate structure is, what the state of charge of the battery is, and then discharge or charge the battery in order to achieve the highest return on investment for the consumer. That's a very active energy management system that requires the integration of all of these components. Aside from the fact that we're going to show you how it is we're going to achieve these goals on cost, we also get to recognize that Enphase has a tremendous global presence. We have over 375,000 systems in over 90 countries, and it's because of the global brand, the fact that the brand means high quality, that we have a large and growing distribution channel in every major region.
That is the distribution channel by which we're going to enter the market and provide the energy solution globally. We have the sales channels in place. We have, as I mentioned, the brand in place. The technology is being developed and will be delivered very shortly, we believe we have the cost to be the dominant player in the space. All of this, we believe, provides an incredibly exciting future for Enphase and for the future of energy management. With that, I'm going to turn it over to Martin Fornage.
Thank you, Paul, and good morning. Well, Raghu and I started Enphase almost 10 years ago. That's been quite a ride. We released in 2008 our first microinverter system, and that means a microinverter, an AC cable system, a gateway, and a cloud-based control and monitoring structure. We were the first to do that. Today, as a result of that, we are the largest PV inverter monitoring company in the world. We get over 2 terabytes of data per day coming into the server. This is quite an achievement. I believe that we have demonstrated a sustained capability of innovation along the way, and we've demonstrated that by introducing many generation of product, each of which have been more reliable, more efficient, and lower cost than the previous one.
We are also leveraging a bidirectional inverter technology that we just came up with in our AC battery system, which really demonstrates a new way to do storage, with a much more modular way to do it. That, I believe, is superior as a topology to all the other storage systems that we see out there. The product that you'll see today as a result of fundamental research that have been ongoing in the company since the very beginning. This is actually fundamental research. I won't go into details, but we have made an optical invention that were never out there before. As a testament to this innovation, we have filed over 500 patents worldwide and have already received over 100 patents worldwide. Designing a microinverter system is a very hard job.
You constantly have to juggle conflicting requirements and find your way to the best solution over all these conflicting requirements. As an example of that, I could choose a hard switch topology for the powertrain, which will be very easy to control, but it will certainly create problem with electromagnetic compliance, it will create problems with efficiency, and it will basically result in inferior solution overall. As another example, we could oversize the power transistors, for example, and that will of course result in a higher cost in the power transistor, but we'll get maybe better efficiency, hence a lower cost of cooling and maybe a better reliability. We constantly have to juggle all these conflicting constraints, and we managed to do this in large part because we have designed our own software platform to analyze all these designs and be able to achieve the optimum results.
When we started the company, the inverter industry was mostly focusing on power conversion. Pretty much to only power conversion. We knew coming from telecoms that this was not a viable solution. We came up with a system approach where control, communication, and monitoring are inherent parts of the design. Due to this approach, we can modify the behavior of the system remotely. This has proven to be critical in a market, especially in location with high penetration PV, such as Hawaii or Australia. Utilities now are demanding us to actually be able to change behavior remotely, and we can certainly do that. This also prepared us very well to tackle the energy management tasks that we now have to fulfill. It was actually a very good segue into the new tasks that we have to do right now.
We believe that distributed topologies always win, as long as the resources are managed, and as long as there are economies of scale. If you look at transportation, communication, computing, for sure, we believe that this has been true all over, and we believe that energy is on the same path. The last part we believe in is digital control. If you look at it, one way to look at it is that one digital element that we use in a control system costs us roughly three tens to the minus seven dollars. A third of a millionth of a dollar. Okay? An analog element costs us roughly $0.10 or 10 minus one dollar. I can move a lot of complexity in digital domain, and I can do it much cheaper than I can do it by doing processing in analog.
Because of that, we have our own ASIC capabilities, and we digitize the analog variables immediately and process all the data in a digital domain. This is very common in the communication industry. This is very common in networking. We just use all these approaches, in the same way with the same success. The first-inverter design. Well, we've always used high frequency conversion, typically over 100 kilohertz, much higher than most everyone out there. We're now using a resonant topology. This topology is characterized by its very low EMC signature. Again, very low conducted radiated emissions. Those are things that we have to do to comply with by standard. We also can get great efficiency with it. It's very cumbersome topology to control.
Our research has solved the control system in a very elegant way and in a very fast way. We can therefore reap the benefit of this topology. We can reduce cost, we can increase functionality, and increase reliability at the same time. Due to the low noise inherent to this powertrain and the quietness of it, we can move from metallic enclosure to polymeric enclosure, which has very many advantages that we'll get to in the next slide. In turn, due to the polymeric enclosure, we can eliminate the grounding requirement. That gives us even more advantages for the wiring system. All of these improvements yield a superior solution, which reduces both hard cost of a unit, but also soft cost, meaning installation cost and ease of installation. All right. More about powertrain.
We have cracked the code on using digital control system to drive the resonant powertrain. These normal resonant controllers are very slow and are very difficult to manage. Well, we've succeeded in doing a control system which can control the powertrain very fast, in a microsecond levels. That allows us to actually have superior reaction to change in operation systems, which leads to a better product. We can use wide-bandgap with this topology. Actually, this topology is ideally suited to use wide-bandgap. We don't have to. We can use gallium nitride or silicon carbide devices. We believe that we will use them when we need to, meaning when we can take advantage of them in an efficient way, when their reliability and the cost are yielding to parity with existing devices. We don't believe we are there currently. However, we're ready to use them.
We can also use the same improvement by using digital circuits and custom digital circuits to improve the auxiliary function that are in inverters, such as housekeeping, supply, communication, and so on. We will show you how we will use more ASICs to further reduce the cost and the component count of the inverter. Polymeric enclosure. The first time you see this new product here. Well, polymeric enclosure has many advantages. The first one is that the thermal coefficient of expansion of the enclosure matches very well the PC board and the potting compound, unlike the metallic enclosure. Because of that, we fundamentally reduce stress on the components and achieve a better reliability. Another advantage of polymeric enclosure, it's the transformation cost, which is much lower for basically molding these enclosures than for casting or forming sheet metal. We have structural reduction in cost.
Design is also less encumbered by practical consideration due to the transformation process. Therefore, we can actually tailor much better the shape of the enclosure to the devices that we are trying to enclose. That brings positive results in the form of less weight and less material used. People will say, "Well, if you have a polymeric enclosure, you can't really extract the energy very well from it. Basically, it's going to get much hotter inside." The truth is that we have come up with a solution which yields the same thermal resistance or better than before, which means that the components will operate at the same or lower temperatures than before. We've solved that issue as well. This operating temperature is, of course, a critical aspect for reliability in the long run and for performance as well.
Last piece is there is no need to ground this enclosure, unlike the metallic enclosure we had before. What that does is that it helps us reduce the cost of the system by removing the ground wire in the AC cable system. This is our new AC cable system. On the bottom, you have the existing one, the four-wire cable that we sell today. It's two-wire on the top. You have over 50% weight reduction in the cable system per unit for the same current capacity. That makes for, of course, a much cheaper, much more cost-effective cable system, as well as a much easier cable to install. This is, again, a win-win for soft cost and hard cost. Then there is AC module. AC module is this here. This is a PV module which has an integrated inverter into it.
Integrated inverter is actually not plugged in right now, but we'll demo that later. The big advantage of AC module is that there is no DC wiring whatsoever. The installation is basically the fastest installation you could ever do. There's more than that. We can save money, to both us and the module manufacturer, by removing unneeded parts that are needed for standard PV modules. As an example, we don't need a long cable going from the junction box's inverter, so we can reduce the length of these wires by a large amount. Another one is that in that junction box, you have bypass diodes that are used for string inverters. We don't need these bypass diodes, so we can remove them. We could even remove the junction box if we wanted to, if our partners will get that technology.
Another one way to look at it is that because the system voltage of this module is now going from 1,000 volt or 1,500 volt to 60 volt, you can make a lot of those trade-offs in the construction of the module itself, and we could probably reduce the size of the module or maybe have slightly more power in the same size, as well as being able to use other materials for the backsheet and so on and so forth. Another advantage is that there is no phenomenon called PID, which is a degradation of the PV due to high voltage. This is now eliminated in that topology. We believe a much better solution with this thing. Okay. I'm going to pass it on to Greg, who's our VP of Engineering, and we'll run you through the devices.
That's great. Thank you, Martin. Good morning, everyone. I'm going to take the time I have with you this morning to take those principles and technologies that Martin talked about and actually explode those into actual numbers for you to show you how it is that we take 50% of the cost out of the product over the next couple of years. I'll take those very specifically and break those down. What I would like to do first is just to show you, and I'll pass these around a little bit later on as part of the presentation. This product here is the M250. This is our high-volume product that we're shipping today. Just to give you a size of, or a basis of comparison, this is the S300 that we will be shipping in two years.
There is a two-step process in which we take 50% of the cost of the product out, as Paul discussed earlier, over a two-year time period. I'll discuss this as I go through the presentation. Martin really talked about four technologies, I just want to reiterate those for you. The first is the architecture, the system architecture, and silicon integration. Martin talked about all of the competing things that we must deal with as part of the microinverter system. Whether it's advanced grid functions, whether it's higher power, whether it's higher efficiency, whether it's control, whether it's grounding EMC, all those things, if they're done properly and done and architected in a systems way, we can then build all of those features and functions into a form factor that is smaller with less components.
That's what silicon integration does, meaning our own custom ASICs, the ability to shrink the size of the product and to shrink the size then of the enclosure and everything that goes with it. It ought to be clear what silicon integration does. I'll actually show you in detail, but we take about 150 parts out of the system over time. Those 150 parts then make the printed circuit board smaller. They make the enclosure smaller. They make the amount of thermally conductive potting material that we put in the enclosure less. All those things structurally reduce or take out cost out of the product. Second, Martin talked about operating at higher frequencies. It allows us to have smaller magnetics.
We work very closely with our suppliers to develop magnetics that deliver in the system, higher power over time, higher efficiency over time, Darin will talk more about this later, but automation also not only in our own facility, but at the facilities of our suppliers. Optimization of the magnetics is a very important part of reducing the overall cost of our product. You'll see when I hand these out, you'll actually see the footprint of the magnetics, it'll become apparent to you why reducing the size of that footprint is important over time. Martin also talked about the polymer enclosure and what it does. As Martin shared with you, we had to solve a couple of issues first, that was one in particular was the thermal issues. Other is structural.
This project actually started, Martin, I don't think shared this with you, but started about two years ago, working on all of the technologies, the choice of materials, the way it would be sealed, how it would reduce cost in transformation, as well as raw material cost. When you take a polymer, you can mold that polymer to the printed circuit board much more closely. That helps thermally. A polymer enclosure is much less expensive, both to purchase and in the transformation of it in the factory. It's also much lighter. Lighter all the way through the process, all the way from our suppliers, all the way through to our customers. A much less expensive product to move around, both in the factory and to our customers. Lastly, Martin talked about the moving from or simplifying our cable architecture, moving from a four-wire enclosure to a two-wire enclosure.
A piece of it ought to be obvious, that is if you move from 4 conductors to 2 conductors, it removes 2 wires. That ought to be obvious. What may not be so obvious is that it also means that you can shrink the size of the wire, you can shrink the size of the connectors, and you can reduce the cost of that entire cabling infrastructure that goes with the system. These are the four areas, silicon integration, magnetics design and optimization, polymer enclosure, and simplification of the cable architecture that drove or drives a tremendous amount of cost out of the product. This chart is really just meant to show you is where the cost of the inverter is today. This is the current M250 that I showed you earlier that I held up.
It ought to be obvious from looking at this chart why one of the things that we wanted to address is the mechanical enclosure, you can see the other parts of the system that are laid out here in front of you. What I really would like to do is to superimpose upon this for you what is the S300, you can see a direct comparison between the M250 and the S300. What you can see here is those areas first that I mentioned, I'm going to point them out, the laser pointer doesn't work so here, but if you take the actives, the ICs, and the passives, that was really the reduction of what the ASIC integration does in the system, takes part count out of the system.
The unintended or the maybe not so obvious benefit of that is it does a lot also to take size out, which takes the mechanical enclosure and reduces the size of it. Also talked about magnetics. You can see the reduction in magnetics. Again, twofold benefit, the reduction in the material itself, but also the reduction in the size, that reduces the size of the mechanical enclosure. Then you can see here the dramatic reduction in the mechanical enclosure and in the cabling infrastructure. Now I'm just going to step down off of here. As I go through the different generations here, I'm going to hand them out and around the room so that you all can look at them, touch them, and see them. I'll go through each generation as I do that.
We have the newer generations, the S290 and the S300 are in clear plastic enclosures. Obviously, it would not be what the ultimate design would look like. We did it so that you can see inside and see exactly what the product will look like. First of all, this is the M250. I'm going to hand around two things with this. The M250 is today's high-volume product. This is the Engage Cable that goes with it. Obviously, the cable is put on the roof. Each inverter then is plugged into what we call here the splice box on the Engage Cable. I'll pass this around so you can get a sense of size and weight of this particular product. It's about 400 components.
You can see the specifics up there, a little over four pounds in weight, but you can get a sense of what that product looks and feels like as I hand that around. There you go. Next is the S290. Two things about this that you'll see. Martin talked a bit about thermal management. You'll see the heat spreaders on the back, so you get a sense of how we do that. If you were to count the parts on here, you'd notice it's about 60 parts less than the previous design. If you could see, you'd see the magnetics is smaller also. This design is actually in test in engineering right now. This is the prototype that's actually under functional test, just so that you know what it is. Along with this, I'll hand out the cabling infrastructure that goes with it.
You'll notice as I hand this out, much lighter, much more pliable, two-conductor cable. Remember that the splice box that I showed you that we plug into, you get a sense of what that looks like here with the smaller connector. Smaller form factor, both in inverter and in the cable infrastructure. I'm going to pass one in both directions here. There you go. You bet. Finally, the S300. The technology that goes from what is being handed out now, the S290, to the S300, is a couple of more ASICs. All, by the way, have been specified now, and we've started the work on those. Again, reducing part count. It goes from a total really of 150 parts from the M250 that I discussed there.
There's also some capacitor technology that we have working with a supplier to reduce the size of the capacitors on the board. It gives you a sense of the size of what the S300 will look like in its form. These products, the S290, will be out at the end of 2016. This, the S300, out at the end of 2017. The M250 isn't staying stagnant in that time period. The M250 is going to continue to move down a cost-reduction curve in time then to meet ultimately the S290 at the end of 2016 and then ultimately the S300. I'll pass this one around as well. Here you go. Martin talked about this. I already talked about it once. I just want to hit this again, that silicon integration or ASIC design is critical to this because it's what we do to shrink the size of it.
As Martin stated, this has gone on in networking, gone on in every other Silicon Valley company, that's shrinking the size of the product, if you will, through silicon integration and taking cost out. We continue to increase the gate count of this and include more parts. As I said, it's 150 different or more components that we include in that and increase functionality and increase the efficiency of the inverter. We use TSMC, the world's largest foundry, as a partnership. We also have our own ASIC team. Many of you may not know that. We put them right in Silicon Valley, where those folks, the expertise lies. It's a team of 30 people that works very closely with TSMC in the design of the product.
We chose the 55-nanometer technology for this based on the availability of IP. It's really optimized for us in terms of cost performance. The other thing about that I know that I mentioned earlier about the reduction in part count, this may be obvious to everyone, but when you take 150 parts off the board, it certainly allows cost reduction, that's true. It also allows ease of manufacture, that's true. It's also a whole lot less solder joints, so it continues to drive the reliability of the product up. This is just a picture of the family that I handed out. Paul, about five years ago, said to all of us, "The inverter ultimately needs to be the size of a cell phone." We have two things working in our favor. Our product's getting smaller, and cell phones are getting bigger. That's not what Paul meant.
He meant to make it smaller. You can see, this actually shows, I think this is Raghu's phone. I think it was a picture of his iPhone 6. You get some sense of over time how we're continuing to move down that path towards a much, much smaller inverter. All of this design work is done not just with cost reduction in mind, but with improvement for Darin Spencer, who I'll introduce in just a minute, and the ability to manufacture the product in a more efficient way, but also in improvements in reliability. What you can't see on the backside of the S290, the S300, is that we've made a single-sided board instead of a two-sided board. Huge improvement in efficiency and reliability. Also tremendous number or less number of parts.
In the way that we even seal the unit and enclose the unit, continue to improve the reliability. All those things, the things that I have shared with you are really through silicon integration, magnetics, polymer, and simplification of cables, a way to structurally take cost and material cost out of the product. I'm going to introduce Darin Spencer, our VP of Manufacturing Operations, to talk now about the operations side of the business and how we take cost out there as well.
Okay. Thanks, Greg. Good morning, ladies and gentlemen. I'm Darin Spencer. I'm the Ops VP for Enphase, I'm going to talk to you about our manufacturing model. Most of you know that our model is one that leverages supply and manufacturing partners around the world. These partners are world-class global enterprises. They have significant purchasing power. For example, Flex purchased over $20 billion worth of material components over the past year. We leverage our partners to secure supply at the lowest possible cost. These partners also have significant experience building high-reliability products. As you guys know, our products have 25-year useful lives. They're used at 50% duty cycle. It's very important for us to be able to balance the high-reliability processes with the lowest possible cost of ownership. We also have a very optimized global footprint from a distribution perspective.
This enables us to service our customers around the world in a very efficient manner. It also equates to best-in-class from an inventory carrying outcome, from an inventory turns, as well as distribution cost perspective. Our model also lends itself well to increases in volume. We do not increase our cost of goods sold overhead investment as a result of volumes increasing. As a result, we get significant benefit from overhead absorption from a per-unit cost perspective as volumes increase. For example, over the last couple of years, our volumes have essentially doubled. As a result, we've had a significant reduction in cost as a result of that volume increase on the COGS overhead absorption side of the equation. It gives our supply partners significant leverage with their suppliers. They get a lower raw material cost. We also get better overhead absorption in their factories.
We get those same benefits in the factories that make the Enphase product. In that sense, as volumes have increased 2X over the last couple of years, we've seen a 15% cost reduction just as a result of the volume increase, and that's significant. We'll continue to have volume as a lever going forward. In addition, we put a lot of focus on many metrics from a process efficiency perspective. We're always focused on improving process efficiency throughout the entire value chain. Part of that is localizing sourcing, so as we set up factories in new locations, we localize the supply chain. That gives us more flexibility. We also work heavily with our supply partners to automate their factories, as Greg said earlier. As we do that, we get a couple of benefits.
One of the benefits is obviously we reduce the labor component of cost of making the component. The other benefit is with process capability improvements, which give us a more repeatable outcome out of the process, which gives us better quality, which is also important. The factories that build our products are also heavily automated, as I said. Our approach when we automate is first we optimize the process. As you can see here, we've been able to optimize the process by reducing the number of manual touchpoints in the manufacturing process in half over the last couple of years. We still have plenty of room to continue to optimize the process, then we automate around that. The automation we've been very successful with, and I'll talk a little bit more about that later.
One of the outcomes is that two years ago, the typical operator in the factory was producing about 1,000 microinverter systems per quarter. That same operator today is producing 2,500 microinverter systems per quarter. We're on a great path, and I'm highly confident that we'll get that same operator to produce 5,000 microinverter systems over the next couple of years. We also focus heavily on making sure that we have as flexible of a supply chain as we can possibly have, and we'll continue to do that. As we do that, we improve yields. We also improve SKU management. Our design gives us very few SKUs, so we're able to hold less inventory and so on. With all of these metrics that we continue to focus on improving, we also continue to focus on investment in quality and reliability, which is very important for us.
These are pictures of environmental stress chambers that we have throughout both design centers, both in California as well as New Zealand. We also put a significant investment in the factory. What these chambers enable is we're able to run highly accelerated life testing. These are tests that mirror the 25-year life in field application. We run all of our products extensively through these environmental chambers, all the way through the development cycle, early development, late development, all the way up through volume launch. As a result, from generation to generation, we've improved quality significantly. As most of you know, we're in production on our fifth-generation product currently. We continue to improve that. That's resulted in a best-in-class result from a quality and reliability perspective.
As I said, we run these tests extensively through the development cycle, but we're not done once we launch into volume. We continue to run these tests all the way through the volume cycles. This enables us to make sure that we don't introduce any latent type problems in the volume cycle and gives us early indications so that we can react and make sure that the product is highest possible quality and reliability levels all the way to end of life. Again, the result is best-in-class quality and reliability. One of the tools that we use, one of the many tools to ensure that we are best-in-class in quality and reliability, is our automation. We design our own automation lines. What we're looking for when we design these is first, as I said, optimizing the process and then automating around it.
We're looking for efficiencies, but we're also looking for flexibility. The lines that we have in the factories today can produce any SKU on any line with very minimal setup and transition time. That gives us a much better use of the asset. The asset efficiency is great. Plus, we can extend the life of the asset from generation to generation. The other thing that's important is global serviceability. We design control systems. It's a centralized control system. It's Windows-based. We use a programming language that's very widely known throughout the world. We can put these lines anywhere in the world, Mexico, Asia, Eastern Europe, and the technician bases in each of those regions can come up to speed very quickly from an ongoing maintenance perspective, which is very important.
As a result, these lines today, we can produce 11,000 microinverters per day, the lines that are in the factory today. That's one microinverter system every seven seconds. We have continuous improvement this area to where, over the next few months, we will actually reduce that to one microinverter system every five seconds. What I'll do, I'll show a very short video just to show you the lines in operation. Again, what we've done is we've integrated application for sealing with screw driving. We've integrated vision so that we can do various quality checks as the automated line's building the product. We also have integrated hipot testing, so we have a fully integrated line that, again, produces one microinverter today every seven seconds. Very soon, we'll be able to produce one microinverter every five seconds.
We're at 11,000 units per day today, we're moving to about 15,000 units per day in the near future. With that, I'm going to turn it over to my colleague, Stefan, who's the VP of Product Management. Thanks.
Thank you, Darin. My name is Stefan Schietinger. I'm the VP of Product Management at Enphase. I'd like to talk to you about how all these initiatives result in 50% cost reduction over two years. What you can see on the chart here are the Enphase costs that show an orange line here closing the gap all the way to $0.10 a watt over two years. It is enabled by continuous improvement, as you can see the slopes, and the step functions in cost down based on the two product generations that we are introducing over the next two years.
As you can see, these cost reductions, every single one of these innovations also adds contributions to reducing the system cost and ease of installation, if you just look at this new two-wire cable as a good example on how we improve the ease of installation at the same time. In the gray band, you can see the string inverters. There's comparison based on available market data. On the low end and also the premium side, you see a wide band of cost of these types of inverters. Over the next two years, slowly reducing. If you look at the system cost, we clearly see some new requirements that actually will increase the system cost for string inverters. One example is that for fire safety, we will see adoption of the rapid shutdown requirements into the National Code.
We see the NEC 2014 690.12 being effective in 2018, the NEC 2017 being effective one year after that. These changes in the National Electrical Code will drive probably $0.03-$0.05 a watt additional system cost in string inverter systems. We expect that these will be adopted actually a lot earlier than the effective code, given the liability exposure for fire safety. These are significant add-ons that will come over time, showing the steepness of our curve as a very clear differentiator. Now, in addition, there are upside opportunities for us to decrease the cost further. One of the initiatives is the AC module initiative, a solar module with an integrated microinverter, as Martin pointed out already.
You can see a sample of that here, and it creates additional significant cost reduction opportunities. You can see in the sample how the inverter adheres to the back sheet of the device. As Martin pointed out, there are significant cost reduction opportunities, not only on the microinverter side, but also on the module as we are integrating on the back sheet. We are eliminating cables, we are eliminating materials. Given the fact that these modules will never be exposed to high DC voltage, there are significant cost savings opportunities on the module side. This is the first phase of our AC module roadmap. In total, we have identified with our module partners already $0.03 per watt of material savings that they can achieve on the module side.
In addition, given that you've significantly simplified the installation process, there's another upside of $0.02 per watt savings. Not even to mention all the soft cost-saving opportunities here which will be increasingly important over time as we move forward in the solar industry. In particular, in this case, I would like to point out simplification of design. The fact that you have a single SKU through the value chain creates another simplification, and of course, you could actually increase and simplify the asset management process by pairing and registering the module and the microinverter at the same time. So already we have announced our first partner SolarWorld, an announcement we did earlier in fall. There are multiple more partnerships in the works that we will announce shortly.
To summarize, this AC module product will be launched concurrently with the S290, the first generation of our new products at the end of 2016. Another upside opportunity that is uniquely applicable to microinverters are shifts in the PV module industry to higher power modules. Why do higher power modules uniquely benefit microinverters? When you look at the 7 kW residential solar installation, you typically need, say, 27 modules in order to enable this. If you move to higher power modules, you only may need as low as 20 modules. Less modules means less microinverters, therefore a significant cost benefit to the installation cost. Unlike string inverters, where the string inverter cost will be the same independent of the number of modules installed at this installation.
The trends that we see in the market are that, in particular here in the blue bar, you can see the high power mono PV modules increasing in share. We see a lot more low-cost mono wafer capacity coming online, and therefore they're driving the adoption. In regards to new technologies, we see N-type mono wafers and modules coming out or bifacial technology. There's a whole set of new technologies with higher power modules. In practice, we can see instead of today a 260-watt module for a typical residential application, we can see within a year 340-watt modules or within two years 390-watt modules, meaning 20% or even 40% cost reduction opportunities on the system cost that directly benefit microinverters in this time period. With this, I'd like to conclude and summarize the cost reduction section.
In summary, we are having a demo showing you a roadmap that lowers the cost of Enphase microinverter systems by 50% over a two-year period, down to $0.10 a watt, closing the gap with string inverters. There are upside opportunities, such as the AC module and the shift in the module industry to higher power modules for residential applications. At this point, I'd like to ask Paul to come up here and help me here with the-
Great. What we thought we would do at this point, because we're transitioning now, we've spent some time talking about cost reduction, where we're going, why we're going there. Hopefully, we've been able to give you the confidence that we have that our ability to execute on this is very deterministic. As Greg was showing you with the S290, we already have prototypes up and running, and we're very far along with the S300 as well. At this point, I thought it would make sense to open up for questions before we move into the energy management and energy system part of the program. Yes.
My question relates to the polymeric enclosure. Have you done any durability testing on that and what polymer are you planning to use as far as
The question was in reference to the polymeric enclosure, have we done any durability testing and reliability testing? For that, I think I'll ask Martin, do you want to go ahead and start with that, please?
Sure. Yes, we have, of course, done significant testing. Yes, we see a very good result with this product.
In terms of thermal performance, does it degrade over time?
No. The material that we're using for the enclosure is a very specific material. It's not just any normal plastic. It's a material that is designed for this application, that we can certify so it has proper flammability rating, proper UV rating, proper cold impact test rating. It is a very technical material. It's something which is very well-suited for this application.
On the manufacturing cost, you talked about doubling sales volumes to achieve a 15% reduction in manufacturing cost. What gives you guys the confidence that you can double over the next two years?
The question is on what gives us the confidence that we can double the volume or whether the volume has the effect on cost?
Double sales volumes over two years.
Yeah. We don't provide guidance for what the volumes are going to be over the next couple of years. My point is that volume over the last couple of years has been a significant lever. It'll continue to be a lever over the next couple of years. We don't typically share what the volumes are going to be two years out.
What I would say in general, that we have seen historically that people prefer an Enphase solution because of simplicity, because of the extra energy production. The challenge that we've had most recently has been very singular, has been about price. We recognize that the pricing environment with our customers has gotten very aggressive. By addressing the price while providing, yet again, more features and functions by creating the entire energy system, we feel very confident that our share is going to continue to grow both domestically and internationally. We'll be able to leverage organic growth, share growth, and moving into new geographies. While Darin is exactly correct, we don't guide beyond the current quarter, what I'd say is we're very optimistic about our ability to dramatically increase volume over the next couple of years.
Yeah. Could you explain the advantage of the microinverter over the optimizer? Right now, the cost of the optimizer is lower, but let's assume same cost.
The question was, what are the advantages between a microinverter and an optimizer? The optimizer, the way to look at it is as a form of string inverter. It's a string inverter with some additional components. Those additional components are meant to provide the additional energy production that a microinverter provides. Number 1, a microinverter will always produce more energy than an optimizer solution. While they're better than a string inverter in terms of energy production, they don't make it to a microinverter. Second of all, with a microinverter solution, there's a dramatic simplification in design because there is no string sizing. Every string inverter, with or without optimizers, has strings and has certain string constraints. With a microinverter solution, you eliminate those challenges.
On top of that, you now have inventory management with our installers and our installer partners in that they carry 1 SKU. With a string inverter solution, again, with or without optimizers, you have multiple string inverters to support different system sizes. 2 kilowatt, three, four, five, six, seven, eight, nine, 10, whatever that may be. With an Enphase solution, there's 1 SKU that fits all of those. Therefore, inventory management and supply chain logistics with our installers just got a lot simpler. That is just on the microinverter itself. Now, if you add the level of reliability that we provide, now you're looking at a simplification on operations and maintenance. As we move into energy management, now that microinverter is seamlessly integrated into an Enphase Energy system, which is that integration is required for that system to operate efficiently.
It gets, yet again, simpler for both the installer and the consumer. For all of those reasons, we have seen a very dramatic growth in the company in the adoption of microinverters worldwide, that again, the challenge most recently has just been on price. By closing that gap or eliminating that gap, we believe that our market share has significant growth in front of it.
Follow-up. You use electrolytic capacitors, correct? Those in general don't have such long lifetime. Are you planning to replace those for different type of capacitors or?
We do use electrolytic capacitors. We have since day one, we use them in large part it's because of their reliability. Electrolytic capacitors are used in the automotive industry for your airbags, for your automatic braking system. The reason that the automotive industry uses it in those mission-critical functions is because of the reliability that those capacitors have. Most of our components are automotive-grade quality, that is one of them. No, we have no intention of moving away from them. They've proved tremendously reliable and durable, we anticipate using them going forward.
Just on the AC module, there's been a lot of discussion about AC modules in the past. How do you guys create the pull-through demand to ensure that just because you have a relationship to develop an AC module, the demand is there, distributors want to stock the AC module, and so forth?
That's a great question. The question was, just because we have relationships with module manufacturers, what do we do to create demand for the AC module? It's interesting that we did our first AC module back in late 2009, early 2010. We were working with a company at the time, Aktina Solar, and they built an AC module. For us, it was a very logical progression of the microinverter. What could be easier than having the microinverter attached to the back of a module so you effectively take the time and effort of the inverter installation to zero? Seemed very obvious to us at the time. We were aggressive about creating the AC modules back then to limited success. Had some success here and there, but limited.
What's changed now, we announced the SolarWorld partnership, we'll be announcing multiple more partnerships in the near future, is that this is not being driven by Enphase. This is now our customers asking us for the AC module. This is unique. In the past, we have been the ones who've been aggressively pushing it. We actually stopped pushing it at a certain time. Our customers are recognizing that they're extracting every bit of inefficiency out of the installation process. One big chunk of it left is the inverter. If they can reduce that to zero, all the advantages of the reduced SKU count, which makes their inventory management easier, makes their warehousing easier, everything on the back end for them to get easier, now the installation process is faster, is driving them towards this as well.
All of our major customers are asking for it. We're actually fulfilling a demand as opposed to suggesting it.
Paul, you've historically seen a lag between when the incumbent generation the next generation of product really starts to phase in becomes 50% or more of the mix. If I recall correctly, from M215 to M250 was a span of multiple years. As we think about the S290 the S300 being end of 2016, end of 2017 products, should we expect the same kind of phase in where it'll be multiple years before it becomes a large majority of the mix? Secondly, how do you avoid cannibalization of the S290 given how tight the timelines are between when the S290 the S300 are being launched?
Great. The answer to the first part of the question in terms of the rate of adoption, we expect it to be not dissimilar to what we've seen in the past. In other words, as we introduce the S290, we will still be selling the 250. We think that the adoption of the S290 will probably be a little bit faster, in large part for the reasons that Stefan was saying, that we're seeing more and more higher power modules come to market, that's what's driving the adoption of the higher power microinverters. In terms of cannibalization, we actually don't view it as cannibalization. We have multiple SKUs, the SKU that we have is matched to the power of the module that the installer is using. In a way, we're a bit neutral.
If we have the M215 and the M250 right now, the bottom end will move up, the top end will move up with the S290, and the same thing will happen again with the S300. In the meantime, the lower power SKUs will slowly drop off as higher power modules come on board.
There's obviously a lot of changes with respect to policy coming up in the core U.S. market. Could you talk a little bit about how this product evolution can help you grow internationally?
Grow internationally?
Yeah.
Sure. Policy has been a very major issue in the entire solar industry, and that shows no signs of slowing down. In fact, what we just saw in Hawaii is a perfect indication of the volatility of this market. Now, while the changes in policy in Hawaii mean that solar as a standalone market is going to be challenged in the near term, it also opens up the entire Hawaiian market to storage for the first time. This is a very dramatic event that just occurred. We also see this as a harbinger of what's going to happen in California and other parts of the U.S. as well. Although there's a rapid policy shift that may have a short-term adverse effect, it actually creates a much bigger market for us in the long term. That phenomenon is also true internationally.
What we're seeing in Australia with the changes in the feed-in tariff is it may put some short-term pressure on the sale of solar alone, but it's opening up an enormous potential energy market and storage market. In Europe, we're seeing a very rapid shift, both in policy as well as consumer demand, to self-consumption. Self-consumption simply means that you use what you generate. That also creates, yet again, a storage market. As we see policy shifting around the world, what we're seeing is a very clear trend towards an energy system. That energy system must consist of generation, storage, load management, all wrapped together and coupled with the utility.
There has to be an awareness of that distributed energy system with what's happening at the utility so that there can be the right communication, the right messages sent back and forth, and what the utility needs in terms of grid stability they can get with these distributed resources. That trend we see to be universal and very positive towards distributed energy globally.
Paul, can I just add there as well? M250 is what we historically have called our fourth-generation product. All the S versions that we've seen here currently, we are actually shipping our fifth-generation value of the S280, the S290, and the S300 is our fifth-generation product that has not only a cost-reduction roadmap, but also have additional features and functionality in there, including power factor correction and other advanced grid functions which are necessary to enter certain new markets that we haven't played in historically.
The question about the higher power modules and kind of the impact on microinverter sales. If you need less modules to drive the same powered system, obviously that means you'd be selling less units of microinverters per system. I'm assuming that's somewhat offset by an expanded market because of lower system prices.
I would look at it slightly differently. Yes, we're selling less units, but we're selling the same amount of power. We're still selling 7 kilowatt regardless. We're selling it in fewer units. That illustration was to show that only a microinverter benefits from a price per watt or cost per watt perspective from growing module power. Since our costs don't increase linearly with power, as power goes up, you have a lower cost watt and therefore a lower price watt. The total TAM didn't change.
Got you. That makes sense. I guess then, does that leave upside to will that expand the market because the overall system cost is less and therefore drive incremental sales, which would mean incremental megawatts that you're installing?
Yeah. Fundamentally, that's the basic premise we're operating off of, which is the reason many people aren't using Enphase today is because of the price premium over a string. If we can close that gap or eliminate that gap, we have access to an enormous portion of the market that, until now, we really haven't had access to. Yes, we see the total market growing very dramatically as a result of these pricing and cost moves.
Thanks. Just two questions, Paul. One, not a lot of discussion on the M250 and the cost reduction there. Is the plan page 29 with the doubling of volume that you still think you can take costs out of 250 with the volume improving, is that 15%, or is there any initiatives internally to take more cost out of that other than just greater volume going through Flextronics?
Let me answer that, then I'm going to turn it over to Darin. As we look at 2016, we mentioned that the S290 will be released at the end of 2016. However, we're going to see a fairly dramatic cost reduction of the M250 in 2016 as well, so that our cost reduction path, although very dramatic and aggressive at 25%, is fairly linear.
Yeah. We have ongoing initiatives, both from a design innovation perspective that'll help us with cost. We had a supplier conference a couple of weeks back where I had all the global suppliers, we're working with them in terms of cost reduction over time. We're confident that we're going to be able to continue to reduce the fourth-generation product as a result of design innovation, iterative, as well as volume, as well as other initiatives from a process efficiency perspective.
Got it. That's helpful. Then just to follow up, two other quick ones. One is around pricing. Are you finding success with the lower price in terms of driving the additional volume? Is the elasticity there? Any comments on that?
Yes. The answer is yes. We're definitely seeing it now. We've taken step functions towards that, in the areas that we have addressed markets with price, we've seen a very dramatic uptake. Many of those design wins we have not yet announced yet, we will, it's a combination of new customer adoption and increasing share in existing customers. This is true both domestically and worldwide. Remember, the majority of the price reduction is in front of us. We've taken some pretty dramatic moves so far, we're going to be taking yet again more dramatic moves in 2016.
Got it. The last question was just on slide 34, the 50% cost reduction in two years. Is the cost curve based on the timing of the introductions, or is that your assumptions on the weighted average mix of the products that you have? It looks like a big step down in Q3 2017. Is that because of what Brian was talking about and the lag between introduction and it actually flowing through the P&L? I'm just trying to get a sense of what that curve is-
Sure
How you came up with it.
Sure. Stefan?
Yeah. What you can see on the curve is it's definitely the timing of the introduction as well as impact on mix. It's a blended view in the earlier time. The $0.10 will be more the-
$0.10 per watt will be more on the high-power modules. In the blended view, we expect this kind of a curve moving forward.
I think there's a question back there.
Yeah. How compatible are the M250s and M190s? Let's say you're a homeowner in 2021, and you have a string of panels on the roof. How does that work?
The question was backwards compatibility with the future products, with the current products, and the answer is, they're all 100% backwards compatible. Every product we do will support the existing install base for whatever reason.
As higher power modules come online, something like a 340 and 390-watt module, would you put an S300 on that type of module, or is that too small for a module of that power?
It's a good question because it can be a little bit confusing, even within the industry. There is a derate factor associated with the power on the module side, which is measured in DC, versus the power on the inverter side, which is measured in AC. Fundamentally, as you move up to high 300s on the DC power, on the module side, our S300 is more than capable of supporting that.
Okay. Then just somebody asked a question before about DC optimizers. What would be the additional cost on your chart comparing Enphase Micro versus string inverters? What's the additional cost of that DC optimizer?
You mean how much higher it is than a regular string?
Yes.
Stefan, do you want to address that?
Yeah. Obviously, there is a lot of uncertainty to assess this. Based on the publicly available information, we estimate that in 2016, roughly that cost will be on top of the Enphase curve. Obviously, our rate of innovation is significantly steeper than anything we know about other technology roadmaps, so we expect that we break through. As you can see, we are going through the string inverter curve in this chart, and clearly, that considers only string inverter cost.
One more on the cost side. If you did a historical look back, how much cost reduction have you guys actually achieved in the prior 24 months?
Prior 24 months.
24, yeah. Like for like comparison.
Uh, does-
I can answer that. We've seen around 30% cost reduction, but again, most of that was due to process improvements and volume improvements. We didn't have any, what you just saw as step function product innovations over the last couple of years. If you add that on top of that's how you get to the 50%.
Historically, this goes back eight, nine years, but we've seen about a 15-plus % reduction in cost year-over-year very consistently. We've seen that to date. What has happened now is, given the competitive nature of the solar market, we've reallocated many of our engineering resources to cost reduction, which enables us to then accelerate that from 15%-25%. I think if you look historically, we've had a tremendous track record of consistently lowering costs through innovation, process, everything.
I think your chart for the third quarter starts at about $0.23 for the microinverter, and I'm assuming that's the M250. Your overall cost is about $0.32, if I'm doing the math right. The other 9 would be, I guess, wire and communications gateway?
Correct.
Is there any improvement in wire if you would go into 2 wires from 250 in the year ahead? For communications gateway, are you on the same page as everybody else? If they have to buy one, is your cost roughly the same? In wire, I would think your wire is more expensive than Can you give a size for what do you think the wire difference is today and what it might be with the two-wire solution as that comes in, and I guess, early as it's adopted in 2017?
Okay, I'll ask Stefan to step in.
Yeah. I think when you look at the total system cost, which is really your question, we also see over 50% reduction in the next 2 years. As you pointed out correctly, one of the key contributions is the transition to a two-wire system, which significantly closes the gap to any wiring that you need with a DC system as well. In terms of the communication gateway, yes, you're right. At the end of the day, it's the same components that you need to use in any kind of system, clearly, we see also significant cost reduction opportunities there as we innovate the gateway as well.
When I look at the $0.10 on the chart, is that divided by 360 or something like that? What's the module?
That's right. You could look at this roughly in that range. There's a lot of variables that go into this kind of an equation, but clearly, at that point, you will look at the higher power module.
If I were looking at the box, I could say it was about $36 or something like that as a cost?
Approximately. That's directionally correct.
Today, if I were to try to do the same thing today, I'd be
With my math be 23 times about two, I think
It's hard to make these adjustments. You're getting very specific, and what we're doing is all blending a bunch of things together. I'm not sure that that would give you the right answer.
What I'm trying to get to is I don't have to necessarily lower the cost of my BoP by as much because the denominator
That's right. That is correct.
Obviously, the challenge is it's harder to reduce cost more, so you don't actually have to reduce cost by the 50%.
You're correct. We are taking advantage of the increase in module power. The increase in module power has nothing to do with Enphase. It's what the installers want. It's what the module manufacturers want. We just, again, uniquely are able to leverage that.
One of, I think, the challenges with the AC module has been, Will it ship from their factory with your product?
It's a good question. It's a business model question. We're looking at multiple business models, and they are varied with the different partners that we have. One model certainly is we will ship our microinverters to them, they'll attach it, and sell it as a single combined AC module. There are other models as well that distributors or some of our larger installers can employ to help make it, yet again, more cost-effective.
Work done once it's landed, because in the solar world, it's important that it's a lot easier than shipping it from China than having to come back where it's been in the cycle.
Sure.
Companies had to pay for it or had to-
Sure. That's just in the U.S. The AC modules are going to be a global product. We're going to see it everywhere. Yes. By the way, in reference to the communications gateway, the communications gateway for us is not an incidental product. It is very much the heart of that energy management system. We're investing a tremendous amount in adding features and capabilities to that system. As an example, the new gateway device has a revenue-grade meter built in. You don't need an external meter. It's capable of measuring the consumption within the home. All that's being communicated to the consumer via a very consumer-friendly website that the consumer can then see what's happening with the broader energy system in their home. There's more and more intelligence that's being applied to the communications functionality.
As we move into storage and energy management, communication now becomes mission-critical.
Moving to two wires, can I make the assumption that it's basically daisy chaining one of the power lines?
The-
The second question is, if that's true, what prevents a single point of failure from breaking the chain?
Okay. Good question. I'll ask Martin to handle that.
Actually, the fundamental structure is the same as before. All the units are still in parallel.
Right.
Okay? It looks like it's
Are you daisy chaining one lead and running one lead?
We're running one set of wires, line one, line two, all the way to all the units in parallel. It's the same fundamental structure. We just have less wires to carry that, to move that through. In other words, there is no single point of failure in this system.
Not to put too fine a point on it, if any one inverter failed, it would not affect the rest of the production.
Yeah.
Right.
How many could fail and still produce a profitable-
You're thinking about an optimizer. With us-
With all of them.
all of them can fail, not that that would happen, but all of them could fail except one, and that one would operate completely independently.
With enough current, you could still lose.
You're thinking about a different architecture. In a microinverter architecture, each individual microinverter doesn't even know the other microinverters are there. You can have one module with one microinverter, and you have a grid-compliant system. You can have two, three, four, five, 5,000. If out of that 5,000, you shut off 4,999 of them, that one would work 100%.
At what power?
At 100% power.
Right
It'll be just one module and one microinverter. It is one of the beauties behind the resiliency of a microinverter architecture that we're not dependent on anything around us. The microinverter and the module stand alone. If you have, as an example, shading in one area, obviously it doesn't affect anything else. If something were to happen to other microinverters, the ones that something didn't happen to would operate at 100%.
Based on your 50% expected cost down, what should we expect is your anticipated share gain, especially with the top customers that don't carry your products?
The question was, with the anticipated cost reduction, what do we anticipate our share gain to be? Jesse, that's a hard question for me to answer. What I can say is that we are seeing already an increase in share, an increase in attention from the customers we're in as a result of this roadmap, as a result of the anticipated pricing in 2016 and 2017. I can't give you specifics, but what I can say is we're very confident that that share gain will occur.
How will the targeted $0.10 Watt impact your ability to penetrate C&I and pre-C&I mix? In the long run, what costs do you have to hit to be a viable utility tier model?
The question was, how does that cost reduction affect C&I and eventually utility? In the C&I market, we are very aggressive. We have a great position right now. We continue to sell into that market. What we had just talked about was the fact that as module power goes up, we can uniquely take advantage of it. Well, one thing about the C&I market is that those modules are yet again higher power, that the cost reduction we're showing here is for traditional 60-cell modules. It does not include the larger 72-cell modules, which are going to be higher power. The higher-power modules would result in, yet again, a lower cost per watt, which should make us even more competitive in those markets as well. As for utility scale, that is a uniquely different market, we're not commenting on that right now.
How much of a cost is it for the customer to switch from string inverters or optimizers, I mean, getting accustomed to microinverters?
When you say customer, you mean?
Your customer.
Installer or the owner, homeowner?
The installer.
There is a switching cost. It's an astute question that an installer who's used to using a particular form of inverter has a certain inertia associated with that. There's a certain momentum. What we have found is, as we get closer and closer to price parity with competitive solutions, they're willing to make that switch, and they're making that switch. I think it's perhaps a little bit harder to make the switch away because they're used to the simplicity and ease of a microinverter solution. With several of the new installers that we have, that may have been 100% using a competitive solution and are today using 100% Enphase solutions, it takes a couple of weeks of training, and then after that, we tend to get a snowball effect where they see more and more of the advantages of an Enphase solution over time.
A customer like SolarCity might be a little bit difficult to switch, right?
The question was, would it be more and more difficult for SolarCity to make the switch? You'd have to ask SolarCity that. We just fairly recently won Sunrun as a customer for the first time. I'd say that that transition to Enphase systems has been going very smoothly and very well. I think, again, you would have to ask Sunrun, but I think that they would be pleased with the support and the ease with which that transition has occurred.
In looking at cost per watt, looking at the upfront install cost, can you comment on the cost over time of a string inverter versus a microinverter? String inverters, I think, have a 10 or 15-year warranty life, and microinverters may have a 25-year.
It's a great question. The question was the cost over time of a string inverter versus a microinverter solution. That actually addresses one of the reasons we feel that as we approach string inverters, we'll start taking a very dominant position. If you take into account the reduced warranty reserve with an Enphase inverter, coupled with the extra energy production as a result of it being a microinverter system, which is going to have higher energy, and the reduced O&M, you're talking about a difference in tens of cents between us and a string inverter. The challenge has been that until now, the pricing delta sort of took up a lot of that, if you will. As we get down into near string inverters, that tens of cents advantage still exists.
now the difference between us and a string may be zero or a couple of cents. At that point, it's hard to imagine that somebody would choose a string inverter with a lower warranty, lower useful life, lower production, at what would be close to price parity.
Have you actually quantified that? You know, by tens of cents.
we have quantified it, and actually, there's a gentleman here from Enphase who has focused on that. I can make that introduction for you. The reason it's hard to give you a specific number is that every customer treats those financials a little bit differently, and they may look at the numbers slightly differently. there isn't a specific number. I can make that introduction, and you can get a lot more detail on that.
Any possibility of making dramatic technological changes in the string inverter? They talk about this HD-Wave lowering their costs.
In terms of dramatic changes to string inverters, remember, string inverters have been around for decades. Most of the efficiency has been wrought out of that already. Not to say that there isn't going to be further cost reduction. As you saw, we're assuming that that occurs. Most of that has been taken into account, which is why the slope of their cost reduction is so much less. I would say they're in danger, actually, of something reverse happening. That's what Stefan was talking about, is that there's now code that's going to require everybody to have something called rapid shutdown. This is to protect the homeowner, to protect firemen. This is all about safety. That rapid shutdown will actually add costs to the string inverter.
All the costs you saw on the string inverters that we showed you do not include the adjustments needed for rapid shutdown, which we think could easily be $0.03-$0.05 a watt. In reference to the HD-Wave, I'm going to ask Martin to comment on that.
Sure. This technology is known in the industry as multilevel inverters. This technology has been in existence for decades, literally. A lot of the high-voltage inverters used by utilities are using that topology. In this topology, you basically put more transistors in a powertrain and basically chop up the DC bus voltage in smaller increments. The advantage of that is that, yes, you can reduce the size of magnetics materials. The inconvenience of that, it's pretty large, is that now you have far more components that are in, basically, single point of failures in that path. You also have far more cost associated to driving all these new devices that weren't there before. There is a trade-off there.
I can't comment on the detail of that structure, actual detail of the actual structure, basically, the comment is that we believe that there is a possible large impact in reliability because of the additional number of devices that are critical to the operation of the system. The control system is quite a bit harder to implement as well, but I assume that these companies can handle that. The reliability is a big question.
That sort of underscores the fact that this HD-Wave or whatever is actually technology that's been around for decades, because string inverters have been around that long, and there's been many, many architectures and topologies in the string inverter world that have been tried over and over again. It's not to say that some of them won't help, but it's at a very different stage of development than the microinverter. Microinverter is very early stages in terms of its development life cycle.
Is your shut-off at each inverter software controlled, or is it automatic if there's a break in the system? How quick is the shutdown?
We are exempt because our DC system voltage is low on our system, we don't need to do that. We inherently do this because when you remove the AC, when you shut down the AC, which any fireman going to a location like this would pull the meter off. When you pull the meter off, all the AC shuts down, and then there's no voltage left except what's between the junction box and the microinverter, which is very short and very low voltage. It de-energizes the entire system in one fell swoop.
Just getting back to my question from before, if each of these is feeding, I think of it almost as like a circuit into your AC.
Right.
There should be a circuit breaker effectively built into it, so if there is a short in that AC circuit, just that one line out.
Yes. Yes. If there is a failure, like one inverter shorts somehow the grid, yes, we immediately disconnect that system.
The beauty behind this is that today we are compliant. Today, we are compliant with the codes that exist today in the Northeast, but that will exist across the U.S., and that is extremely important for many of our customers, especially our larger customers, who are concerned about the potential liability of putting systems out there that will not be, by definition, compliant in the future.
What about if it wasn't a panel, but it was just a battery Enphase? Is that also just one battery?
If it was a battery, if one of your battery modules was there and exposed to a conduction.
The code doesn't apply to these projects then, as ultimately we don't. It would be exactly the same hardware anyway, so we wouldn't apply battery. There's no accessible DC connection on a battery system, it's actually even better. There is only one port and another AC port.
Justin.
The ease and speed of an Enphase installation relative to string had always been an advantage of Enphase during their growth cycle and how you gained so much share on the early days. Is there still an advantage there based on your findings? Given that, how do you look at the fact that installation resources for them are tapped and lead times are extending going into a full year 2016, and what's your strategy to kind of capitalize on that?
Right. The question is, do we still have the advantage that we used to have in terms of ease of installation, and what are we doing to leverage that or capitalize on that because installation resources are constrained right now? The answer is, to the first part, absolutely. Nothing has changed. In fact, again, the only reason, the challenge right now in the marketplace is price. It's the value proposition of an Enphase solution, simpler design, simpler installation. That hasn't moved a bit. It's just addressing the highly price-competitive nature that the market that our installers are in. In fact, moving to things like an AC module, yet again accelerate the simplicity of an Enphase solution. The design is literally as simple as it can get.
There simply isn't a string to worry about. You put as many as you need, and if you're on-site, and almost every installer will tell you this, when they come on-site, they almost always have to, or many times have to make modifications to account for the real-time environment of that roof. With an Enphase system, that's made right then and there, very simple. They don't have to go back and redesign it. All those advantages are there. Now with an AC module solution, we've simplified the backend logistics to a single SKU. We've simplified the installation. An AC module takes the installation time and effort of an inverter literally to zero. You don't see the inverter. You don't know the inverter is there. It looks like you're plugging it into a module. The inverter just happens to be on the back of a module.
We absolutely do plan to capitalize on that and some other things we're doing, like the simpler and lighter wiring and all the rest to help our installers meet the demand that may come should there be a change in policy in the U.S. Phil.
We've talked a lot about the cost curve looking forward. Can you talk about the ASP curve looking ahead?
It-
You recently took a price action where historically prices were down 10%-15% year-on-year.
You accelerated that to 20+. Are you prepared for another price action if the market warrants it, and what will it take to get to that next price?
The question is, we've talked a lot about cost. We have not talked much about price. What is our plan on pricing? The answer is yes, you're exactly right, Phil. We've taken a much more aggressive pricing stance already up to Q4 than we have in the past. What we're talking about, that 25% cost reduction in 2016, is to allow us to be at the same or an accelerated price pace in 2016. We're not guiding to it. It's going to depend on multiple market factors, but we are putting ourselves in a position where we can compete on price as necessary and then continue to do that in 2017. We don't guide to pricing for obvious reasons, but these costing actions we're taking give us a tremendous amount of ammunition, which candidly, we've never had before.
We've relied on the quality of the product, the sophistication in technology, the ease of design. We're saying we're going to double down on those. We're making it simpler, easier, and better, and we're going to do it at the lowest price you've ever seen.
Quick follow-up to the commercial question earlier. What kind of mix could we see in 2016? Similar to what we've historically seen, maybe 20%?
The question was the mix commercial and resi, 2015 to 2016, the answer is, I don't see any significant change there.
When did you start noticing the share loss? The shipments in the third quarter weren't that far off from expectations, really.
The guidance implies that there was inventory at customers. When did you start taking the price action in response to that? How did the channel inventory get so large? Is it at specific large customers, or is it distributors that feed the tier 2s?
The question was, when did we start seeing the pricing delta and recognize that we need to take a pricing action, what was the issue in terms of inventory buildup in the channel for Q4? I'll answer the second part first. The inventory really sits mostly in distribution that feeds the tier 2 and tier 3 customers. The tier 1 customers, generally, their inventory levels have been relatively stable. The reason for that, and Chris had mentioned this a couple of times on the call, is that we took a pricing action, we took it mid to late in the quarter. That generated demand in distribution. That created the additional volume in distribution. It takes time for that to ripple its way and push its way down the rest of the channel.
What we're seeing now is just that occurring as you take that pricing action and have it pushed down from distribution to the actual customers.
I had kind of asked this after the call last time. You can retroactively give a price cut to the channel. I call it price protection, others call it different term. Does the channel have to see a lower price now so that they can give it the lower price to the tier 2?
I'm not going to comment on where they can be. That's a decision that the channel has to make. When we do take a pricing action, a generic pricing action, a drop in EDLP, that's the distribution pricing, there are rules that we apply for price protection in the channel. We've been using that same process for years now. In terms of where the pricing is in the channel, we expect channel inventories to be normalized this quarter, I'm not sure that is going to be a very big issue going forward. The pricing actions we'll be taking in 2016 will definitely affect distribution and the tier 2 and tier 3 customers.
In a perfect world, what price do you think is the equilibrium price that you need versus SolarEdge, versus string to the installer through distribution?
The question was, what pricing do we need to be in a perfect world?
What delta?
Yeah. It's very hard to say because different customers view the product in different ways, and they look at it differently, both financially and operationally. I think the right way to look at it is the closer we get, the more share we're going to get, period. I think there is a very clear recognition that the advantages of an Enphase system are tangible, are measurable. Again, in a very price competitive environment, as our installers are in, as much as they want to, they may not be able to afford a price delta. The closer we get, the more we win.
The big guys, the bigger players would have had this price, the first, at least, price adjustment would have been throughout the whole entire fourth quarter?
Again, the question was, what happens with a tier 1? It's an impossible question to answer because we sign contracts at different times for different periods. It's not structured like that.
If I can ask in a different way, maybe you can answer this follow-up question. Do you need to be as tight with the optimizer solution to gain share going into next year, or can you be at a gap?
The question is, do we have to be at parity with optimizers to gain share? The answer is, what we have seen empirically is, no, we can still charge a premium, the premium is minimized. Certainly, if we're at parity or below, I think the decision becomes a lot simpler for our customers, we can support a price delta, we are.
Just to follow up on that, when are you going to be below optimizers?
It's very hard to say because I don't have a view on their costs. As Stefan was saying, based on the data we have, we think we're at cost parity with optimizers sometime in 2016, then below that as we hit the $0.10 in 2017.
If you reach cost parity, will there be a price war, how do you maintain the margins?
The question is.
cost will be much lower compared to your competition than maintaining margins, right?
The question is, if we're going to be at cost parity, won't there be a price war? The answer is, there is a price war. It's happening right now. You're witnessing it.
Yes. What were your margins, I mean, if you are looking to your costs?
What we've shown you down to that $0.10 is not what we're done. It's just we've shown you 24 months. There's plenty of room to go from there as module power expands, as we do more and more in the way of semiconductor integration, as there's more and more advances. What we believe will happen, and we saw something like this happen with the modules, where several years ago we saw this very precipitous decline in ASPs and modules until it got to a certain point and then kind of stabilized a little bit. It's been that way for a couple of years now. We believe the same thing happens with inverters as you approach $0.10.
The benefits, remember, when you're at $0.10-ish, and we're talking about cost, you can make your implications to price, but the difference between a cheap string inverter and an Enphase system may be in the $0.02 range. That's $200. At that point, percentage differences aren't really reflective of the true implications of the difference in cost. In other words, just for the sake of an example, you could be $0.12, $0.13 versus $0.10. You could argue that's 20% or 30% more, which is true, but it's $0.02 or $0.03, which is $200 per system, compared to all the advantages that I talked about in terms of warranty reserve, extra energy production, lower O&M.
That's why on the call, Chris and I were very clear that there's going to be a very challenging pricing environment for a while, but we are very confident in our ability to achieve our target gross margin over time, just longer than we had originally planned to do it.
You're still maintaining the 30% long term?
Long term is 35%-40%. Correct, we're still maintaining that. Okay. I think we're going to take a 10-minute break. We'll come back and talk about energy.
Good morning. My name is Raghu Belur. I'm responsible for products and strategic initiatives for Enphase. As the team just pointed out that we are aggressively driving our cost down, that will make us competitive against string inverters. However, we believe that that's not sufficient. We continue to invest and leverage our technology in order to provide high-value solutions in the broader energy space. I'll explain a little bit more about what I mean by that. This is an illustration of our vision. Our goal is to provide our partners with a plug-and-play comprehensive energy solution, that is very simple to design, very simple to install, and very simple to maintain and adds value to their offering, at the same time saving the end customer money.
If you look at the components of this, for example, imagine your house with an Enphase solar system on the roof, Enphase storage in your garage, a device that Enphase provides that can monitor and measure your usage, and a device that can control your usage as well. All of these things managed by an energy management system. This solution that we're saying, a comprehensive energy solution, which is all plug-and-play and very simple to design, install, and maintain, all managed by energy management system, can drive our revenue per home, which is a metric, revenue per home from about $1,000 to greater than $6,000 per home. This does not include any potential revenue from services. Services such as operations and maintenance, services such as distributed energy resource management systems, services such as energy savings from providing energy optimization.
None of those recurring revenues, for example, potential recurring revenues are included in this. What we have done, if you think about it, as Martin pointed out, one of our guideposts when we think about designing our product is we always take a systems approach to it, which means software-defined power management, bi-directional communications, and a massive software infrastructure to support it. Again, as was mentioned earlier, we manage two terabytes of data every day. That's how much we collect, but it's collect and manage, and that takes a massive software infrastructure. The key here is that we leverage the software-defined power electronics, the bidirectional comms, and the software infrastructure across our products. In effect, what we have done is we have built this operating system, where solar is the first application that's running on that operating system.
Storage, load management, et cetera, are the next set of applications on that operating system. Storage. Let's take an example of storage and how we leverage technology. Our storage solution, actually, everybody's seen the storage solution, but that's what it looks like. Our storage solution uses the same bidirectional communications and software infrastructure. In fact, the hardware that's there, the power management hardware that's in that device is the same power management hardware that goes on the roof. That's what we mean by significant amount of leverage. We are actually well along our way in realizing our vision. We launched a device known as the Envoy-S that actually measures your usage, as well as provides you the breakdown of where your usage is coming from, the significant elements of your usage. Okay? This device also provides additional functionalities.
Additional functionalities such as revenue-grade metering for our partners who provide third-party ownership. It's a fully ANSI C12 revenue-grade meter built into this. It interfaces with a smart thermostat. It integrates solar. This is part of the integration into that home energy solution. We've been in the market now for a bit, where we have done a lot of beta trials, and there's been a great deal of interest from our installer partners who see this as additional value as part of their offering, and system owners who can now look at what their consumption is in real time and be aware of what their consumption is, which is the first step towards behavioral change. This system is very easy to install.
All you do is a current sensor, tiny little current sensor that goes around your main load center, install the Envoy-S, then the software takes over from there and gives you all the information that you need. Stefan will actually do a software demo of this device. This device that measures and monitors your consumption as well as gives you the breakdown of it. The next application, if you may, that's running on the operating system is our storage solution. Our storage solution, which is right out there, is called the AC Battery. It's a fully integrated distributed storage solution. What that means is it interconnects on standard household AC wiring. It's fully integrated because it contains the cell modules, all the cells that are in there, the BMS, the charge controller, the inversion, as well as the interconnection.
It's called an AC Battery because it interconnects on the AC channel. It provides the highest lifetime value because of efficiency, because of reliability, because of ease of installation, because of ease of integration. Again, I want to point out what our goal is, that we have all this complex technology, but it's all plug-and-play and works seamlessly together. I cannot overstate safety. Just like what we did with solar, we have no high voltage DC on the roof. It's all low voltage DC. That's why we are correct by construction when it comes to things like rapid shutdown. We are all low voltage DC and traditional 240-volt AC wiring. We took and applied those same principles to storage as well. We have no high voltage DC anywhere in our storage solution. We believe a combination of high voltage DC and high energy chemistry is fundamentally suboptimal.
Now, when you think about chemistry, Martin and I spent almost 18-24 months just in evaluating chemistry. The choice of chemistry was pretty complex, and part of that was doing our due diligence in looking at all the major chemistry vendors. We converged on a lithium iron phosphate in a prismatic format. We looked at cost, performance, and most importantly, we looked at safety as well. It's a lithium chemistry, as I said, LFP or lithium iron phosphate in a prismatic format. If somebody wants more details about it, there's an incredible amount of details between the choice of chemistry. There's a lot of analysis work that we did. If somebody wants to geek out on it, please come and see me after this. Happy to share all that information with you.
Here's what the system line diagram, if you may, looks like for an Enphase solution. Again, just to remind everybody, our goal is to provide our partners with a plug-and-play comprehensive energy management system that's very simple to design, install, and maintain, and that adds value to their offering as well as saves the end customer money. If you look at that, our AC system on the roof, it's a module. It's a panel with a microinverter. It could be embedded in, just like you see there with our S300, actually with our S290 and S300, connected on standard AC wiring. That's the two-wire cable that you saw. You get all the benefits of it, which means you get greater production because it's a fully distributed architecture. It's much more reliable. There's no single point of failure. Very simple to design, install, and maintain.
You can mix and match panels. You can point them in any direction. You have fantastic flexibility. You have no limitations around strings. Strings with or without optimizers, no limitations there. Finally, safety. There is no high voltage DC. Again, we took the same approach to our storage solution as well. You have a fully distributed architecture, which means you have a fully integrated system, and it interconnects again on standard AC wiring. That just goes into a 20 amp breaker. It could go into a sub panel. It could go into a panel. Tremendous amount of flexibility for our installer partners. Same thing with storage as well. You can have three units, four units. Not everybody's usage profile is the same. You can right-size these devices to your individual usage profile. Of course, it's all interconnects on standard AC wiring.
The Envoy-S also interconnects, just plugs and plays. Put it all together and the software takes over at that point and will provide whatever heuristics is needed. The most simplest case of the heuristics would be, for example, time of use optimization or self-consumption. One of the interesting points about this architecture, and this is really important in our mind, is the solar, the storage, and monitoring and managing your loads are completely abstracted from each other. At the hardware level, they don't know that each of them exist. At the application layer, obviously, they're all very aware. What that means is you can have a system with solar alone, you can have a system with storage alone, you can have a system with just a device that monitors and manages your load, or you can have a system with all of this.
That gives our partners a tremendous amount of flexibility in what value add that they provide to their customers. We see great demand in all of those use cases. Let's double-click down into storage. There's been a lot of questions around what's better, an AC-coupled storage system or a DC-coupled storage system. We obviously are fundamental believers that an AC-coupled storage system is much better than a DC-coupled storage system. Why? Because of the following reasons. It provides greater amount of value, and the reason for that is it's more efficient, and we'll talk in the next slide about efficiency. It's got better performance on the chemistry, for example, greater cycle life, better depth of discharge, round trip efficiency. If you look at ESR, et cetera, we are just much better. Let's talk about installation for a second. We are much easier to install. That's a 50-pound unit.
That's a one-person install. You walk into your garage, you install it on the studs of your garage. You can have one, two, three, or four. It doesn't matter how many of you want. Connect it over your standard AC wiring off into a 20 amp breaker. Contrast that with centralized power conversions, where you may have a massive battery bank and inverter systems that can weigh between 250 and 600 pounds. That takes more people, takes more time, may even require lift equipment to go install once you actually figure out where you're going to install this heavy-duty system. In some cases, you may have to install a pad, especially those systems we call eyebolt storage systems because they come with eyebolts on top, and there's a reason they come with eyebolts on top. Modularity.
Again, as I pointed out, your usage pattern is going to be very different from your usage pattern, which means you can right-size your system. Our building block for our AC battery is 1.2 kilowatt hours. What we call a quantization problem doesn't exist. You can right-size it exactly to what your need is. Furthermore, it's expandable, which means tomorrow, if your load profile changes because, say, you added a swimming pool or you added a hot tub, you may want to add more storage devices. You can, because it's infinitely scalable. It's all interconnected on the AC domain. Reliability. Again, we took the exact same approach because we are fundamental believers in distributed architecture. As Martin Fornage pointed out, distributed architectures always win in the long run, and if you look back, there's enough technology existence proof up there that shows that we took the exact same approach.
If you lose an AC battery, it's okay. The rest of the system continues to operate because it's all parallel and interconnected on the AC domain. We already talked about safety. Cannot overstress it. Finally, retrofit. As I pointed out, the solar and storage is completely abstracted away from each other. The corollary to that is we can connect our storage solution to actually any solar installation. It doesn't need to be connected to an Enphase. This is particularly important in markets where feed-in tariff contracts are ending. For people to get back to positive economics, you have to add storage. Now you can go and retrofit existing systems, which may be a non-Enphase solar system, with our storage solution, and we get back the economic benefits that we talked about.
Very important, if you look at countries or regions like Asia-Pacific, Australia in particular, you're seeing a lot of that, where feed-in tariff contracts are ending, and that's a big retrofit market. Some newer markets where some of the tariff structures are grandfathered, while you get to a new install, that's okay. You can do that as well. That's the flexibility that you get. Clicking down again, the efficiency in AC versus DC coupled system, this come up. If you walk through the efficiency conversion point, if you talk to the power conversion point and calculate the efficiency, this is one use case, which is actually a self-consumption use case, which is solar and storage, and it's a self-consumption driver. What we see is our efficiency is same if not slightly better than that of a DC coupled system. You get other tremendous benefits.
If you look at the use case for time-of-use optimization, for example, where you may be charging and discharging at nighttime, your cost of electricity is very low, you charge from the grid and you discharge back into the grid, you have one less power conversion efficiency, and our overall efficiency jumps up quite a bit. We believe we are very conservative in our efficiency calculations. For example, in the competitive system, we do not account for the large cells in series, the nonlinear degradation or a difference in degradation of those cells over time, and the losses due to cell balancing. We only have eight cells in series. We do not take that into account because that's a tax on them that's not been accounted for and has an impact on efficiency. Having said all this, we know we are more efficient.
We know we are a better solution. I think the success of Enphase fundamentally comes down to the fact that it's a very simple device to install, and the fact that it plugs and plays with the overall energy management solution. Just to finish the AC coupled advantage, particularly as it pertains to retrofit applications, you have a solar system, an Enphase solar system, and a non-Enphase solar system. You put one, two, three, four, how many ever storage units to match your load profile. The Envoy-S, as we told you, gives you your history of exactly what your load profile is. There is no guesswork. This is engineering and science that tells you exactly what kind of storage you need and what the heuristics needs to be to maximize your return.
However, you try to do that with an existing system, you got to put a big battery bank. You got to upsize it. That's a forklift upgrade. You got to change your inverter. You got to increase the size of the inverter. There are also all the interface components that need to be added. We are just a better technology and a better solution across the board when it comes to that. Our systems approach and software-rich architecture lends itself extremely well to what we call the new use cases for storage. Storage historically came off of the off-grid and backup world. As the world has evolved, there are new use cases that provide economic benefits to the customers. Things such as self-consumption.
Self-consumption simply is because there is misalignment of peaks between when you use your load and when the solar peaks, it's shifting those peaks so that all your generation is also consumed by you, except shifted in time. Time-of-use optimization, as the name suggests, nighttime prices are very low, so you store during the night and then consume during the day. Again, a very interesting use case for storage. One of the use cases that I see has the biggest potential in the future is providing aggregated grid services. I've been speaking a lot about this lately at conferences, and just last week I was in APAC region talking about it as well. Think about it like this. For the first time, the utilities have incredible amount of knowledge deep in their network, something they have never had before.
They can leverage that distributed energy resources to help them stabilize and actually improve the efficiency of their grid. However, you need the right kind of distributed energy resource out there. One that is capable, that is fully adaptive, which is software-defined, one that's fully controllable, and one that's hyper-connected. This is our strong suit. If you look at all the work that Hawaii is absolutely a leading indicator of where the world's going. If you look at all the work that we have done in Hawaii in partnership with our utilities, it's fascinating the stuff that having a smart system out there. Sorry, I'm geeking out on technology, but what a smart system is capable of doing in order to transform the entire grid itself. Let me conclude before I hand off to Stefan. Our vision goes beyond solar.
Our goal, just to reiterate, is to provide our partners with a plug-and-play comprehensive energy solution that's very simple to design, very simple to install, very simple to maintain, and that adds value to their offering while saving money for the end customers. It's already started. You know we are doing very aggressive cost reductions on the solar piece. We are well along our way. We launched the device that now manages your consumption and gives you a breakdown on what your consumption is. The storage solution in alpha trials now, beta trials in Q1, and launch in Q2. The launch of the entire energy management system starts in Asia Pacific. We strongly believe that we have a best-in-class solution, both in performance and cost. I'm going to pause just for one second. What we have is incredible amount of complex technology, and you can see that.
We have 500-plus patents we have filed, more than 100 that have been granted, and none of these are fufu patents. These are serious patents that have been filed because there is some real technology behind it. Part of leveraging the technology is abstracting all that complexity away from us, from the installers, as well as the system owners, so it can be a very simple system to install. Just think for a second, if I may. Whoever thought, whoever envisioned that you could have a plug-and-play solar system. Sorry, storage system. Oh, solar system and storage system. We actually did it. We have a very simple plug-and-play storage system. Just one example of what we have done. With that, I will hand it off to Stefan, and then, hopefully, there are questions after that.
Thank you, Raghu. I'd like to set up for a quick demo of our Enlighten system. We'll run this from a mobile device. Just for demonstration purposes that I can connect it to the screen, I actually put it on a wire. Otherwise, you can see we are running this off a mobile device. Enlighten is our Let's see. Will I get this going here? Okay. Enlighten is our data acquisition and energy management platform. On top of Enlighten, we have multiple applications that are tailored to different use cases for specific users, such as installers or utilities or consumers. In this case, I am providing a live demo of MyEnlighten, which is the consumer application on top of Enlighten.
In this example, I will demonstrate, in the first part, the consumption monitoring that we added to our solar generation that is enabled by Envoy-S, our new communication gateway, like Raghu already mentioned. Now, what you can see in this screen, for example, is Sarah Brown's house, and this is a live demo. In fact, you can see her energy production on the top left corner of 15.2 kWh produced yesterday. A sunny day, she has consumed 12.8 kWh. There's a net energy gain of about 2 kWh. Typically, in her house, there's more solar electricity generated than consumed. Let us walk briefly through the time of day. As you can see, let me just scroll this up here a little bit. This is today. Go back to Monday. Bring this in the center of the screen.
As we are going through the day, you can see here, as we are moving along. On the screen, you can see that she has woken up in the morning, her family has woken up, and the energy in the red lines, you can see the consumption used that has been covered by the grid in orange. You can see in the morning that This is not working. What you can see on the screen here is that she has consumed in the morning as they woke up, the electricity, as you're moving through the day, the energy production by the solar system has exceeded the consumption, and this is highlighted by the dark blue bars on the screen. They are shown in 15-minute intervals, and the dark blue represents the electricity that's being exported to the grid.
Later in the afternoon, what you can see, the family returns home, afterwards goes on with their evening. Let me move on and show you an example. That is an example of how you move through the house and through the day. Let me see that I can switch this over to pick another day with a more consumption utilization in the day here. Let me see if I can switch this over here. Looks like my screen has frozen for a second here. Hold on. This is called a demonstration effect. Let me see if we established the screen connection here, with this consumption monitoring enabled.
This is exactly why we don't like to do demos in front of other people. While Stefan is working on it, if it comes up, great. If it doesn't, we can show you offline. While this is coming up, I'd be happy to start taking questions on energy and energy management. Yes?
The question is specifically the choice of LFP. As far as I know, like something like what you've done before, LFP or NMC, how does it play in your cost reduction effort with you?
In terms of chemistry, when we think about cost, it's not just only the cost of chemistry, right? You got to think about the cost of the solution that you're providing. Everything from chemistry cost to power management cost to installation cost to integration cost. Right? Our choice of LFP, actually, the LFP vendor that we chose is very competitive on cost for us. Very competitive. We feel very good that we are on the right trajectory as far as cost is concerned. Not just the chemistry cost, but the overall solution cost as well. By the way, we are not naive about the fact that we have to be very aggressive on driving our cost of the batteries solution or the energy storage solution as well. Our driver for the choice of LFP was based on cost, performance, and safety.
We took a much broader view of thinking about cost of the solution. Having said that, we have very competitive product in here as well, and we know that from what the pricing is out in the marketplace.
Basically, a bigger and higher volume compared to some other technologies, brought the cost down as well.
Well, let's be careful. It's lifetime cost, right? You have to think about overall cost. For example, it's $ per kilowatt hour. It depends on what your depth of discharge is, what your round trip efficiency is, what your ESR is, what the thermal performance is over time. All of those variables add into cost. You got to think about life cycle cost, not just upfront $ per kilowatt hour. While that's important, and we will continue to drive that down, you have to look at it, because everything is a tax. For example, if you have something that, say, has a depth of discharge of 80%, you got to pay a 20% tax. To say I have a $400 per kilowatt hour versus $500, well, not really, because you can go to 80% depth of discharge versus 95 or higher. Multiple variables play into the cost.
The electronics that goes along with that is-
Exactly. This is an example of leverage. The hardware that goes in here to charge, discharge, the switches, is all the same physical hardware. The software that's running in there is different. However, what's also highly leveraged is the fact that just by virtue of plugging this in, it starts communicating. It uses the same bidirectional communications topology, as well as the back-end software infrastructure as our solar product. There are massive amounts of leverage. The biggest challenge for us was to solve the power electronics, the bidirectional software-defined power electronics problem, that we solved over the last 4 years. It's, I don't want to trivialize this, but it's as much an integration problem for us on that device.
With that, I think I'm going to hold off on the rest of the questions. I think Stefan has his demo up and running.
I got it up and running. Thank you. Sorry for the interrupt here. I wanted to point out here that as you can see, here's the history of the consumption. As you now, as a consumer, look to optimize your electricity bill and really understand the relationships between consumption and generation, let's point out and see if we can find some of these days where there's a lot more consumption at Sarah's house. I'll point to one of the darker squares on the screen here that points to a more consumption-intensive day. You can see, for example, here in the day that actually there was, in this day in August, a lot of electricity produced, but a lot more consumed. They basically are taking the net energy from the grid.
Come to find out that basically Sarah has an electric vehicle that charges during the night, and therefore you have a lot of energy consumption in that. I think this is just an example of how you empower the consumer just with this consumption monitoring capability to explore the relationships between generation and consumption, and therefore enable the first round of optimization and bill reduction capabilities. In the second part of the demo, I would like to showcase to you how this will change as we are introducing a fully integrated home energy solution that includes storage as well. Let me bring this up here. What you can see here is basically an integrated view of this energy production on the left side. In the center, the storage. In this case, these are four AC batteries with a total capacity of 4.8 kilowatt hours.
You can see in this example, during that day, 4.6 kilowatt hours have been stored, and then later on, 4.1 kilowatt hours have been discharged and being used. On the right side, you see a summary of the energy consumption. In this case, we actually have broken down and disaggregated the consumption into the major loads. You can see on the top, heating and cooling over the last 15 days has cost $28. In this example, you can see the breakdown of the water heater or major appliances like washer and dryer. This is a very interesting case. The use case here is time of use, where basically the storage system is used to support the consumption requirements during time of very high electricity rates.
As we now take the journey during the day in Sarah's house, you can see the green shaded intervals that indicate that the excess solar generation has been stored into the battery and not exported to the grid. When you go to the latter part of the afternoon, you can see at this 15-minute interval, 237 watt hours have been produced, 121 have been consumed, and the balance have been stored in the storage system. As we now move here into this time later in the afternoon, the storage system is full, and now the excess electricity being generated by the solar system is again being exported to the grid. This is an interesting day because you can see some cloud coverage here as the solar generation is going down at four o'clock and then at five o'clock.
You can see that, in fact, at 4:00 P.M. or 4:30 P.M., the solar system does not produce enough electricity to cover the consumption. The storage system is starting to release electricity and discharge to cover for this, because in the late afternoon, it's already a high electricity rate time in the day. What you see also here is the clouds are moving away. In fact, between 5:00 P.M. and 6:00 P.M., again, enough electricity has been generated by the solar system to charge the battery again. Later in the day, in the early evening hours, you can see that instead of you drawing electricity from the grid at these high electricity rate times, the storage system is discharging to support the needs of the family in the evening hours. This points out two couple of very important takeaways that I think Raghu has indicated.
Number one, it is very important to enable multiple cycles during the day in order to enable a very effective use of the storage system over the long lifetime. You can see in an everyday situation, such as a cloud, it could mean that you're charging, discharging, charging, discharging in a single day. The second thing to point out here is the right sizing of the storage system. On this case, you can see that in fact the storage system has completely been charged, has completely been discharged, and very, very little blue bars, and the dark blue bars meaning very little export to the grid. The unique approach with the Enphase home energy solution, the storage system being so modular, it allows you to right size to the consumption profile in the house.
In fact, even though you know the average homeowner's consumption in the U.S., about 18 kilowatt hours, there's a very, very wide distribution in use cases. Obviously, this is a very special case. Every house is a special case, and therefore you need to have an ability to right size to maximize the return on investment for the homeowners. With that, I think I'd like to just summarize and conclude the demonstration. It was a quick introduction here into how we see the home energy solution coming together in an integrated view to really enable, in this case, the homeowner to optimize the electricity bill in the future. With this, I want to hand it back to Paul.
Great. Thank you, Stefan.
I think they should switch back.
That's okay. I'm going to conclude by just reminding you of the two core initiatives that we have. First and foremost, the recognition that we are in a very cost-competitive environment, therefore, we need to get our cost at or below standard string inverters. In addition to that, and we recognize that that's very important and that is foundational to what we need to be doing going forward, it is necessary, but not sufficient. Our engineering resources are being deployed to get our cost to a point where we can compete with any string inverter and to create the total energy system for homes and businesses that include all the elements that you just saw, storage, energy management, solar generation, all wrapped in a cloud-based application that makes it seamless for the installer and seamless for the homeowner.
I'd like to thank you very much for your time, and I'd like to open it up for questions to both myself or anybody else, in reference to either the cost portion of the discussion earlier on or energy management.
On the battery front, how quickly can this become a financially needle-moving product?
The question is how fast can it become a financially needle-moving product for Enphase. As was mentioned, we expect to launch this in Q2 of 2016. I think sales in 2016 are going to be significant. I think in 2017 it becomes an important part of the total revenue mix for Enphase.
Will you be breaking out battery revenue versus inverters?
That's a decision that Chris will make, and I don't know that we've made it yet.
Could you contrast your product to Tesla's Powerwall, both in features, cost, and design?
Sure. The question was to contrast our product to Tesla's Powerwall. I'm going to ask Raghu to go over that. Importantly, let's remember that the Tesla Powerwall is a battery. It's not the intelligence. It's not the inverter. It's not the energy management system. It's not the total energy system. It is simply a battery. A very important element, of course, but one element of a much bigger system. With that, I'll ask Raghu.
Again, I just want.
Review it.
echo what Paul said. One's a widget, the other one's a complete solution. It's a very important widget, but it's just a battery, and what we have is a complete solution within that device as well, which means that it is the chemistry, it's the BMS, it's the charge controller inversion, the interconnection, and all of them plugging into that operating system that I was talking about, which has the bi-directional communications and the cloud-based infrastructure. One's a complete solution, and the other one is a very important building block for everything else. Which means you got to add the inverter, you got to install that thing, you got to add the interconnection devices, and then you still have to somehow integrate this into some sort of an export system to do all of those things. We took a very solutions approach to it.
Could you perhaps construct a battery part of your system that you have, so that it gives people a little bit of understanding how the two compare? If you can have all of that, I'm sure they will do.
Absolutely. Right.
third-party provider.
Again, we want to be a one-stop shop, a solutions provider. That's one thing that's very important for us. This is what we hear from our installer partners as well. They want a solution. Maybe this is an overused word. I'm old enough that I used to go out there and buy motherboards and memory cards and graphics card and everything, and today I just buy a smartphone, right? We are taking the same approach. You just buy a whole solution, and you install it, and as long as installation's very simple. As far as the chemistry is concerned, it's a lithium-based chemistry. We are also a lithium-based chemistry. There's not a significant difference between the chemistry themselves. There's clearly performance difference between the chemistries. Right. That's optimized.
That particular chemistry came out of the transportation application, this chemistry was actually specifically built for stationary applications. Has probably a little bit less energy density compared to a transportation application, because one, I believe that's nickel cobalt aluminum, we are an LFP. If you look at performance in terms of cycle life, if you look in terms of depth of discharge, round-trip efficiency, et cetera, thermal performance over the use case, we have much better performance. As far as cost is concerned, the fact is, everybody's driving to scale in chemistries, I think you'll see, the numbers I've heard is by 2019, that we are looking at sub-$200 per kilowatt hour for chemistry alone. Our vendor is exactly on that track as well.
Who is buying the batteries from?
As part of our due diligence, we actually evaluated a number of large vendors, we actually settled on a vendor out of Japan called Eliy Power.
Another point is that we are flexible on which vendor we work with, even though we have a very good relationship with this vendor, Eliy Power , we can change in due time, we can change to other chemistry if they become better over time. It's not like we are married-
Right
100% to one vendor. We can switch to others.
This is a very important point. If you look at our architecture, which is fully distributed. If I can go back here for a second. Hopefully not that far back. If you look at this architecture, that's the bidirectional device, and that's the chemistry. We have abstracted the chemistry away. What that means is that can be lithium iron phosphate, this can be nickel cobalt aluminum, nickel manganese oxide. Someday, zinc-air becomes real. That could be zinc-air. As you go, you can add the better chemistry. It's completely abstracted. We have tremendous amount of flexibility in that. Just like we have that flexibility up here, because everything interfaces on standard AC wiring. The module's abstracted away here and the chemistry is abstracted away here.
The Volt-Var Optimization strategy is going to be a better solution. This is for Enphase only system or for any PV system?
Any PV system. That's the other advantage, as I pointed out. As this line diagram illustrates, you can have a system with solar alone, you can have a system with storage alone, or you can have a system with just your consumption monitoring and management, which means that doesn't have to be an Enphase system. That can be anybody's solar system, and we can interface to it because it's all interconnected on the AC side.
Just to underscore one thing, just to make it very clear, we've had this question come up a couple of times before, it's not terribly obvious. Inside this box are the batteries, the inverter, the charge controller , the battery management system, everything. There's nothing else you need except this box. It's all in here. This is hung on a wall and connected via a simple AC circuit into the load center, and you're done. The contrasting solutions, whomever they may be, have a battery as a separate unit, the inverter as a separate unit. There's usually a charge controller as a separate unit. There may be some safety protection mechanism as a separate unit, and it's connected via solar and the AC, so you have DC and AC wiring all connected together.
The beauty behind this, the reason it's worth describing, is that oftentimes people, after this description, will ask, "Well, where's the battery? Where's the inverter?" It's all here. There is nothing else needed. It's all buried into one unit.
I think.
One other question.
Go ahead. Jesse had a question. Jesse, go ahead.
Other than selling the system, what's the business model for scattered network storage, like VARs into the market?
Great question. That's why we're saying one of the things that I'm very excited about the potential of a system like this, as part of the use case is aggregated services, is now if you had solar only, you could do VARs, but here you could do reserves. It's extremely powerful. You could do VARs and reserves.
Customer or how does that work?
You know, all of those business models, this is early days. All of those business models have to be worked out. Some policy work has to happen. The right tariffs have to be put in place. The good news is all of that is happening. Look at what Hawaii did. Hawaii actually, again, is very forward-thinking. They're starting to put tariffs in place to support the use of these very smart distributed energy resources that are, for the first time, deep in the utilities network. We already do this. Now you add this, you turbocharge that capability. Now, again, there's a promise of it. We know the time constant of our friends in the utilities, but there's a promise here. Sri, go ahead.
Timing on the microgrids solution, what would change in the fact that you want to separate those two grids?
Today we do microgrids, except that there is a generation source that we drive off of, and then the value proposition there is you reduce your fuel. We do that today. We have done some pretty large microgrids. In the future, fundamentally, this architecture doesn't change.
Yeah, will the utility allow?
Require some sort of a setup then?
Yeah. Go ahead, Martin.
Yeah. In order to operate a microgrid independently from the network, yes, you have to cut off connection from the grid to the network. It's called IID, islanding interconnect device. Yes, we're working on all these aspects, all these options.
Yes, absolutely right. Please go ahead.
Okay. A question about your energy management Enlighten . Do you own your own data center or do you use third-party storage?
Yeah, we third party.
Okay.
Yeah, third party store all that data, but it is dedicated servers. Greg, do you have anything to add on that?
The question-
The data centers all third-party data centers that we use to store the data.
Yeah, two other third-party data services, fully redundant system around the globe. Yeah.
Please go ahead.
Do you have any conversations with utilities about monetizing the data you're getting from Enlighten load and what kind of stages might this process be in?
Yes, we are. Active conversations with numerous utilities. If you look at all the work that we did in Hawaii in terms of remotely upgrading systems, and we are actually in the middle of another set of upgrades. Absolutely, we are in numerous conversations. Revenues, et cetera, are immaterial at this time. Again, there's a promise that all that data gets used, because it's very valuable data because they get incredible amount. Remember, these devices are all sitting effectively on the grid. We have high-fidelity data on exactly how the grid is doing, and that's extremely valuable, and it's being recognized, but it's very early days, not material in terms of revenue.
All right.
Go on.
Over the past month, can you talk about the customer wins with your new pricing that you've had? I know about a month ago, you had talked about maybe winning eight customers at the time. Beyond that, over the past month, what can you share with us?
Unfortunately, I can't share any specific customer names right now, but we are seeing tremendous success with a more aggressive pricing strategy. We've applied it very surgically so far. As we talked about for 2016, it's going to be very much a broad-based application of aggressive pricing. We'll be announcing multiple customer wins over the ensuing months.
What's the margins you expect for the battery unit?
The margins are going to start off maybe just slightly lower than corporate gross margins, but very quickly ramping up after that.
Do they have the same target as the corporate?
Yes.
Okay.
Yes. We expect to see a relatively rapid decline in battery pricing over the next couple of years. This is, again, very early stages for stationary storage. I think you're going to see a very competitive environment which will drive pricing down.
What would be a different price on offer for this product?
For the solution? We're launching first in Australia because there's a clear economic case in Australia. There's been obviously a lot of talk about the potential of the Australian storage market. Having said that, those dynamics are not dissimilar to what we see in Europe right now for self-consumption. It's very likely that we'll launch in Australia, shortly thereafter in the European region, and then in Hawaii, as of recently, is now potentially a storage market as well. While we're launching in Australia, it is very much a global product and a global market.
In terms of cost reduction, what's going to be the main area with batteries, where you can see the cost declining?
This is our very first storage product, you're going to see it across all areas. You're going to see it on the power electronics. You're going to see it on mechanicals. You're going to see it on the battery itself. There's more integration to be done inside. We're early days, and there's going to be a lot of opportunities to reduce costs on the storage side.
How do you cross-sell your energy management system? How does Enphase Energy sell it to homeowners? If your main customer right now is distributors and installers, how do you cross-sell it?
The question is how do we cross-sell the energy solution. We actually won't cross-sell. One of the beauties behind this is that it leverages the exact channels that we've spent years building. We will sell it directly through distribution to installers, and then to the consumer. What you bring up, however, is a very interesting point, that an energy system that you are, as Stefan had shown, you're accessing every day, you're looking at, it's informing you of what's going on, is very much a consumer-level product. We do see a transition to a consumer-facing brand over time. Initially, we're going to stay focused on exactly the distribution channels we have and leveraging the brand we have with them and the reputation we have with them to help expand their businesses.
qualify for the ITC or any of the current tax credits?
The question is, does the battery qualify for the ITC or tax credit? I actually don't know.
I believe there is a, I forget the name for it, like an IRS letter that says it can qualify for federal ITC. What we are seeing, though, in Hawaii, right now the market really is in Hawaii. What Hawaii is working on is a tax credit for storage right now.
One other question on Australia. Can you talk about the TAM there? Is it more of a retrofit market or a greenfield market?
It's both. The TAM on storage, I'm not willing to put a stake in the ground yet on. The response that we've received has been tremendous. It's very exciting. The installers there are very optimistic about what that market looks like. Until we start seeing actual sales, I think it's something that I would refrain from being too specific about. The great thing for us is that there's a huge retrofit market in Australia because there are a lot of solar systems out there, and those solar systems are going to be affected by the reduction in the feed-in tariff. There's a huge reduction in feed-in tariff, which then creates an arbitrage opportunity between the cost of energy, and the feed-in tariff. That's where storage comes into play. There are many tens of thousands of solar systems out there that are ready for this.
Enphase is uniquely qualified to address the retrofit market. In addition to that, many new systems, like in Queensland, all new systems will almost require storage simply because they have a zero export rule going into place. Elsewhere, again, because of the changes in policy, most new systems, we believe, will be a combination of solar and storage.
There's a lot of competition for the connected home space. Can you talk about any way that Enphase can leverage those relationships or potential partnerships and create play roles in that home ecosystem?
Right. The way we look at the connected home space is really in a very bifurcated manner. We do see the same thing. There's a lot of attention, more than ever before, but there's a difference between what happens on a connected home if you're looking at cameras and locks and things like that versus energy. Energy is its own ecosystem. Within the energy ecosystem, we have announced a partnership with Nest, and we're actually engaged in multiple other partnerships to put all the pieces together for one holistic energy solution. Whether that eventually gets integrated into the rest of the home, it's hard to say. We are working with partners who are interested, potentially looking at that. We're not really placing a bet as to whether it gets integrated or not. What we're very focused on is the creation of that single energy system.
That energy system is going to be very complex because all the pieces, storage, loads, generation, predictive weather patterns, what the tariff structure is, all that requires a very tight integration. The communications infrastructure, the bi-directional communications, the control, all of that has to be integrated into a single system.
When you think about some of the behavioral aspects of this, what's the best way to keep customers engaged or to have them become an active participant in their energy management? What can you do to help customers in those roles?
Right. The question is about customer engagement and how do we work with the customers to have them part of this energy system and keep them engaged. Actually, there are multiple dimensions to that. There is the application of Enlighten itself, what we're doing to help optimize the return on investment for the consumer, providing them the data to help them do that. There are times in the day where they may want to, or they may want us to, reduce loads, whether it's modifying a thermostat, whether it's turning something on or off, whether it's working in conjunction with an electrically heated water heater. All of these are now interconnected. There are things we can do dynamically to help manage a consumer's bill.
In addition to that, we are engaged with utilities who are also looking at things that Raghu was talking about earlier in terms of their ability to leverage our system to help the utility, there be a form of exchange there. We're in the very early days of this. I think there's a lot of potential in multiple different directions. We're sort of keeping our fingers into all of them. Okay. Well, thank you very much. I think on behalf of all of Enphase, we appreciate the time that you took to come and speak with us. If there's any additional questions we can address, please feel to reach out to any of us. Thank you very much.