There has been a lot of discussion and speculation in recent weeks about the impact of the new net energy metering policy (NEM 3.0) that passed in December in California and that regulates the rates at which solar owners are compensated for the excess electricity they push into the grid.
California indeed accounts for a large portion of revenue of solar installers and inverter makers (e.g. around 20% at Enphase) and the new policy has been seen as a potential headwind for new solar installations as it materially reduces (up to 75%) the export rates solar owners get for their electricity and increases the payback period for solar systems from 5 years to 7-8 years, unless the owner installs a battery. With battery storage, owners can store solar electricity during the day and push it on the grid in the evening when export prices are higher, making the system payback period in line with the previous policy (NEM 2.0).
As the first major solar company to report earnings in the inverter/installer ecosystem, Enphase’s comments were then widely expected and management indicated that it was not seeing any slowdown in California (strong originations in January) or, to the contrary, any pull forward demand from customers seeking to avoid the new policy that will be implemented in April. Longer term, it sees NEM 3.0 as a positive for battery attach rates, keeping in mind that battery storage represents a major growth driver as it massively expands the addressable market of inverter makers.
That said, Enphase expects more pronounced seasonality than usual in the US in Q1 due to macro headwinds as the company and the solar ecosystem are, unsurprisingly, not immune to the economic environment. The cost of installing a residential solar equipment is indeed still high, ranging from around $15,000 (4kW) to $30,000 (8kW), prior to tax credits but excluding the battery (around $10,000). And solar system distributors and installers have become more conservative in their orders to preserve their cashflows, according to Enphase.
This environment did not prevent Enphase from providing a strong guidance for Q1 with revenues expected to grow 63% at midpoint, 7% above consensus, as the value proposition of solar energy for consumers has never been higher. Against a backdrop of rising utility rates, consumers are indeed increasingly seeking cheaper electricity alternatives, a trend that is likely to intensify over the years as electric vehicles penetration goes up and further inflates consumers’ utility bills. Installing solar panels also represents the opportunity for consumers to secure their power supply amid deteriorating grid reliability and frequent outages in the US, and risks of power shortage in Europe.
In conclusion, the risk of a slight deceleration in the number of solar installations appears manageable as demonstrated by Enphase’s Q1 guidance as inverter makers should benefit over time from homeowners’ willingness to install larger solar systems on their roofs to charge their power-hungry EVs (a positive for unit economics) and from rising battery attach rates.