More complete energy solutions are a key to Telsa Motors' offer to buy SolarCity. Image source: Tesla Motors.

There's no question that in the coming decade, homes will get smarter about how they use energy and interact with the grid. And as more consumers install their own solar power systems and start to see on-site energy storage as a tool that allows them to use those systems more effectively, it will create incredible opportunities for innovative companies.

But who will provide the intermediary tech between consumers and utilities, controlling when and how energy flows to and from the grid? It's the brains of the system that will create the next stage of utility disruption, and SolarEdge Technologies (NASDAQ:SEDG) is vying to be one of the companies that fills that void.

The brains of home energy

The idea that energy controls are coming to the home isn't a new one. One of the reasons Elon Musk wants to combine Tesla Motors (NASDAQ:TSLA) and SolarCity (NASDAQ:SCTY.DL) is to create the integrated home energy system of the future. Solar panels would create electricity, Powerwalls would store it, and DemandLogic would control the system and how it interacts with the grid. And SolarCity just happens to be SolarEdge's biggest customer, which is a nice wrinkle in the strategic landscape. 

SunPower (NASDAQ:SPWR) is trying to build a similar system through partnerships. Sunverge is its preferred energy storage company, and a partnership with Tendril will give it the data to build the smart controls required to make the system efficient.

SolarEdge is now trying to throw its hat in the ring too, combining its leading market position in module level power electronics with inverters and batteries to provide more value to homeowners and the grid. As a component that interacts with both the grid and solar systems, the inverter is a natural control point for the smart home's energy system. 

On the surface, it makes sense that an electronics provider like SolarEdge or Enphase (NASDAQ:ENPH) would supply the brains behind a solar-plus-energy-storage system. But that neglects to take into account how solar power systems are sold today, and where the real value lies.  

Image source: Getty Images.

How will customers buy smart energy?

Today, most of SolarEdge's energy storage systems use Tesla's Powerwall, and the SolarEdge inverter acts as the brains of the system. This would be similar to the role SolarCity's DemandLogic plays for SolarCity's Powerwall-backed systems. And that's part of the problem for SolarEdge. Tesla Motors trying to buy SolarCity, which would logically means the companies would use DemandLogic. Not only would SolarEdge lose a major partner, the power electronics or inverters are rarely a driver when it comes to sales of solar power systems today.

When most customers go solar, they choose a solar installer or maybe a solar panel manufacturer. The inverter, which simply transforms the direct current supplied by the solar panels into the alternating current the grid uses, is an afterthought. Why would a customer seek out a SolarEdge inverter installer to get its new control system rather than choosing the installer they'll actually be interacting with to build the rest of their solar-plus-storage system? 

Customers aren't likely to demand a SolarEdge product, and in the future, partners may be leaning on the company less. SolarEdge has little bargaining power with large solar installers, who are developing their own fully integrated solar-plus-storage systems. SolarCity and SunPower are leading that charge, and could render most of the company's components obsolete or commodities in the next few years.

How SolarEdge hopes the market plays out

What could work in SolarEdge's favor are changes that have come to the solar market recently. Regional solar installers are gaining market share, and for the most part they'll be piecing together components from different suppliers rather than installing the type of fully integrated systems that SolarCity and SunPower are selling.

This could give SolarEdge, Enphase, and inverter supplier SMA a path to the market without owning the sales channel. But they'll still be reliant on installers choosing their product and customers wanting their control system. And with only one or two pieces of the value chain I'm not sure they can command business for long.

Can SolarEdge branch out?

Component suppliers haven't had a long history of value creation for shareholders in the solar industry because they rise and fall quickly as installers change their preferences. And with many companies trying to vertically integrate and/or design fully engineered solar systems rather than piece them together, I don't know where SolarEdge fits in the market.

It's a good idea for the company move into energy storage and control systems, but will it add to earnings long-term? That remains to be seen.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.