It's Not Enphase, It's a Lifecycle (NASDAQ: ENPH)
This week’s investment idea is Enphase Energy (NASDAQ: ENPH). Enphase provides a complete solution for residential solar power with the ability to completely remove the home from the grid. Despite the fierce competition in the PV market, Enphase has successfully developed and expanded their brand from microinverters to complete power, storage, and transmission of energy for a “microgrid.”
In the article, as published through SeekingAlpha, I cover various effects on Enphase rising from public policy and the state of the macroeconomy. Enphase Stock: Short-Term Pain With Long-Term Resiliency (ENPH) | Seeking Alpha
By and large, my top concern is the state of consumer spending. As I have previously discussed in articles published on the PeachPit, consumer spending, savings, and credit go hand-in-hand and are controlled by inflation (consumer price index, CPI). A major challenge that many Americans are facing, let alone just about anyone around the world, are the increasing costs of living. To make matters worse, the federal reserve has been aggressively increasing interest rates, making it more challenging for consumers to finance big ticket items such as new cars, homes, or more specific to this note, PVs (photovoltaics, or solar panels). A new solar installation can cost anywhere between $16,000 – 23,000, with the average APR costing anywhere between 7.75% and 35.99% for consumers with the highest quality credit scores.
Call me old-fashioned, and I may not be the most altruistic person, but I’m a firm believer in following the economics as opposed to the idealistic views of society. i.e. natural gas is cheap and affordable, widely used and widely distributed, and very abundant. Depending on one’s understanding of Scope 1, 2, and 3 emissions, PVs may appear to be cleaner than burning natural gas to heat and cool one’s home. Though if you’re like me and more interested in the broader effects of manufacturing PVs, you’re probably wondering where all of these resources are sourced. To give you a hint, it’s not in our backyard.
According to the US Geological Survey (USGS), 100% of the Arsenic, Gallium, and Indium are sourced from foreign mines. 50% of Germanium and 75% of Tellurium are in that same boat. Do bear in mind that these are from a 2018 survey and figures may differ today. Minerals for battery storage are primarily imported and manufactured overseas as well. 100% of graphite and manganese and 61% of cobalt and 50% of lithium are sourced from foreign mines. One point to note is that the IRA requires 40% of minerals to be sourced domestically for government incentives on purchasing new electric vehicles. Reading through the IRA, the language is murky on whether this requirement applies to home electric storage systems in relation to the 30% tax credit for solar-powered microgrids. Hopefully, this detail is sorted out soon as Enphase sources all home batteries from two factories based in China.
I have referenced this figure on multiple occasions, but I like to use Goering & Rozencwajg’s energy equivalency to compare different sources. The power input/output costs are substantially higher for PVs and other renewables when compared to fossil fuels and nuclear power. Renewables input/output power requirements are roughly 1-to-5. Fossil fuels are much more efficient at 1-to-30 and nuclear energy is 1-to-100. This means that it takes one unit of power to produce 5 from PVs. Considering that nuclear is 20x more efficient, it’s baffling that renewables are being adopted at a higher rate than new nuclear power plant builds. To read more about this, please read through my article on EPC projects for new power plants. (3) Earth, Wind, and Fire: Nuclear, Wind/Solar, and Natural-gas Fired Power Plants (AGX) (substack.com)
Other public policy mishaps include NEM 3.0 (net energy metering) in California. One of the values PV energy brought to the homeowner was the ability to sell excess power generation back to the utility. Every state seems to have different legislature relating to how this is executed, whether it’s through the state or directly dealt with through the utility company. CNET reports that New York, Idaho, Illinois, Maryland, Oregon, South Carolina, and Texas have the most beneficial incentives for the consumer. New York has some of the highest net metering rates and will pay out anywhere between $0.69-1.09/KWh on top of the 25% tax credit (upwards of $5,000) for installation. South Carolina has one of the strongest incentive programs, providing a tax credit of 25% of the cost of the PV system, upwards of $35,000, or 50% of the taxpayer’s tax liability for the year. Every state’s net metering program is at the will of the utility company the consumer chooses to connect with.
NEM 3.0 on the other hand has created somewhat of a disadvantage to anyone purchasing PVs after the April 15th, 2023, deadline. Essentially it claws back on the payments to PV owners selling power back to the grid, reducing payments from $0.25-0.35 down to $0.05-0.08/KWh. This also lengthened the breakeven timeframe from 5-6 years to upwards of 10 years. Given that PVs have a life expectancy of 25 years, this reduced years of profitable generation by ~20%. Though the panels still pay for themselves over the long run, the overall point of independently generating and selling power back to the grid became significantly less appealing, especially when considering the viability and volatility of the grid in California. Ultimately, consumers’ continuation to flock towards investing in PVs will be determined by the cost of power at the utility level. As discussed in a previous note, Earth, Wind, and Fire: Nuclear, Wind/Solar, and Natural-gas Fired Power Plants (AGX) (substack.com), natural gas accounts for just under 40% of the total power mix in California with 30% of the total power mix being imported from neighboring states. According to the EIA, February 2023 residential natural gas in California costs $25.97/mcf (thousand cubic feet) as compared to Texas at $13.70/mcf. In relation to these figures, it will come down to whether the consumer is purchasing for today or purchasing for the future.
Despite these changing policies, solar power has taken ground stateside. Solar power generation in North America has reached 6.5GW in 2022, with residential generation accounting for 1.7GWh. Europe’s residential solar market was over 10GW for 2022 and is expected to grow 25-30% annually. Though US and EU economics differ substantially when it comes to power generation, the US is arguably in better shape than EU.
Europe imports the majority of their natural gas and coal and has substantially higher prices at the utility. The average electricity cost for EU residents was €0.283/kWh. Ireland and Germany has the highest prices for power at €0.495/kWh with Ukraine far below at €0.044/kWh. With the average EUR/USD exchange rate for February at $1.07, the average cost of electricity in the EU comes out to $0.46/kWh.
For total power mix in the US, the average cost for electricity is $0.1596/kWh. California’s cost sits at $0.2707/kWh to compare to NEM 3.0 caps of $0.05-0.08/kWh. Connecticut has the most expensive power at $0.34.32/kWh, well below the average cost across the EU. It only makes sense that residents across the EU would be more prone to adopt PV to electrify their homes.
Enphase offers a phenomenal solution for anyone’s power needs. Their offerings include power production through their microinverters, heat pumps, power storage, power distribution, and dual directional EV home charging stations, and to tie it all together, a cloud-based application that interconnects all the products into an autonomous microgrid. Enphase also controls the process for lead generation, design and proposals, financing and contract, permitting, installation and commissioning, and operations and maintenance, making it easier for the consumer to make a purchasing decision. Not many competitors have their hands in the entire lifecycle of customer acquisition and servicing, let alone a profitable and capital-light business model. This allows Enphase to be nimble and enables them to right-size their business given the macroeconomic environment. Despite solar power not being the most efficient use of minerals and materials for power generation, the ability to scale microgrids and take stress off of the grid is a strong value that Enphase offers to the economy. Overall, I think Enphase is a great company, well run, and has proven itself as a profitable entity. Though it has shown operational excellence in a low interest rate environment, its time management proves this company is solvent during a tighter, higher interest rate market. At this time, I provide bearish guidance on ENPH; however, I believe a major pullback on their stock price will provide a buying opportunity for a long-term position.
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