Good morning, and 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 drive 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, and 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 30, 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. Now I will turn it over to Enphase Energy's President and CEO, Paul Nagy. Paul?
Thank you very much. So good morning, and thank you very much for attending Ente's Energy's Analyst Day. We have a lot to go over, and I think it's going to be a very instructive and a very informative day for everybody. There are we have much of the management team here, and 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.
So presenting today will be, as I mentioned, a host of Enphase executives. So first off, we'll be our CTO and Co Founder, Martin Furnas, who's going to talk to you about the technologies that we're working on towards cost reduction and others. Greg Steele, our Vice President of Engineering, will then go into the execution of those technologies against the product road map and the delivery they're in. Darren 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 Cheechner, who is our Vice President of Product Management, is the Vice President of Strategic Initiatives and also a cofounder, will then dive in and give you a more descriptive view of what a home energy system means to Enphase. And then finally, Stefan will come back up and give you a demo of Enlighten, which is our cloud based application. So I'm just going to start with a couple of quick slides that really address what our focus and priorities are. So for Enphase right now, the our focus and our distribution of resources is along 2 key areas. 1 is cost reduction.
So there was a period of time where our customers and installer partners were willing to pay more for an Enphase system, considerably more because the value we brought, because of the extra energy production, because of the simplicity, because of the O and M simplification. But 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 phenomena 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, and we're going to go into details as to what that means. And I'm going to talk more about the specific targets in a moment, but 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 being a just selling a solar system to selling an energy system. And it's that larger energy market that Enphase, 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.
So 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. These are very this is a very ambitious target. It's a very ambitious goal, but and we're going to share with you why it is that we have the confidence that we can achieve that. But 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 have been able to address because of price and because of string inverters. So our target right now is to be at or around the price of a low cost ring inverter, therefore, open up really 100% of that market to Enphase.
And then we talked about energy and how solar is an important component of energy, but it's one component. We believe that in a short period of time, somebody will be buying an energy system, not a solar system. And 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 of 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 we have to do 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 highest return on investment for the consumer. That's a very active energy management system that requires the integration of all of these components. So 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. So 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, and 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.
So with that, I'm going to turn it over to Martin Fornage.
Thank you, Paul, and good morning. Well, Regu and I started Enphase almost 10 years ago. That's been quite a ride. We released in 2,008 our first microinverter system. And that means a microinver, an AC cable system, a gateway and a cloud based control and monitoring structure.
And 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. It's 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 our biogasional inverter technology that we just came up with in our AC battery system, which is a 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. So product that you'll see today as a result of fundamental research that have been ongoing in the company since the very beginning. And this is actually fundamental research.
I won't go into details, but we have made analytical patents worldwide and have already received over 100 patents worldwide. Designing a microinver 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 an inferior solution overall. As another example, we could oversize the power transistors, for example, and that will get that will, of course, result in a higher cost in the power transistor, but will get maybe better efficiency, hence a lower cost of cooling and maybe a better reliability. So we constantly have to juggle all these conflicting constraints and we managed to do this because in Oshkosh 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 solution. So 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 our market, especially in location with high penetration PV, such as Hawaii or Australia. Utilities now are demanding us to actually be able to change the behavior remotely and we can certainly do that. CECL itself prepares very well to tackle the energy management tasks that we now have to fulfill. So it was actually very good segue into those new tasks that we have to do right now.
We believe that distributed topologies always win as long as they are managed resources are managed as long as they are economies of scale. And 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. So 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 our control system cost us roughly $0.03 to the minus $7 a third of 1,000,000 of 1 dollar, okay?
An analog element cost us roughly $0.10 or 10 $1 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. So because of that, we have our own ASIC capabilities and we digitize the variables and other 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 and we just use all these approaches in the same way with the same success. So the first thing that we design, well, we've always used high frequency conversion, typically over 100 kilohertz, much higher than most everyone out there.
But we're now using a resin topology. This topology is characterized by a very low EMC signature, again, very low conducted aerated emission. Those are things that we have to do to comply with by standard. And we also can get great efficiency with it. But 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 and we can therefore reap the benefit of this technology. We can and 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 elimination due to the plastic polymeric enclosure, we can eliminate the grounding requirement. And that gives us even more advantages for the wiring system.
All of these improvements yield a superior solution, which reduces both hard cost, cost of the unit, but also soft cost meaning installation cost and ease of installation. All right, it's more about Powertrain. We have cracked the code on using digital control system to drive the Ryzen powertrain. These normal Ryzen controllers are very slow and are very difficult to manage. Well, we've managed to we've succeeded in doing a control system which can control the powertrain very fast in microsecond labels.
And that allows us to actually have superior reaction to change in operation systems, which yields a better leads to better product. We can use Wideband Gap with this topology. Actually, this topology is ideally suited to use Wideband Gap, but we don't have to. And we can use gallium nitride or silicon carbide devices, but 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 where they are 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 inverse such as housekeeping, supply, communication and so on. So we will show you how we will use more ASICs to further reduce the cost and the component count of the inverter. Polymeric Enclosure, so the first time you see this new product here. Well, Polymeric enclosure has many advantages.
First one is that the thermal coefficient of expansion of the enclosure matches very well the PC board and the potting compound, unlike Simulink enclosure. Because of that, we fundamentally reduce stress on the components and achieve a better reliability. Another advantage of Polymeric Enclosure, it's a transformation cost, which is much slower for basically molding these enclosures and for casting or forming sheet metal. So we have structural reduction in cost. So 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. And that brings positive results in the form of less weight and less material used. So 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. And 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 component will operate at the same or lower temperatures than before.
So 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 that there is no need to ground this enclosure unlike the metallic enclosure we had before. And 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 4 wire cable that we sell today. There's 2 wire on the top. You have over 50% weight reduction in the cable system per unit for the same current capacity. So that makes for, of course, a much cheaper, much more cost effective cable system as well as a much easier cable to install. So this is, again, a win win for soft cost and hard cost.
And then there is AC module. So AC module is this year. This is a PV module, which has an integrated inverter into it. Integrator 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.
So the installation is basically the fastest installation you could ever do. And but there is more than that. We can save money by to both us and the module manufacturer by removing unneeded parts that are needed for standard PV modules. So 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 inverse.
Well, we don't need these bypass diodes, so we can remove them. We could even remove the junction box if we wanted to. It's 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 1500 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 all the 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. So we believe a much better solution with this thing. Okay. So I'm going to pass it on to Greg, who is our VP of Engineering. I will run you through the devices.
It'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. So 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. And just to give you a size or a basis of comparison, this is the S300 that we will be shipping in 2 years. There is a 2 step process in which we take 50% of the cost of the product out, as Paul discussed earlier, over a 2 year time period.
And I'll discuss this as I go through the presentation. So, Martin really talked about 4 technologies and 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 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. And 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 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.
2nd, 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. And Darren will talk more about this later, but automation also not only in our own facility, but at the facilities of our suppliers. So 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 and it will 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, and that was one in particular was the thermal issues. Other is structural. This project actually started, Martin, I don't think I'll share this with you, but started about 2 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. It also 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. So a much less expensive product to move around both in the factory and to our customers.
And lastly, Martin talked about the moving from or simplifying our cable architecture, moving from a 4 wire enclosure to a 2 wire enclosure, a piece of it ought to be obvious and that is if you move from 4 conductors to 2 conductors, 4 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. So this is the current M250 that I showed you earlier that I held up. It ought to be obvious looking at this chart why one of the things that we wanted to address is the mechanical enclosure. And 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, so you can see a direct comparison between the M250 the S300. And what you can see here is those areas first that I mentioned, I may point them out, the laser point doesn't work so here. But if you take the actives, the ICs and the passes, 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. And then you can see here the dramatic reduction in the mechanical enclosure and in the cabling infrastructure. All right. Now I'm just going to step down off here. I'm going to hand these 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. So first of all, this is the M250.
I'm going to hand around 2 things with this. So 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, little over £4 in weight, but you can get a sense of what that product looks and feels like as I hand that around. Next is the S290. 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. And if you were to count the parts on here, you'd notice it's about 60 parts less than the previous design. And if you could see, you'd see the magnetics is smaller also. And this design is actually in test and engineering right now.
This is the prototype that's actually under functional test, just so you know what it is. Along with this, I'll hand out the cabling infrastructure that goes with it. And so you'll notice as I hand this out, much lighter, much more pliable to conductor cable. And 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. So smaller form factor, both in inverter and in the cable infrastructure.
I'm going to pass 1 in both directions here. 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 are and we've started to work on those. But again, reducing part count, so 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. But it gives you a sense of the size of what the S300 will look like in its form.
These products, the S-two ninety will be out at the end of 2016. This, the S-three hundred 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 S-two ninety at the end of 2016 and then ultimately the S-three hundred. So I'll pass this one around as well.
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, has gone on and networking has gone on in every other Silicon Valley company and that's shrinking the size of the product, if you will, through silicon integration and taking cost out. We continue to increase the size or 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, and 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 I guess it's been 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 drives the it continues to drive the reliability of the product up.
This is just a picture of the family that I handed out. Paul, about 5 years ago, said to all of us, the inverter ultimately needs to be the size of a cell phone. And we have 2 things working in our favor. Our product is getting smaller and cell phones are getting bigger. That's not what Paul meant.
He meant to make it smaller, but you can see this is actually shows I think this is Ragu's phone. I think it was a picture of its iPhone 6, but 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 Darren Spencer, 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 to the S300 is that we've made a single sided board instead of a 2 sided board, huge improvement in efficiency and reliability, also tremendous number or less number of parts and in the way that we even seal the unit and enclose the unit continue to improve the reliability. So all those things, the things that I have shared with you are through silicon integration, magnetics, polymer and simplification of cables, a way to structurally take cost and material cost out of the product.
I'll introduce Darion 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 Darien Spencer. I'm the ops VP for Enphase.
And 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 US20 $1,000,000,000 worth But these partners also have significant experience building high reliability products.
As you guys know, we our products have 25 year useful lives. They're used at 50% duty cycle. So it's very important for us to be able to balance the high reliability processes with the lowest possible cost of ownership. And we also have a very optimized global footprint from a distribution perspective. This enables us to service 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. So 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 as a result of that volume increase on the COGS overhead absorption side of the equation.
But we also it gives our supply partner 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. So in essence, 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.
And 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. And 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. But 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. And the factories that build our products are also heavily automated, as I said.
And 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 plenty of room to continue to optimize the process, then we automate around that. And the automation, we've been very successful with, and I'll talk a little bit more about that later. But one of the outcomes is that 2 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.
And 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.
But 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. But we also put a significant investment in the factory. And what these chambers enable is we're able to run highly accelerated life testing. These are tests that mirror the 25 year life and field application.
And 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. And as most of you know, we're in production on our 5th generation product currently. So 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 in the 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. So again, the result is best in class quality and reliability. And 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.
And 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. And 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. So 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. So 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. So we can put these lines anywhere in the world, Mexico, Asia, Eastern Europe, and the Europe, and the technician bases in each of those regions can come up to speed very quickly on from an ongoing maintenance perspective, which is very, very important. So as a result, these lines today, we can produce 11,000 microinverters per day of the lines that are in the factory today. That's 1 microinverter system every 7 seconds.
We have continuous improvement this area to where over the next few months, we will actually reduce that to 1 microinverter system every 5 seconds. And what I'll do, I'll show a very short video just to show you the lines in operation. And 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 lines building the product. We also have integrated high pod testing.
So we have a fully integrated line that again produces 1 microinverter today every 7 seconds. And very soon, we'll be able to produce 1 microinverter every 5 seconds. So we're at 11,000 units per day today and we're moving to about 15,000 units per day in the near future. And with that, I'm going to turn it over to my colleague, Stefan, who's the VP of Product Management.
Thanks. Thank you, Darian. My name is Stefan Scheidner. I'm the VP of Management at Enphase. And I'd like to talk to you about how all these initiatives result in 50% cost reduction over 2 years.
What you can see on the chart here are the end phase costs that show an orange line here closing the gap all the way to It is enabled by continuous improvement as you can see the slopes and the step functions and cost down based on the 2 product generations that we are introducing over the next 2 years.
As you
can see these cost reductions, it does actually in these 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 2 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 inverter 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 2 years, slowly reducing. But 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 20,14690.12 being effective 18 and then you see 2017 being effective 1 year after that. These changes in the National Electric Code will drive probably $0.03 to $0.05 a watt additional system cost in string inverter systems. And we expect that these will be adopted actually a lot earlier than the effective code given the liability exposure for fire safety. So these are significant adders 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 Maarten pointed out already. You can see a sample of that here. And it creates additional significant cost reduction opportunities. And you can see as in the sample, how the inverter adheres to the backsheet of the device. And 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.
And 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 can 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 in the in 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.
And again, 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 for that is uniquely applicable to microinverters are shifts in the PV module industry to higher power modules. Why does it 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, 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 mono low cost mono wafer capacity coming online, and that's what they're driving the adoption. In regards to new technologies, we see n type mono wafers modules coming out or bifacial technology. So there's a whole set of new technologies with higher power modules. So in practice, we can see instead of a today a 2 60 watt module for a residential typical residential application, we can see within the year 3 40 watt modules or within 2 years 3 90 watt modules, meaning 20% or even 40% cost reduction opportunities on the system I'd like to conclude and summarize the cost reduction section.
In summary, we are having a demo shown you a road map lowers the cost of end phase inverter microinverter systems by 50% over a 2 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. So 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. We as Greg was showing you with the M290 with the S290, we already have prototypes up and running, and we're very far along with the S300 as well. So 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 program.
Yes? So the question was in reference to the polymeric enclosure, have we done any durability testing and reliability testing? And so for that, I think I'll ask, Marcin, do you want to go ahead and start with that, please?
Yes. We have very good results with this product. Is a very specific material. It's not just any global plastic. It's a material that is designed for this application that is we can certify so it does proper filmability rating, proper UV rating, for cold impact test rating.
I mean it is a very, very technical material. It's something which is very well suited for this application.
On
the manufacturing cost, you talk 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 2 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 2 years.
Yes. So 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 will continue to be a lever over the next couple of years, but we don't typically share what the volumes are going to be 2 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. So we're not going to we'll be able to leverage organic growth, share growth and moving into new geographies.
So while Darren 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.
Sure. So the question was what are the advantages 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. So number 1, a microinverter will always produce more energy than an optimizer solution.
So while there's they're better than a string inverter in terms of energy production, they don't make it to a microinverter. 2nd of all, with a microinverter solution, there is 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, 3, 4, 5, 6, 7, 8, 9, 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. So that is just on the microinverter itself. Now if you add the level of reliability that we provide, that makes now you're looking at a simplification on operations and maintenance.
And then 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 price By closing that gap or eliminating that gap, we believe that our market share has significant growth in front of it.
You use electrolytic capacitors, correct? And those in general have some they don't have such long lifetime. So are you planning to replace those for different type of capacitors or?
So we do use electrolytic capacitors. We have since day 1 and we use them in large part is 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 and that is one of them.
So no, we have no intention moving away from them. They have proved tremendously reliable and durable and we anticipate using them going forward.
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 stop 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. And we were working with the company at the time, Akina Solar, and they built an AC module. And 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 0. It seemed very obvious to us at the time. Yet, and so we were aggressive about creating the AC modules back then to limited success, not some success here and there, but limited. What's changed now and we announced the SolarWorld partnership and 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 have been aggressively pushing it. We actually stopped 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 and now the installation process is faster is driving them towards this as well. So all of our major customers are asking for it. So we're actually fulfilling a demand as opposed to suggesting it.
Paul, you've historically seen a lag between when incumbent generation and the next generation of product really starts to phase in and becomes 50% or more of the mix. If I S300 being end of 2016, end of 2017 products, S300 being end of 2016, end of 2017 products, should we expect the same kind of phase in where it will be multiple years before it becomes a large majority of the mix? And then secondly, how do you avoid cannibalization of the S290 given how tight the timelines are between when the S290 and the S300 are being launched?
Great. So 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 Stephan was saying, that we're seeing more and more higher power modules come to market and that's what's driving the adoption of the higher power microinverters. The in terms of cannibalization, we actually don't view it as cannibalization.
We have multiple SKUs and the SKU that we have is matched to the power of the module that the installer is using. So we're in a way, we're a bit neutral If we have the M215 and the M250 right now, that will move will move 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?
Yes.
Sure. So 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. So although there is 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 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 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.
So M250 is what we historically have called our 4th generation product. All the S versions that we've seen in the country are actually shipping our 5th generation of revenue, the S280, the S290 and the S300 is our 5th generation product that has not only a reduction road map but also have additional features and functionality in there, including power factor correction and other advanced wind functions, which are necessary to enter certain new markets that we haven't played in historically.
Question about the higher power modules and kind of the impact on microinverter sales. So 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. So the 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, but the total TAM didn't change.
Got you. That makes sense. So 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 should mean incremental megawatts that you're installing?
Yes. 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. So yes, we see the total market growing very dramatically as a result of these pricing and cost moves.
Thanks. Just two questions, Paul. 1, 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 cost at a 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 Let
me answer that, then I'm going to turn it over to Darien. As we look at 2016, we mentioned that the S-two ninety will be released at the end of 2016. However, we're going to see a fairly dramatic cost reduction of the M-two fifty in 2016 as well. So that our cost reduction path, although very dramatic and aggressive at 25% is fairly linear. And I'll ask Darren to
Yes. So we have ongoing initiatives, both from a design innovation perspective that will help us with costs. 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. So we're confident that we're going to be able to continue to reduce the 4th 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. And then just a follow-up to 2 other quick ones. 1 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. But 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, and we will, but it's a combination of new customer adoption and increasing share in existing customers. And this is true both domestically and worldwide. And remember, the majority of the price reduction is in front of us. We've taken some pretty dramatic moves so far, but we're going to be taking yet again more dramatic moves in 2016. Got it.
And the last question was just on I believe it's 34, the 50% cost reduction in 2 years. Is that curve based the cost curve based on the timing of the introductions or is that your lag between introduction and then actually flowing through the P and L? Yes, I think that's about and the lag between introduction and then actually flowing through the P and L? I'm just trying to get a sense of what that curve is and how you came up with it?
Sure. Stefan?
Yes. So what you can see on the curve is, it's definitely the timing of the introduction as well as impact on mix. So 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. But in the blended view, we expect this kind of curve moving forward.
There is a question back there. So the question was backwards compatibility with the future products with the current products. And the answer is, they're all 100% backward compatible. So you can every product we do will support the existing installed base for whatever reason.
Sorry, 3 40 and 3 90 watt module, would you put an S300 on that type of module or is that too small for a module of that power?
So there is and this is 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. So fundamentally, as you move up to high 300s, on the DC power on the module size, our S300 is more than capable of supporting that.
Okay. And 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?
I mean how much higher it is? Is it than a regular string?
Yes.
Stefan, do you want to
address that? Yes. I think this is obviously, there's a lot of uncertainty to assess this. Based on the publicly available information, we estimate that in 20 16, roughly that cost will be on top of the end phase curve. And obviously, our rate of innovation is significantly steeper than anything we know about other technology roadmaps.
So we expect that we break through. And as you can see, we don't have 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?
Yes. So I don't like to go back to that.
So we've seen around 30% cost reduction, but we 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. So if you add that on top of that, that's how you get to
the 50%. So historically, we've seen this goes back 8, 9 years, but we've seen about a 15 plus percent reduction in cost year on year very consistently. So 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% to 25%. But I think if you look historically, we've had a tremendous track record of consistently lowering costs through innovation, process, everything.
The future chart for the Q3 starts at about $0.23 for the micro inverter and Your overall cost is about $0.32 if I'm doing the math right. So the other $0.09 would be, I guess, wire and communications gateway?
Correct. So
is there any improvement in wire due to going to 2 wires with 250 in the year ahead? For communications Gateway, are you on the same page as everybody else? They have to buy 1, is your cost roughly the same? But in wire, I would think your wire is more expensive than can you give us size of what do you think the wire difference is today and what it might be with the 2 wire solution as that comes out in, I
as it's adopted in 2017. Okay. I'll ask Stephan to step in. Yes.
So 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. And as you pointed out correctly, one of the key contributions is the transition to a 2 wire system, which significantly closes the gap to any wiring that you need with a system as well. In terms of the communication gateway, this also here, we 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. And 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 model?
That's right. So you could look at this roughly in that range. I mean, there's a lot of variables
Approximately. That's directionally correct.
And what is so today, if I were to try to do the same thing today, I would be it might be 23 times about 2,
I think.
It's hard to make these adjustments. You're getting specific and what we're doing is blending a bunch of things together. So I think if you were to 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 box by as much because these denominators get
That's right.
That's correct. That's correct.
It's harder to reduce cost more. So you don't actually have to reduce cost by the 50%.
That is you're correct. Are taking advantage of the increase in module power. And 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 the problems, one of the big challenges with the AC module has been
if you what
will it shift from their factory with your product?
It's a good question. It's a business is we will ship our microinverters to them. They will attach it and sell it as a single combined AC module. Are other models as well that distributors or some of our larger installers can employ to help make it yet again more cost effective. Sure, sure.
And that's just in the U. S. The AC modules are going to be a global product, so we're going to see it everywhere. So 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. So we're investing a tremendous amount in adding features and capabilities to that system. As an example, the new gateway device is has a revenue grade meter built in, so you don't need an external meter. It's capable of measuring the consumption within the home. And all that's being communicated to the consumer via a very consumer friendly website so that the consumer can then see what's happening with the broader energy system in their home.
And there's more and more intelligence that's being applied to that that the communications functionality because as we move into storage and energy management, communication now becomes mission critical.
The second question is if that's
true, what prevents Okay. Good question. I'll ask Martin
to handle that. So,
actually, the fundamental structure is the same as before. So, all the units are still in parallel. Okay? It looks like it's
Are you taking one lead and running one lead?
We're running one set of wires, line 1, line 2, all the way to all the units in Para. So it's the same formal structure, which established wires to carry that to move that through. There is no single point of failure in this system.
Not to put too fine a point on it, but if any one inverter failed, it would not affect the rest of the production.
And how many could fail and still produce the profitable?
So you're thinking about an optimizer with us. All of them can fail, not that that would happen, but all of them could fail except 1 and that one would operate completely independently. With a it doesn't again, 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 1 module with 1 microinverter and you have a grid compliant system.
At 100% power, but just it will be just 1 module and 1 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. So 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 being especially in the top customers that don't carry your product? The question was with the anticipated cost reduction, what do we anticipate our share gain to be? And 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 road map, as a result of the anticipated pricing in 2016 2017. So I'm not going to I can't give you specifics, but what I can say is we're very confident that, that share gain will occur.
So the question was, how does that cost reduction C and I and then eventually utility? So in the C and 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 and I market is that those modules are yet higher power. So 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. So the higher power modules would result in yet again a lower cost per watt, which should make us more even more competitive in those markets as well. As for utility scale, that is a uniquely different market.
So we're not commenting on that right now. When you say customer, you mean the Installer or the owner, homeowner? Installer. So there is a switching cost. It's actually 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. But in the with several of the new installers that we have that may have been 100 percent using a competitive solution and are today using 100 percent 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.
The question was, would it be more and more difficult for SolarCity to make the switch? You'd have to ask SolarCity that. But we've just fairly recently won Sunrun as a customer for the first time. And I'd say that, that transition to Enphase Systems has been going very, very smoothly and very, 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.
So it's a great question. The question was the sort of the cost over time of a string inverter versus a microinverter solution. And that actually addresses one of the reasons we feel that as we approach string inverters, we will start taking a very dominant position because if you assume 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 and M, you're talking about a difference in tens of sense between us and a string inverter. The challenge has been that until now the pricing delta sort of was took up a lot of that, if you will. But as we get down into near string inverters, that tens of sense advantage still exists.
But now the difference between us and a string maybe 0 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. So we have quantified it and actually there's a gentleman here who 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.
So there isn't a specific number, but I can make that introduction and we can you can get a lot more detail on that. So in terms of dramatic changes to string inverters, remember string inverters have been around for decades. So most of the efficiency has been rocked 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.
But 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 is something reverse happening. That's what Stephan was talking about, is that there is a there is now code that's going to require everybody to have something called rapid shutoff. And 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 point 0 $3 to 0 point 0 $5 a watt. In reference to the HD Wave, I'm going to ask Martin to comment on that.
So this technology is known in the industry as multilevel inverse. This technology that 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 make put more transistors in a switch in a powertrain and basically chop up the DC bus voltage in smaller increments. So the advantage of that is that, yes, you can leverage reduce the size of the magnetic materials.
So 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. And you also have of the actual structure, but the basically comment is that we believe that there is a possible large impact in reliability because of the additional number of devices that have to be that are critical to the operation of the system. So control system is quite a bit harder to implement as well, but I assume that these companies can handle that. But the reliability is
a big question. So 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 lifecycle.
Doesn't need to be basically, we are exempt because our system voltage DC system voltage is low on our system. So we don't need to do that. But we inherently do this because the 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 microconverter, which is very short and very low voltage. So it de energized the entire system in one fell swoop.
Getting back to my question before, if each
of the speeding, I think it would almost
in that AC circuit.
Is that one line out?
Yes. So yes, if there is a filler like one very short somehow is a grid, yes, we immediately disconnect that system.
So the beauty behind this is that today we are compliant. Today we are compliant with the codes that existed in the Northeast, but that will exist across the U. S. 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.
Because there's no accessible DC connect I mean connection on a battery system, it's actually even better. There is only one port and another AC port.
Given that, how do you look at fact that installation resources for less than your half and lead times are extending going into a full year 2016? What's your strategy? How does capital run it on that?
Right. So 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. So 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 priced 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.
So 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 back end logistics to a single SKU.
We've simplified the installation. We've an AC module takes the installation time and effort of an inverter literally to 0. You don't see the inverter. You don't know the inverter there. It looks like you're plugging it into a module.
The inverter just happens to be on the back of a module. So 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 down 10% to 15% year on year,
but you accelerated that to 20% plus.
Are you prepared for another price action? What's the market more often? And what will it take to
get to that next question? Right. So 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 in Q4 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. Now we're not guiding to it.
We don't it's going to depend on multiple market factors, but we are putting ourselves in a position where we can compete on price necessary and then continue to do that in 2017. Again, we don't guide to pricing for obvious reasons, but these costing 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. Now 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 we've ever seen.
So the question was the mix commercial and resi 2015 to 2016 and the answer is I don't see any significant change there.
When did you start noticing the share loss? Because the shipments in the Q3 weren't that far off from expectations, really. The guidance implies that there was inventory of customers. So when did you start taking the price action in response to that? And how did the channel inventory get so large?
Is it at specific large customers or is it distributors that feed the third tier?
So the question was when did we start seeing the pricing delta and recognize we need to take a pricing action? And then 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 2s and Tier 3 customers. The Tier 1 customers generally are have been their inventory levels have been relatively stable.
And the reason for that, and Chris had mentioned this a couple of times on the call, is that we took a pricing action, but we took it sort of mid to late in the quarter. That generated demand in distribution, So that created the additional volume in distribution, but it takes time for that to ripple its way and push its way down the rest of the channel. So what we're seeing now is just that occurring as you take that pricing action and have it pushed down into the actual from distribution to the actual customers.
I had kind of asked this after the call the last time. The channel you can retroactively give a price cut to the channel. I call it price protection, I just call it different terms. Does the channel have cheap, a lower priced house, but they can give it the lower price
I'm not going to comment on where they can be. That's a decision that the channel has to make. We do when we do take a pricing action, a generic pricing action, a drop in ADLP, that's a distribution pricing, there are rules that we apply to protect the for price protection in the channel. We've been using those same process for years now. In terms of where the pricing is in the channel, and again, we expect channel inventories to be normalized this quarter.
So I'm not sure that, that is going to be a very big issue going forward. But the pricing actions we'll be taking in 2016 will definitely affect distribution and the Tier 2s and Tier 3 customers.
Perfect. Laurel, where what price do you think is the equilibrium price that you need versus SolarEdge versus string to the installer through distribution?
It's going to sound like the question was what pricing do we need to be in a perfect world? Yes. So 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, But again, in a very, very price competitive environment, as our installers are in, they as much as they want to, they may not be able to afford a price delta.
So the closer we get, the more we win.
But the big guys,
the bigger players would have
had this price, the first at least price adjustment would have been throughout the whole entire Q4?
Again, it's the question was what happens with a Tier 1. And it's an impossible question to answer because we signed contracts at different times for different periods. It's not structured like that.
So 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, but the premium is minimized. Certainly, if we're at parity or below, I think the decision becomes a lot simpler for our customers, but we can support a price delta, and we are.
So
the yes, it's very hard to say because I don't have a view on their costs. But as Stephan was saying, based on the data we have, we think we're at cost parity with optimizers sometime in 2016 and then below that as we hit the $0.10 in 2017. So the question is, if we're going to be a 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. So what we've shown you that 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, the what we believe will happen and we saw something like this happen with the modules, where several years ago we saw there's a 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 costs, so you can make your implications to price. But the difference between a cheap string inverter and an Enphase system may be in the couple of cents range. That's a couple of $100 That is at that point, percentage differences don't 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 $0.02 or $0.03 more you could be $0.12 or $0.13 versus $0.10 You could argue that's 20% or 30 percent more, which is true, but it's $0.02 or $0.03 which is a couple of $100 per system compared to all the advantages that I talked about in terms of warranty reserve, extra energy production, lower O and M. So do I believe so 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.
Long term is 35% to 40%, correct. We're still maintaining that. Okay. So I think we're going to take a 10 minute break and then we'll come back and talk about energy.
Good morning. My name is Raghu Balor. I'm responsible for product 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. So I'll explain a little bit more about what I mean by that. This is an illustration of what of our vision. Our goal is to provide our partners with a plug and play comprehensive energy managed 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. So 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 measure and 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 are seeing, 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 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 management 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.
So 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, bidirectional communications and a massive software infrastructure to support it. Again, as was mentioned earlier, we manage 2 terabytes of data on the back every day. That's how much we collect, but it's collect and managed and that takes a massive software infrastructure. The key here is that we leverage that the software defined power electronics, the comms and 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 our operating system.
Storage, load management, etcetera, are the next set of applications on that operating system. Let's take an example of storage and how we leverage technology. Our storage solution actually let me 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 revision. 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 meeting for our partners who are 3rd who provide 3rd party ownership actually can do it's a fully ANSI C12 revenue grade meter built into this. It interfaces with a smart thermostat.
It integrates solar. And part of that part of this integration, 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 that they can 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 and then the software takes over from there and gives you all the information that you need.
Stefan will actually do a demo, 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 up 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 and 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 work 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 2 40 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 let me when you think about chemistry, Martin and I spent almost 24 18 months to 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.
And we converged on lithium iron phosphate in a prismatic format. We looked at cost, performance and most importantly, we looked at safety as well. So 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 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. I'm happy to share all that information with you. So here's a very with the system line diagram, if you may, looks like for an Enphase solution. Okay. 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.
And if you look at that's 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 2 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 is 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. And finally, safety, there is no high voltage DC. Again, we took the same approach to our storage solution as well.
You can 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, 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 3 units, 4 units. Not everybody's usage profile is the same.
So you can right size these devices to your individual usage profile. And of course, it's all interconnects on standard AC wiring. And the Envoy S also interconnects just plugs in place, 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, none of them know they don't know that each of them exist. But 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 your monitors and manages your load or you can have a system with all of this. That gives our partners 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, right. 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, etcetera, we are just much better. From a modularity, let's talk about installation for a second.
We are much easier to install. That's a 50 pound unit. That's a 1 person install. You walk into your garage, you install it on the studs of your garage. You can have 1, 2, 3 or 4, 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 convergence where you may have a massive battery bank and inverter, systems that can weigh between £250600. 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 as eyebolt storage systems because they come with eyebolts on top and there's a reason they come with eyeballs 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.
So what we call is your 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 you 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 exact same approach because we are fundamental believers in As Martin 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. So, 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, right? 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.
And for people to get back to positive economics, you have to add storage. But 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 and if you look at countries like or regions like Asia Pacific, Australia in particular, you're seeing a lot of that. We're feeding 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, if you the efficiency in AC versus DC coupled system, this come up. If you walk through the efficiency conversion points, if you talk to the power conversion points and calculate the efficiency, this is one use case, which is actually a self consumption use case, which has storage which is SolarEdge storage and it's a self consumption driver. What we see is our efficiency is slight same if not slightly better than that of a DC couple system.
But you get other tremendous benefits. Now if you look at the use case for time of use optimization, for example, where you may be charging and discharging at night time, 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 efficiency calculations. For example, we do not account for in the competitive system, we do not account for a they have large cells in series, the nonlinear degradation or difference in degradation of those cells over time and the losses due to cell balancing. We only have 8 cells in series.
So 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 have 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 in place 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 type Enphase solar system and a non Enphase solar system.
You put 1, 2, 3, 4, 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. So there is no guesswork. Is engineering and science that tells you exactly what kind of storage you need and what your 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's not 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. So 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.
But 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.
But 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.
1 that is capable that is fully adaptive, which is software defined, one that's fully controllable and one that's hyper connected. And this is our strong suit. If you look at all the work that Hawaii is absolutely a leading indicator of where the world is going. And if you look at all the work that we have done with in Hawaii in partnership with our utilities, It's fascinating the stuff that smart having a smart system out there. So I am 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 Stephan. 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.
They're well along their 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. We'll have the launch of the entire energy management system starts in Asia Pacific. Strongly believe that we have a best in class solution both in performance and cost.
I want 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.
But 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.
So with that, I will hand it off to Stephan and then hopefully there are questions after that. Thank you, Raghu. So I'd like to set up for a quick demo of our nLIGHTEN system. And 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 just but otherwise, you can see we are running this off a mobile device.
Enlighten is our see what I got this going here. Okay. Enlighten is our data acquisition and energy management platform. On top of enlyten, 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 my enlighten, 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 EnvoyS, our new communication gateway that like Wagyu already mentioned. Now what you can see in this screen, for example, is the Sarah Brown's house. And this is a live demo. In fact, you can see her energy production on the teplav kernel of 15.2 kilowatt hours produced yesterday.
So a sunny day, she has consumed 12.8 kilowatt hours. So there's a net energy gain of about 2 kilowatt hours. So 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 a little bit. So this is today.
Go back to Monday. So 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. And you can see in the morning that basically, somehow This is not working. So what you can see on the screen here is that she has consumed in the morning as they woke up the electricity. And then 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 that the family returns home and you can see the bars, the red bars on the bottom that indicate that the family is preparing dinner and afterwards goes on with the evening. So let me move on and show you 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 more consumption utilization in the day here. Let me see if I can switch this over here.
It looks like my screen is frozen for a second here. Hold on. This is called a demonstration effect. Let me see if I've reestablished the screen connection here with this consumption monitoring enabled.
This is exactly why we don't like to do demos
for those people.
So while Stephan is working on it, if it comes up, great. If it doesn't, we can show you offline. But while this is coming up, can we I'd be happy to start taking questions on energy and energy management, yes?
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. So everything from chemistry cost to power management cost to installation cost to integration cost, right. So our choice of LFP actually, the LFP vendor that we chose is giving is very competitive on cost for us, very, very competitive. So 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 battery the energy storage solution as well. So our driver for the choice of LFP was based on cost, performance and safety. So we took a much broader view of thinking about cost of the solution. Having said that, we have a very competitive product in here as well and we know that from what the pricing is out in the marketplace.
Well, let's be careful. It's lifetime cost, right? You have to think about overall cost. For example, it's dollars 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 lifecycle cost, not just upfront dollar per kilowatt hour. Now while that's important and we will continue to drive that down, 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. So to say I have a 4 100 dollars per kilowatt hour versus $500, well not really because you can go to 25% 80% depth of discharge versus 95
the cost.
Exactly. This is an example of leverage. The hardware that goes in here to charge discharge, which is which 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 communication, bidirectional communications topology as well as the back end software infrastructure as our solar product. So 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. Now it's as much I don't want to trivialize this, but it's as much an integration problem for us on that device. So with that, I think I'm
going to hold off on the rest of the questions. I think Stephan has his demo up and running.
I got
it up and running. Thank you. Sorry for the interrupt here. So I wanted to point out here that as you can see here is the history of the consumption. And as you're 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.
So I'll point to one of the darker squares on the screen here that points to a more consumption intensive day. And 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. So there's basically 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. So I think this is just an example of now you empower the consumer just with this consumption monitoring capability to explore the relationships between generation and consumption and therefore enable the 1st 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. And let me bring this up here. What you can see here is basically a integrated view of this energy production on the left side. In the center, the storage. And in this case, these are 4 AC batteries with a total capacity of 4.8 kilowatt hours.
And 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 disaggregated the consumption into the major loads. So 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 like 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. So as we now take the journey during the day of 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 grid.
This is an interesting day because you can see some cloud coverage here as the solar generation is going down at 4 and then at 5 and you can see that in fact at 4 or 4:30, in fact, the solar system does not produce enough electricity to cover the consumption. So 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 kind of time in the day. What you see also here is then the clouds are moving away. In fact, between 5 and 6 p. M, again, enough electricity has been generated by the solar system to then charge the battery again.
Later in the day, in the early evening hours, you can then see that instead of 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. So this points out to our 2 couple of very important point takeaways that I think Raghu has indicated. Number 1, it is very important to enable multiple cycles during the day in order to enable a very, 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 have that you're charging, discharging, charging, discharging in a single day. The second thing to point out here is the rightsizing of the storage system.
On this case, you can see that in fact the storage system has completely been charged, and very, very little blue bars and the dark blue bars meaning very little export to the grid. So 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, that's a very, very wide distribution and use cases. Obviously, this is a very single 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 with a quick introduction here into what 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 I should switch back.
So it's okay. So I'm going to conclude by just reminding you of the 2 core initiatives that we have. 1st 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.
So our engineering resources are being deployed to get our costs 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. So 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. The question is how fast can it become a financially needle moving product for Enphase? So as was mentioned, we expect to an important part of the total revenue mix for Enphase.
And will you be breaking out
battery routing versus inverters? That's a decision that Chris will make and I don't know that we've made it yet. Sure. So 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 inverter, it's not the energy management system, it's not the total energy system, it is simply a battery, very important element of course, but one element of a much bigger system. And with that, I'll ask Greg U.
Again, I
just want to echo what Paul said. One's a widget, the other one is a complete solution. It's a very important widget, but it's just the 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 bidirectional communications and cloud based infrastructure. So one's part of a one's a complete solution and the other one is a very important, but building for everything else. Since 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.
So we took a very solutions approach to it. Absolutely, right. So again, one is we want to be a one stop shop, a solutions provider. That's one thing that's very important for us. And 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 boards and memory cards and graphics card and everything and today I just buy a smartphone, right. We have taken the same approach, you just buy a whole solution and you install it and as long as installation is very simple. Now as far as the chemistry is concerned, that's a it's a lithium based chemistry. We are also a lithium based chemistry. So 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 and this chemistry was actually specifically built for stationary applications. Has probably a little bit less energy density compared to a transportation application, because once I believe that's nickel cobalt aluminum, we are an LFP. But if you look at performance in terms of cycle life, if you look in terms of depth of discharge, run tip efficiency, etcetera, I believe our solution is and thermal performance over the use case, we have much better performance. As far as cost is concerned, the fact is everybody is driving to scale in chemistries and I think you will see I think the numbers I've heard is by 2018 to by 2019 that we are looking at sub $200 per kilowatt hour for chemistry alone.
Our vendor is exactly on that track as well. We went to a part of our due diligence, we actually evaluated a number of large vendors and we actually settled on a vendor out of Japan called Ele Power.
Good relationship with this vendor, Elite Power, we can change in due time, we can change towards the chemistry if they become better over time. So it's not like we are married 100 percent to one vendor. We can switch to others.
This is a very important point. If you look at our architecture, which is fully distributed, so 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. So we have tremendous amount of flexibility in that. Just like we have that flexibility up here because everything interfaces on standard AC wiring. So the modules are abstracted away here and the chemistry is abstracted away here.
Any PV system, that's the other advantage as I pointed out. In this particular 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.
So just to underscore one thing, just to make it very clear, and we've had this question come up a couple of times before and it's not terribly obvious. So inside this box are the batteries, the inverter, the charge control, the battery management system, everything. There's nothing else you need except this box. It's all in here. And 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 mechanisms 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 and the reason it's worth describing is that oftentimes people after this subscription will ask, well, where is the battery or where is the inverter? And it's all here. There is nothing else needed. It's all buried into 1 unit.
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 of 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. You could do do all of those business models, this is early, 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. But 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 distributed energy 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, it's all there's a promise of it. It's not we know the time constant of our friends in the utilities, but there's a promise here. So 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 micro grids. In the future, fundamentally, this architecture doesn't change. Yes. That's go ahead, Martin.
Yes. So
in order to operate
the microgrid independently from network, yes, you have to cut off connection from the grid to the network. It's called IID, interconnect device. Yes, we're working on all these aspects, all these options. Yes, absolutely right.
Please go ahead. Okay. So a question about your energy management. In light, so do you Yes, we 3rd party. Yes, 3rd party store all that data, but it is dedicated servers.
Greg, do you have anything to add on that?
The question right here.
The data center is all third party data centers that we use to store the data. Yes, actually
2 other third party data services, fully redundant system around the globe.
Yes. Please go ahead. Yes, we are. We have active conversations with numerous utilities. If you look at all the work that we did in Hawaii in terms of remotely upgrading systems because and we are actually in the middle of another set of upgrade.
Absolutely, we are in numerous conversations. Revenues, etcetera, immaterial at this time. But again, there's a promise that all that data gets used because it's very valuable data because they get incredible amount of remember these devices are all sitting effectively on the grid. So 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. 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 have talked about the winning 8 customers at the time. Beyond that of the past
month, what
can you share?
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. But 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. The margins are going to start off maybe just slightly lower than corporate gross margins, but very quickly ramping up after that.
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. So I think you're going to see a lot of a very competitive environment which will drive pricing down. For the solution? So we're launching 1st in Australia because there's a clear economic case in Australia.
So we and 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. So it's very likely that we'll see 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. So it's
a while
we are launching in Australia, it is very much a global product and a global market. It's again, this is our very first storage product, so 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. There's again, there's a lot of we're early days and there's going to be a lot of opportunities to reduce costs on the storage side.
So the question is how do we cross sell the energy solution. We actually won't cross sell. Of the beauties behind this is that it leverages the exact channels that we've spent years building. So we will sell it directly to 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, accessing every day, you're looking at, it's informing you of what's going on, is very much a consumer level product.
So we do see a transition to a consumer facing brand over time. But 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. The question is, does the battery qualify for the ITC or tax credit? And I actually don't know.
I forget the name for us like an IRS letter that says it can qualify for federal ITC. But what we are seeing though in Hawaii, Hawaii is working on a 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?
And 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 got we've received has been tremendous. It's very exciting.
The installers there are very, very optimistic about what that market looks like. But 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 is 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 is a huge tariff, which then creates an arbitrage opportunity between the cost of energy and the feed in tariff. So that's where storage comes into place.
And there are many, many tens of thousands of storage systems out there that are ready for this. And 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 0 export rule going into place. And then elsewhere, again, because of this because of the changes in most new systems, we believe, will be a combination of solar and storage. Right.
So 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 energy. Energy is its own ecosystem.
So 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 1 holistic energy solution. Whether that eventually gets integrated
into the rest of the home, customers who are partners, who are interested in 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 structures, all that requires a very, very tight integration. The communications infrastructure, the bidirectional communications to control, all of that has to be integrated into a single system.
Right. So 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. There's actually there are multiple dimensions Enlighten itself and what we're doing to help optimize the return on investment for the consumer and 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 electrical electrically heated water heater. All of these are now interconnected, and there are things we can do dynamically to help manage the consumers build.
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 and there be a form of exchange there. We're in the very, very early days of this. I think there's a lot potential in multiple different directions, and 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. And if there's any additional questions we can address, please feel to reach out to any of us. Thank you very much.