The cost of lithium-ion batteries continues to fall. The cost of solar energy continues to decline. That's beginning to make the long-awaited pairing of solar and storage a competitive market option.

On a rated-power basis, the United States was on pace to install 338 megawatts (MW) of energy storage in 2018, according to analysts at Wood Mackenzie and the Energy Storage Association. That would mark a 57% increase from the previous year, but the trend is just getting started. Projections call for energy storage installations of 660 MW in 2019 and 1,700 MW in 2020. Those estimates could prove to be too low, as the country's backlog of projects hit over 33,000 MW last year. 

In other words, the battery market finally broke out in 2018 and appears here to stay. Individual investors looking to tap into the long-term growth will want to get more familiar with the energy storage efforts underway at Tesla (NASDAQ:TSLA) and Enphase Energy (NASDAQ:ENPH).

A green neon light in the shape of a battery.

Image source: Getty Images.

Tesla's "other" business

Check out the latest Tesla earnings call transcript.

Tesla made a blunt admission in its most recent quarterly filing with the SEC, simply stating that "demand for our energy storage products remains greater than our current production capacity." That's a good indicator that investors eyeing opportunities in batteries are on the right track. 

Demand is outstripping production capacity because the company's massive manufacturing facility, Gigafactory 1, is still ramping to full nameplate capacity. That hasn't stopped Tesla from building an impressive business selling energy storage products to both residential customers (the Powerwall) and commercial, industrial, and utility-scale customers (the Powerpack). The former represent more of a niche market at the moment, but the latter have some impressive near-term growth potential, as noted above.

Unfortunately, the company reports energy storage product performance in a segment that includes the sale of solar energy products, which means investors cannot gauge the growth in batteries alone. However, the business did report 358 megawatt-hours (MWh) of energy storage product sales and 523 MW of solar product sales in 2017. Bearing that in mind, here's how the energy generation (solar) and storage (batteries) segment performed in the first nine months of 2018.  

Metric

First Nine Months 2018

First Nine Months 2017

Change (YOY)

Revenue

$1.18 billion

$818 million

45%

Cost of revenue

$1.04 billion

$592 million

75%

Gross profit

$147 million

$226 million

(35%)

Gross margin

12%

28%

(57%)

Data sources: SEC filings. YOY = year over year.

The giant leap in cost of revenue in the most recent period was primarily due to a $72.5 million cost incurred for the South Australia battery project (for which Tesla received $72.5 million in revenue), deploying higher-priced solar systems, and higher solar energy system costs. That said, as battery installations grow and the company works its way through higher-priced inventory for its solar products, the segment should see its margins improve in future periods. The growth in energy storage might be the most important driver.

Case in point: Tesla has previously stated that Gigafactory 1 will have a total annual cell capacity of 50,000 MWh. If that supports battery systems for 500,000 vehicles per year, and the average vehicle carries an 85 kilowatt-hour (kWh) battery, then there would be 7,500 MWh of production capacity remaining for energy storage products. It sold just 358 MWh of energy storage units in 2017. 

Solar panels on a roof.

Image source: Getty Images.

Roll out the red carpet?

Check out the latest Enphase Energy earnings call transcript.

Enphase Energy is looking to join Tesla as a newly profitable business in the near future. The company finally found its footing in 2018 by ramping up sales and reducing costs for its microinverters, which are a crucial component in solar module systems. It helps that solar energy is booming in the United States right now.

The U.S. generated an estimated 95,189 gigawatt-hours of electricity from solar in the 12-month period ending October 2018, according to the U.S. Energy Information Administration. That's a 101% increase from solar generation in 2016 and put the energy source on pace to deliver about 2.5% of the nation's total electricity in 2018. 

Enphase Energy capitalized on the trend with a new agreement to supply microinverters to solar module manufacturer SunPower, a deal that should generate an extra $65 million in annual revenue at a gross margin of 34% by the end of this year. That will be enough for the company to begin delivering profitable operations -- and the timing couldn't be better.

An arrow hopping up shelves on a wall.

Image source: Getty Images.

That's because Enphase Energy is getting ready to throw some elbows in the highly competitive markets for energy management and energy storage systems. The company is set to launch its new Encharge AC Battery lineup, which will include residential energy storage products of 3.3 kWh, 10 kWh, and 13.2 kWh. It currently only sells a small 1.2 kWh battery and has installed only 27 MWh of products since they hit the market in late 2016, so the new portfolio has the potential to really shake things up. 

The energy storage market is still in its infancy

While energy storage is poised for a big future thanks to growth in intermittent power generation sources such as wind and solar, investors should remember that the market is still in its infancy. Businesses are still figuring out the best way to proceed and how to optimize products and services to deliver value to customers. Tesla has found success targeting the well-worn pain points for commercial and utility-scale customers relying on solar energy installations, while Enphase Energy is looking to jump into the footrace this year with a new product lineup targeting residential customers. That makes these two of the best-positioned battery stocks in 2019.

Just remember that Tesla's bread and butter will remain in automobiles, while Enphase Energy is targeting a notoriously difficult market. Is residential energy storage ready for liftoff? Investors will soon find out.