LG has quietly built a sizable solar manufacturing business that has one of the largest market shares of the U.S. residential solar market. And module efficiencies of up to 21.1% mean the company can generate more electricity from each rooftop than most manufacturers. 

That makes LG a perfect partner of SolarEdge's (NASDAQ:SEDG) power optimizer and inverter solutions, which are leaders in the U.S. residential solar market. In an announcement on Tuesday, the companies unveiled plans to sell modules with SolarEdge power optimizers built in. This continues a trend of companies trying to add more components to the modules themselves, moving labor from the roof to the factory floor. This move could lay the groundwork for SolarEdge's strategy in the future

A solar installation on a rooftop with the sun in the background.

Image source: Getty Images.

Advancing module level power electronics

SolarEdge's deal with LG will help make the company's power optimizers and inverters a preferred solution for customers who want high-efficiency LG solar modules. In other industries, manufacturers who provide components to OEMs often attempt to be designed in early in the design process, and this is an analogous deal for SolarEdge, allowing the company's product to come pre-packaged with solar modules. 

The agreement also lays out a package for residential solar installers that includes SolarEdge's inverters to go with the modules with power optimizers. This could help expand SolarEdge's penetration into the inverter market by leveraging its strength in power optimizers. 

Is SolarEdge tying its fate to LG? 

One risk SolarEdge is taking is that it might push solar module manufacturers to find, or design, their own power optimizers or micro-inverters. Tesla (NASDAQ:TSLA) already has an inverter product in the Powerwall and is pushing to design everything in the solar value chain. SunPower (NASDAQ:SPWR) installs micro-inverters in its X-Series solar modules and has its own inverter product. These are turnkey solutions for installers, something LG is trying to replicate. 

The challenge is that LG still only supplies about 6% of the residential solar modules in the U.S., according to EnergySage. If Trina Solar or Canadian Solar decide they need to ship integrated power optimizers or micro-inverters, they may choose a different vendor or design their own, just to differentiate from LG. Why would they give SolarEdge the power to be the only standard component for solar modules? 

The big risk is being designed out

A deal with LG is notable because SolarEdge's biggest risk is being designed out of the residential solar market altogether. Tesla and SunPower are two of the manufacturers designing their own electronics and don't have a need for SolarEdge's products as a result. As they integrate product offerings with pre-engineered components, they'll be able to lower costs by assembling more components on the factory floor and increase the efficiency of crews installing their solar modules. 

SolarEdge needs to create partnerships that accomplish the same goal as Tesla or SunPower while staying independent. That may be easier said than done as module manufacturers grow in size and market power, branding their own products directly to customers. If module suppliers are what customers seek out, who is going to know what electronics are under the hood of their solar system?