The long read: Let’s get digital

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From pv magazine, October edition

When European solar subsidies were cut or drastically reduced in 2012, the then biggest inverter maker – SMA – was severly impacted. SMA, which at that time focused heavily on the European market, had to deal with a steep drop in demand. Average selling price (ASP) for SMA’s inverters dropped between 10% and 40% between 2014 and 2015 – the German inverter maker reports.

The company managed to return to growth in 2015, crediting its nimble adaptation to the new market status, and has reported solidly growing shipment and revenue numbers ever since.

The solar market is characterized by a high degree of volatility. This year has demonstrated this on several occasions, 31/5 China, Section 301, and India safeguard duties. As a result, suppliers to the solar sector must react to rapidly changing market scenarios.

SMA’s fortunes earlier this decade are a compelling example of this. However, the German inverter giant appears to have learned that a broader diversification of its business base will add to its resilience. At its Capital Market Day presentation in 2015, SMA presented a plan in which digitalization played a key role in tapping into new, and most importantly, steady revenue streams. And other inverter companies are doing the same.

Götz Fischbeck of Smart Solar Consulting comments: “What is impressive about SMA is that the company already very early on invested in R&D in areas which at that time were still years away from promising any meaningful market potential. But since SMA never underestimated the relevance of solar power for our future energy provision system, they clearly understood that certain issues demanded adequate solutions sooner rather than later.” Fischbeck continues that the art is finding the balance between technical ambition, basic research, and coping with constant regulatory, and therefore, market change. “SMA acknowledges it will take at least another two to three years before there will be sufficient economic evidence to prove whether the company was successful in developing the right tools the market needs and is willing to pay for.”

Price pressure and volatility

Downward price pressures, while essential to the ongoing growth of solar more generally, play an important role in this pivot to digital service provision. SMA’s COO/CTO Jürgen Reinert describes the price pressures in no uncertain terms: “The inverter is increasingly becoming a commodity, in which the main point of differentiation is price. China’s surprise announcement to reduce installation targets has only intensified this competition, as Chinese manufacturers are now flocking to international markets, to find new customers.”

Indeed, the marketplace for inverters has always been competitive. Though prices for inverters differ significantly, by product type, market, and vendor, Wood Mackenzie Power & Renewables suggests that on average inverter prices per watt are currently dropping at a rate of 8-12% per year.

Scott Moskowitz, an analyst at Wood Mackenzie comments on this matter: “There has always been price pressure in the inverter market, and there has never been a time when at least some inverter companies were not struggling. Demand for solar has shifted continuously over the past decade from Europe to China to the Americas and other developing markets. Prices have fallen consistently over this time, and companies without differentiated projects or with heavy exposure are always subject to struggle.”

The competition on price only increased with the transition to use string inverters for utility-scale systems. Where the ­central inverter business once offered attractive profit margins, this is less so with string-inverters. The competitive dynamic was also amplified by the fact that the string inverter marketplace is shared not just with ABB, Siemens, and GE, with whom competition on price is “easier,” but now also with Huawei, and a wide range of Asian manufacturers, which can produce at significantly lower costs.

Against this backdrop of fierce competition, the market development of digital technologies in the energy sector is impressive. IEA stipulates in its 2017 Digitalization and Energy report that global investments in digital electricity infrastructure and software have grown by over 20% per year since 2014. In 2016 the market reached $47 billion, with 40% more investments than in gas-fired power generation and nearly equivalent to the entire Indian electricity sector.

Enabling future growth

Increasing installations of variable renewable energy resources in some markets have come to a point where grid operators are wary of adding more, without having solutions for the production fluctuations. Smart load management of grids could be one of the solutions.

Additionally, high penetration of PV has made the job of grid operators more demanding when it comes to managing and stabilizing the grid while responding to the increasing demand for self-consumption.

For players active in grid infrastructure, this has been a pressing concern. “ABB’s priority is to leverage the company’s investment in R&D to create a fast-growing and profitable digital business,” says ABB Global Product Manager Emanuele Figliolia.

According to the IEA’s data, smart demand response alone could provide 185 GW of system flexibility, which is roughly the total installed capacity of Australia and Italy combined. Applying this technology could save grid operators $270 billion of investments in new infrastructure. The agency estimates that in the residential sector one billion households and 11 billion smart appliances could participate in such interconnected electricity systems.

Curtailment of wind and solar in the EU currently lies at around 7%. With digitally enabled demand response and other digital helpers, this could be reduced to 1.6% by 2040, suggests the IEA. Additionally, smart EV charging could allow saving between $100 billion and $280 billion in grid infrastructure investments, between 2016 and 2040, depending on the rollout scenario.

At the heart of this scenario stands the inverter, argues SolarEdge. Lior Handelsman, VP Marketing & Product Strategy and one of the Israeli company’s founders explains, “We now see smart home energy management systems, EV charging, and virtual power plants and think they are their own thing. However, if you take a step back, you can see that they are all connected. All of these features are not just a fancy interface but actively support smart load management. The inverter is connected: to the PV array, to your home’s appliances, to the EV in front of the house, and to the grid. Also, it already has enough processing power to handle all the data it gets from all these points. It is the ­perfect candidate to be the heart of the future energy system.”

The progressing energy transition requires inverter companies to bring a new suite of digital products to the market, but it also enables them to generate a stable revenue stream from customers. Where the financial relationship between inverter manufacturer and customer ended pretty much after the product’s sale (neglecting O&M services at this point), offering digitally enabled services can improve an inverter company’s resilience to future sudden policy-driven changes in demand.

It’s a new dawn – a new paradigm

SMA’s Reinert explains, “Our goal is to transition SMA to a provider of system and solutions, and herein we are specially focusing on energy-related services. This year we will be investing €10 million ($11.7 million) into the development of our digital business. However, we expect the profits to return from this investment by 2020 at the earliest.”

Data-driven services that allow for more self-consumption, to ease stress on the grid and lower reliance on utilities, have become a win-win for all parties involved. Figliolia says, “We see that the solar market is growing, but in the past the driving element was to export electricity only into the grid. Today the new paradigm of self-consumption has been characterizing more and more solar applications in many regions of the world.”

SMA’s sector coupling energy management system ennexOS is, by its own account, the first time various energy systems throughout multiple sectors can be planned online using the Sunny Design Pro software. EnnexOS would combine all heat and electricity consumers and prosumers to a single platform and thus allows for seamless and comprehensive monitoring across all sectors. “The next step is to develop automated prognosis-based management of energy production and consumption,” says Reinert.

SMA launched its subsidiary company Coneva, for digitally enabled services at the beginning of this year. Coneva has already signed a deal with Munich’s municipal utility to allow it to save costs on load management. Coneva utilizes the data that are acquired through ennexOS to provide its energy-related services in the form of management solutions. For SMA then, the revenue stream continues through the energy management and monitoring services it provides to, for example, Munich’s municipal utility.

Reinert explains, “Against this backdrop the ability to not only deliver products but comprehensive systems and solutions, including all digitalized services, has gained a lot of importance on the market. Players who are not capable of delivering this won’t stand a chance in the future.”

Both ABB and SolarEdge concur in their assessment, both adding that in the future it will be impossible to sell an inverter that isn’t capable of any of these digital services. “Everything is moving towards digitalization and the ability to connect everything to everything,” says Handelsman. “I don’t think you will be able to sell an inverter without the inverter being able to take part in this digitalized world.”

ABB’s Figliolia highlights the mutliple use cases for digital services as solutions can be flexibly integrated to achieve better asset monitoring, energy efficiency, optimization, and control all at once. He continues that ABB Ability brings together ABB digital offerings as one unified offer. It’s a set of common digital enabling technologies that exist at the device, gateway, and cloud levels.

For analyst Moskowitz, the trend does not show an attempt by failing companies to find a new business base, but rather that the addition of sophisticated digital services is the result of success. “You see these types of product announcements from leading vendors, not the lagging ones,” he says.

Are they betting on the right horse?

Moskowitz adds that for these companies, power electronics will remain the core business. However, increasing market maturity and large asset bases created incentives to layer on services. He also believes that inverters will continue to become smarter and more interoperable.

On the other side of the argument, Moskowitz goes on to say that software is typically not the leading differentiator for inverters. Layering on services and capabilities could be a distraction from the requirement that manufacturers continue to lower their costs and improve their products.

“The inverter market has consolidated and will continue to do so. Software certainly provides value, but the primary requirements of any buyer is quality and cost. Function is typically far down the line of priorities,” says Moskowitz.

Götz Fischbeck from Smart Solar Consulting has a differing view: “Going forward, hardware features as well as the price-performance ratio provide less and less potential for inverter manufacturers to differentiate their offering from that of their competitors. Yet being capable to offer industry and market specific energy provision solutions based on a potent software platform will be key when it comes to convincing prospective customers that their choice of inverter
manufacturer provides them with a future proof solution.”

For large companies like SMA, the software-enabled business could potentially generate revenues exceeding hundreds of millions of euros. By 2020, the company expects its addressable market to grow from €390 million today to €2.3 billion. On the other hand, the energy economy continues to play catch-up in the matter of digitalization. A report by the German Ministry of Economy and Energy sees the energy economy as only partially digitalizing, and forecasts only a moderately growing role for digitalization. According to the data, in Germany, 51% of companies active in the energy sector report that digitalization is not an important topic for them.

While digital services will likely grow in importance, ABB’s Figliolia maintains that the hardware business still matters and represents the core of the offer. “It is thanks to the combination of software and analytics that we can create more value for our customers. Of course, it is important to be resilient to market fluctuations, but you can only be resilient with a new revenue stream if that is what customers are asking for.”

SMA’s Reinert adds, “In the wake of digitalization, the development of software and the increasing integration of multiple new functions of an inverter have taken center stage. However, to offset the continuing price pressure, hardware developments must continue. The inverter remains the central interface for the collection of relevant data for the digital business.”