Hi, good afternoon everyone. My name is Austin Moeller. I'm the sustainability analyst here at Canaccord Genuity. And today, we're joined by J.B. Lowe, the head of investor relations at SolarEdge. So it's great to have you.
Happy to be here. Thanks for having me.
Yeah. So just my first question here, can you discuss the importance of having distributed rooftop solar to provide surplus electricity to base load power on the grid at peak times, like the summer and at night, particularly when the EVs are charging?
Sure. Thanks for the question. Look, I think distributed solar is gonna be a piece of the puzzle that kind of solves this whole energy transition ecosystem that we have going on right now. It's not gonna be the biggest part, given the smaller system sizes that you see on rooftops, but it'll definitely play a part. I think from a commercial perspective, on commercial installations, it's certainly going to be a bigger deal, but looking across the entire ecosystem, I think the importance of grid services is only going to be increasing over time.
And you see, you know, the pretty large number of virtual power plants that are including distributed solar and distributed batteries, for that matter, behind the meter, of which SolarEdge, you know, plays a small but important part, I would say. We have VPP programs in many states, and we actually have VPP programs in Europe as well, that are going to be, you know, part of the puzzle of, again, solving this kind of load shifting dynamic that we think about when it relates to, you know, having massive amounts of power gen from solar during the day and then having lots of needs overnight, as you mentioned, with EV charging happening in the night.
And I think kind of overarching all of this, especially on the commercial side, is the ability to manage all of these energy-producing and energy-consuming assets in an optimal way, right? This is why we have, at SolarEdge, something called SolarEdge ONE for the Home, which handles energy management on the home side. But just recently, we launched our SolarEdge ONE for C&I energy management software solution, which, you know, you can think about the complexity of again energy-producing and -consuming assets at the home, and how many more orders of magnitude of complexity is it is on the commercial side, especially when you talk about VPPs and all, and the load shifting that needs to happen.
I think it's gonna be, you know, a relatively small but increasingly important part, especially as you have some of these VPPs go even into some of the commercial installations that we have.
Can you compare and contrast SolarEdge's string inverters to microinverters, which are another product on the market?
Sure. Well, first of all, we, we don't make string inverters. String inverters is something that we, we compete against. We actually have a DC-optimized inverter system, which... The difference between our inverter and a string inverter, just very briefly, is the fact that our optimizer is actually patented to be able to... You know, when you have a bunch of sun hitting solar panels, the voltage fluctuation is pretty severe, right? Depends on how much the sun is shining. We have a patented solution that, at the optimizer level, steadies that flow, that voltage, in which case, the voltage that goes into the inverter is actually constant. That actually has ramifications on how complex you need to make your inverter.
So a string inverter, for example, doesn't have that voltage regulation capability at the optimizer level that we have, so they have to have additional components within the string inverter that is able to handle fluctuating voltage. SolarEdge, we have a patented system. This is actually what our company was essentially... One of the main patents that our company was founded on, was the ability to, again, keep that voltage constant at the optimizer level so you can feed in something to our inverter, so we do not need the same level of complexity in our inverter that a string inverter has. That has reliability implications, 'cause when you have less componentry and less heat generation in your inverter, you have better reliability. So that's kind of actually the difference between our inverter and a string inverter.
As it relates to the difference between our system and a microinverter, it's a difference in architecture. So basically, what a microinverter is... Every solar system needs an inverter, right? You have to convert DC electricity that's generated at the solar panel, you have to convert that to AC power that your home or business uses, right? So you need an inverter in every system. What a microinverter and traditionally, it's been a string inverter that has handled that conversion. You have a single box at the side of your installation that converts DC to AC, so your house can use it. The microinverter was invented in the '90s to solve a bunch of problems that a string inverter has, right? You don't have panel-level optimization with a string inverter.
You don't have monitoring capabilities with a string inverter, 'cause you don't have electronics at the back of every panel. You don't have the safety capabilities with a string inverter, 'cause again, you're not able to, change or turn electricity on and off at the panel level. And you also have flexibility of design limitations with a string inverter, because you have to have every panel facing in the same direction. You can't have any panels that are landscape versus portrait. You can't have panels on multiple roof facets, because you'd have to run additional strings, hence the name string inverter. You'd have to run additional strings up to the roof in order to handle all of these different arrays.
What a microinverter solved was all of those problems, because once you have a single piece of electronics at the back of every panel, you get module level optimization, which means one panel can be shaded, and another one can be operating at full capacity. On a string inverter, you don't have that. You have everything as a lowest common denominator. You also have monitoring capabilities, so you can see how each panel is acting, so that has, you know, O&M cost ramifications. You have the safety. Now with you can turn off electricity at the grid, at the panel level from the ground. And it also has flexibility ramifications, because with a module level device, you are able to do any sort of design you want.
You don't have to run additional strings to the roof, because every panel can be different, and is able to still perform at maximum efficiency, whereas on a string inverter, you can't. What the microinverter did was it solved those issues that a string inverter had, but it raised one additional issue, which was that it's very expensive. Because what a microinverter is, is essentially you're taking that one inverter that you used to have, you're shrinking it down, hence microinverter, and you're duplicating it however many times... Let's say you have a 20-panel system, you're duplicating it 20 x behind every panel. That's a very expensive piece of equipment.
So when SolarEdge was founded, part of the reason why, the founders of SolarEdge went the route that we went, which is, again, this DC optimized solution, you have a simplified inverter that doesn't fail as often with optimizers behind the panel. You're essentially getting all the benefits from a distributed architecture, again, be it monitoring, panel-level optimization, flexibility, safety, but you're not duplicating the conversion element, which is the DC to AC conversion, 20 different times. And that's the most expensive part of the equipment, 'cause that's where all the power conversion elements come into play. Those are the most expensive components that you have to buy to make an inverter. We only do that in one place. That's at the simplified inverter that we have at the side of your house.
So we essentially have a benefits of a distributed architecture, while at the same time being much less expensive. So that's the main difference between us and a microinverter, and that has implications in terms of size of systems. As the system size gets larger, that economy of scale that we get with less expensive units on the back of your panel, that only widens the competitive advantage we have as your system size gets larger. 'Cause if you have a 500-panel system, for example, on the top of a Target warehouse or whatever you have, having 500 microinverters would be prohibitively expensive, versus our DC optimized solution is actually very competitive with alternate competition.
Can you discuss the revenue per home of a SolarEdge inverter plus battery setup, compared to peers?
Oh, that's a very complicated question. It depends on the size of the home, number one. Again, when the larger system size you get, the more competitive the SolarEdge product is, because it costs less money, right? So by definition, I think it just comes down to pricing. It's... From a revenue per home perspective, we would have more revenue per home than a string plus battery solution, and we would have less revenue per home on a like for like system size than a microinverter solution, simply because we're less expensive. And we all have similar kind of add-on features, be it an EV charger, you know, again, smart energy management software, load control, grid services.
We all kind of do the same thing, but when you're talking about just the hardware piece of it, given the fact that we, you know, we price less in the market on purpose because we have the ability to do so, we'll have less revenue per home than a microinverter, but more than a string.
Do you expect any revisions to Net Energy Metering 3.0 in California or to net metering programs in Europe to make it more favorable in the future for homeowners and businesses to install solar plus battery?
As it relates to California, I am hesitant to predict what the California Utility Council is going to do, because they seem to change their mind a lot. But I would say that generally speaking, they seem to want to make it harder to put solar on your roof, whether they are gonna change the way that electricity is priced or they add additional grid connection fees for residential solar systems. I don't know if they're necessarily gonna change net metering 3.0 specifically, but they might do other things that make it harder to put solar on your roof. Now, I do think eventually there will be a NEM 4.0, but I don't think it's anytime soon. They'll probably further reduce the amount that you get paid to export energy to the grid. As it relates to what, the Netherlands, I think you mentioned?
Yeah
The Netherlands is a very interesting market right now, because there's not a ton of clarity onto what the net metering policy is going to be. Right now, the government has said that net metering will be in place until the end of 2026, but that is just a very recent pronouncement. There is a sense in the market that regulations could either change sometime soon or before 2026. There's a lot of uncertainty around the market. But given where the policy as it stands today says is that, you know, by the end of 2026, net metering will go away, that does not provide a ton of incentive to install solar on your roof in the Netherlands today. Number one, that market is already 40% penetrated on the residential side.
It's probably about half that on the commercial side, but still one of the more penetrated markets in Europe. Given the amount of congestion that's already on the grid, it would probably make sense for them to move away from net metering even faster. I mean, I think, when we were looking at the 1Q numbers, there was something like electricity prices in the Netherlands went negative 45 x in the first quarter, or something like this, 'cause there's a ton of renewables on the grid. If you get a cold, sunny day with not a lot of, obviously, air conditioner demand, you're gonna get tons of energy on the grid and not a lot of demand. Prices have gone negative.
Now, companies like us, we rolled out, you know, software to be able to optimize actually that negative rate. Whereas if you have a battery in the Netherlands, we can detect in the market when electricity prices go negative, and we will have you charge your battery, because you get paid to charge it. When energy rates, when electricity rates are negative, you get paid to use, right? I wouldn't be surprised if there was a change there prior to 2026, but again, that's trying to guess at the whims of regulatory and political bodies. At the end of the day, the Netherlands is going to follow what other countries have already gone through, which is a transition to become a battery market.
I think the faster that happens, the better, because number one, it'll give clarity to the market, which will give people confidence to actually go out and buy solar. It'll be good for SolarEdge because we can- we have the largest installed base in the Netherlands of anybody, and we can, we can sell batteries to those consumers. Because unlike in California, you are not grandfathered into a net metering regime like you, like you were in California with the transition from NEM 2 to NEM 3. In the Netherlands, whatever the regime is, is what you fall under. That's why no one wants to install solar today, if net metering is going away in two years. It completely blows up the economics of, of the decision.
Just on that point, if we talk about interest rates, which has been more impactful in the U.S. market, do you expect any meaningful uptick in demand on the residential side if we get, like, you know, 25-50 basis points of cuts? Or do you think it'll be more gradual as the cutting cycle ramps?
Yeah, I mean, I think it'll be gradual in the same sense of however gradual the interest rate cuts are, right? I think, yeah, every incremental 25 basis points of interest rate reduction will help on the margin. If you're turning a project that was uneconomic into economic, then yeah, that's gonna help. But we've seen interest rates go up significantly over the past couple years, which, you know, caused the U.S. market to go down in 2023, and it's gonna go down again in 2024. I think to see... I don't think that we're ever gonna see something where we get a, you know, 100 basis point cut and the market all of a sudden starts to rip. I think it's gonna be a much more gradual process.
What kind of demand are you seeing in places like Puerto Rico and Florida for solar plus battery to provide backup power during hurricanes, for example?
We're seeing a lot of demand, actually, especially in places like Puerto Rico that you mentioned specifically. The Puerto Rican market is one that's, yeah, it's characterized by pretty significant storm damage and impacts from various hurricanes, but also rolling blackouts. So backup capabilities are definitely a demand pull from the Puerto Rican market. It's actually, that's actually something you've seen pretty significant growth from a SolarEdge perspective, I would say, over the last three quarters. Yeah.
Can you sort of discuss for the audience the differential between electricity rates in California and Europe and other places like Florida and Texas, which in theory would be great places to deploy solar, just given their you know how close they are to the equator and the Sun Belt?
Yeah, it's interesting. It's kind of the reverse of what you would expect, given, you know, how much sunlight is in the southwestern states and how weak those markets have been compared to the northeast, which have actually been fairly strong markets, and Europe, for that matter. You know, the UK is actually a fairly good solar market, despite the fact that they get barely any sun. You know, electricity prices come down to a few things. It's the cost of power gen, it's the cost of transmission and distribution, and it's the cost of taxes, right? If you're looking at these low-cost areas like Florida and Texas, power gen is fairly cheap because you have a lot of cogen natural gas, you have a lot of coal, specifically in Florida.
In Texas, you have a ton of wind in the Panhandle, and you have a lot of solar out in West Texas. Transmission distribution, I mean, it's better in Texas than it is in the northeast, for example, where there's a lot less ability to build out transmission capacity. And then taxes, I mean, we all know what taxes are like in Texas and Florida, they're lower than they are in California and in places like Europe. So, you know, you have pricing in Texas and Florida, which could be $0.12-$0.13/kWh, even though there's, and in California, it'd be upwards of $0.35-$0.40/kWh. And in Europe, same thing. After you add taxes in Germany, it's $0.40/kWh or something like this.
So even though you have a place where you get a ton more sunlight, in Florida or Texas, for example, the incentive is... the economics of solar aren't as attractive because you're offsetting such a lower cost. Whereas in Massachusetts, you know, you guys just got a rate increase here for those who live here last year, that was a pretty significant rate hike. Your electricity bill went up, and even though there's not a ton of sun, the economics of solar make way more sense when electricity prices are two to three times what they are in Texas or Florida.
Very well put. How might changes to IRA tax credits for homeowners during a, you know, a different presidential administration impact demand for rooftop solar?
Well, it depends on what happens, right? Right now, as a result of the Inflation Reduction Act, the 30% investment tax credit that you get when you buy a solar system, of 30% was extended for 10 years. Now, it's been two years since then, so they extend for another eight years. It's actually had a, interestingly, it's had a little bit of a, of a perverse incentive, because when that tax credit was initially introduced, I believe it was back in 2008, we were talking about earlier, that stepped down by 2% every year. So it was 30%, then the next year it was 28%, then the next year was 26%. Eventually, it would roll off at 22% and then stay steady.
So you actually had an incentive to get solar now, because that tax credit was gonna go down the following year. Now that the investment tax credit has been extended for a flat 30% rate over the next, now, like I said, eight years, there's not, like, the urgency just specifically from an investment tax credit step-down perspective to get solar immediately. Now, as it relates to the election, I would, I would just mention that this has been a fairly bipartisan, actually, supported tax credit. The tax credit was actually most recently extended under the Trump administration. So, you know, Republicans. They like some things and they don't like other things. I don't think necessarily the investment tax credit is something that they would go after necessarily. They could, but we've seen as recently as four years ago, Republican administrations extend them as well.
On that same point, within Section 45X of the IRA for the advanced manufacturing tax credit, you've indicated that there's similar bipartisan support around being able to create U.S. jobs-
Right.
And so there's less incentive to remove the manufacturing tax credit.
Yeah, I think that's right, and we have said that, you're right. The 45X tax credit, for those who don't know, is manufacturers of certain products get tax incentives to manufacture here, right? This is kind of the reshoring of domestic manufacturing. We, as SolarEdge, we get an $0.11-per-watt credit to make inverters and optimizers here in the U.S. There's a. Our competitors get a similar tax credit. You get a similar tax, not a similar tax credit, you get a lower tax credit if you make a string inverter here. So there's been very generous incentives in order to reshore some of this power electronics manufacturing capability back to the U.S., which has basically been absent for the last 30 years.
But to your point about the vulnerability of these, that specific manufacturing tax credit under a, I would say, less than friendly regime, I think your point is exactly right, and this is a point we've made in the past. The vast majority of jobs that have been created as a result of these manufacturing tax credits have been in red states. Like us, for example, we built a factory in Texas, and we built a factory in Florida. These have been red states for quite some time now, and there is bipartisan support.
There's actually a letter that was put out last week by a bipartisan group of 18 congresspeople, essentially, lending their support for 45X and, you know, recommending that we keep those tax credits in place because of the amount of jobs that they've created in their districts. And like I said, have been largely in red states.
So as of the latest quarter, management indicated they expect that the sales channel should be cleared out in the third quarter. I guess what gives them confidence that they'll get the sales channel balanced in the third quarter?
I just... I want to make one clarification there. We said that for the U.S. market.
Right. Yeah.
The U.S. market, we think will be largely, from an inventory perspective, largely balanced by the end of the third quarter. And the confidence we have in that is that that's only a quarter's worth away, that's 90 days away. We have fairly good visibility over the next quarter to, you know, feel, have confidence in saying that. The larger question mark from our perspective is what happens to the European inventory situation-
Mm.
which we think will take multiple more quarters than that.
What do you think is the most important factor to focus on, just given the continued light demand in Europe? Is it just oversaturation of the market after the initial Ukraine invasion demand boom, or would you also talk about political and regulatory changes in countries like the Netherlands?
I think it's both. I think there was a pretty significant, I don't know if I would necessarily call it pull forward in demand, but we saw an extreme demand shock in Europe in the aftermath of the breakout of the Ukraine war, to the extent that the European solar market more than doubled in 2022. And was expected to go up by another 50%-60% in 2023. Now, that didn't end up happening, largely because electricity prices started to fall. I think the macro environment in Europe is okay, with the exception of the Netherlands, which we can touch on in a moment, but outside of the Netherlands, you know, everything more or less went up in the second quarter.
Now, a lot of that is seasonal, but it shows you that the market is generally healthy in the UK, in Italy, Germany, which is by far the biggest rooftop solar market in the world. I don't know if people really understand that, but Germany is bigger than all of the US combined from a rooftop solar market perspective. So most markets in Europe actually saw the traditional seasonal recovery that you normally see, albeit a little bit slower than what we would've hoped. But then there is the Netherlands. The Netherlands is a very weak market, I would say, and I think that relates to, number one, the saturation that you mentioned, that I referenced earlier, being almost 40% penetrated already.
And then again, the lack of clarity on regulatory regime as it relates to the Netherlands is driving that market down significantly. That used to be the second biggest country in Europe in terms of solar installation. It's probably... It's not gonna be second this year, I can tell you that.
Right. And you think, in the near term, that Italy could take the place as the number two?
Yeah.
market?
I think it already has.
Yeah.
Yeah. Italy is gonna be the second biggest solar market, probably in 2024, yeah.
Do we have any questions from the audience?
I've explained everything so well.
I guess I've just got one more question here. So how important do you view having the backup capability of solar plus battery as being to support the energy needs of AI data centers as those get rolled out?
I think it kind of relates to one of your earlier questions, that it's gonna be a piece of the puzzle, right? I think the energy demands of AI centers, it's almost a more utility-scale thing. The amount of energy that they actually need, they're gonna need vast amounts of energy. I think rooftop specifically, and small ground-mount, you know, adjacent to data centers, could be a part of the solution. We provide solutions for all of those things. You know, and batteries as well. But I think it also comes down to, you know, who are the customers that are owning these assets, right? And how do they want to manage them? It goes back to my earlier point about energy management capabilities writ large.
I mean, we have massive amounts of energy generation and consuming assets in a single portfolio. You know, you can think of a company that has maybe a portfolio of real estate assets across you know, large-scale logistics distribution, but also maybe have a web servicing company, as a part of that, that may own a lot of data centers. These are the types of companies that want a sophisticated and comprehensive energy management solution across their entire portfolio of assets, and they want to standardize on a single company that can do that. This is a service that we provide, and so, yeah, are we gonna have solar and battery storage on data centers? Absolutely. I think it will be definitely a piece of the puzzle.
Excellent. Well, thank you so much, J.B., for taking the time to-
My pleasure
go through the SolarEdge story with all of us, and hope to see you again soon.
All right.