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Solar Energy Provides Another Cautionary Tale

By Travis Hoium - Jul 20, 2019 at 4:31PM

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ABB is giving up on solar energy and taking a big hit to do it.

One of the biggest electricity infrastructure suppliers in the world is throwing up its hands and giving up on solar energy. ABB ( ABB 0.34% ) is unloading the solar inverter business, formerly known as Power-One, that it acquired in 2013 for $1.03 billion, which included $266 million in acquired cash. The company isn't just taking a loss on the deal, it's reportedly paying Fimer $470 million to take the business off its hands.

Very few companies have managed to generate long-term value in the solar industry, and one of the most volatile segments of the market has been the inverters that ABB was making. The devices that turn direct current (DC) to alternating current (AC) used in the electric system are a necessity in any solar project, but they've also been a very difficult business to be in. And that makes the segment a conundrum for solar energy investors.

Large solar installation in the desert.

Image source: Getty Images.

Why the inverter business has been a disaster

ABB isn't the only company that's struggled with inverters. KACO New Energy sold its central inverter business to OCI Power and its string inverter business to Siemens ( SIEGY -0.81% ) earlier this year. Schneider Electric ( SBGSF -0.05% ) said it's exiting the utility-scale solar inverter business in favor of a commercial and industrial platform it's building with Siemens. These are all big players in electric infrastructure, so their shifts in strategy are notable.

In the small-scale solar space, Power-One was once the biggest name in the solar business, only to be knocked off by companies like Enphase Energy ( ENPH -7.62% ) and SMA when they gained traction. Now they're both losing money as companies like Huawei enter the solar market.

Inverters have been a tough segment to keep up with as component preferences change and upstarts improve on existing technology. And there's really only one company that's managed to stay on top since it began.

The one bright spot

SolarEdge ( SEDG -3.62% ) has arguably been the most successful in generating value because it became a favorite power optimizer supplier. From there, it has branched into products like inverters and energy storage. Despite the fact that power optimizers are starting to slip in market share, the company has benefited from growth in inverter sales, which hit 131,000 units in the first quarter.

SEDG Revenue (TTM) Chart

SEDG Revenue (TTM) data by YCharts.

The company's success isn't going unnoticed, which is one of the problems with inverters. You can see above that Schneider and Siemens are teaming up to go after the commercial and industrial space. Enphase is partnered with SunPower ( SPWR -9.11% ) to provide integrated micro-inverters in the residential solar segment, which is one reason Enphase is winning market share back from SolarEdge.

The ebb and flow of the inverter market doesn't seem to favor any company for long, and even SolarEdge's success story of recent years may be starting to develop some cracks as power optimizer sales fall.

We can learn from ABB's mistake

ABB's acquisition of Power-One will cost the company somewhere in the neighborhood of $1.5 billion, but it provides some lessons for investors. One is that being a component supplier in the solar market is rarely a way to build long-term value. Installers, solar panel manufacturers, and end customers themselves change their preferences, and that can impact the supply chain all the way down to inverter manufacturers.

Bigger isn't always better in solar energy. Power-One thought that it would get a boost from ABB's size and connections in the power supply business, but that's not at all what happened. It began losing to more nimble, lower-cost suppliers, and it's often those scrappy upstarts that you want to bet on in the solar industry.

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.

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Stocks Mentioned

ABB Stock Quote
$35.42 (0.34%) $0.12
SolarEdge Technologies, Inc. Stock Quote
SolarEdge Technologies, Inc.
$307.00 (-3.62%) $-11.54
SunPower Corporation Stock Quote
SunPower Corporation
$24.44 (-9.11%) $-2.45
Siemens Aktiengesellschaft Stock Quote
Siemens Aktiengesellschaft
$83.04 (-0.81%) $0.68
Enphase Energy, Inc. Stock Quote
Enphase Energy, Inc.
$217.10 (-7.62%) $-17.90
Schneider Electric S.E. Stock Quote
Schneider Electric S.E.
$183.62 (-0.05%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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