The solar electronics/balance-of-system startup bubble is currently in full-inflation mode, en route to bursting. 

A few weeks ago, Greentech Media suggested that one of the themes of this year's Solar Power International show in Los Angeles, CA would be Balance of System products -- specifically, microinverters and DC-to-DC PV panel optimizers.  Almost as if on cue, the editorial staff here was deluged with press releases and announcements from the leaders and followers in this overcrowded market sector.

We covered DC-to-DC optimizers:

And microinverters:

We've covered parallel DC player, eIQ and others like microinverter manufacturers Direct Grid and Accurate Solar in the past. There are others in the field, some of whom we'll be interviewing this week. 

This sub-segment of the inverter market (let's call it distributed electronics) is only a small piece of the multi-billion dollar inverter market, and as such, is now officially overcrowded.  Most of these firms are venture-capital funded.  Keep in mind that venture capitalists expect their portfolio firms to be the leader, or in a worst-case scenario, the number-two player in the market. They don't invest to be the fifth source of a rapidly commoditizing product.

The Good News

A few years ago, I had a casual conversation with the CTO and founder of one of the world's premier high-efficiency solar cell manufacturers.  He was not convinced that distributed electronics architectures had a convincing value proposition.  In his view, panel mismatch was a minimal issue and the price for these solutions was too high.  I had similar conversations with a number of leading installers who were unwilling to take what they viewed as an unreasonable reliability risk.  I spoke with PPA providers and developers that wanted nothing to do with this technology.

Times have changed.  That CTO's company is now helping to establish a standards group for this technology and some solar installers are providing testimonials about the virtues of these new products.  The attitudes of the leading module manufacturers have turned around and they're ready to integrate these products, to varying degrees, into their own product line.  And financiers have changed their attitudes, as well -- Enphase just announced that its microinverters will power 4.5 megawatts of solar projects developed by Main Street Power and financed by Morgan Stanley, a leading financier.

More good news: SunTech has announced working relationships with half a dozen of these distributed electronics firms.

Now for the Bad News

SunTech has announced working relationships with half a dozen of these firms.  Yes, that's bad news as well.  If you're a vendor with the opportunity to partner with Suntech amongst four other competitors, what leverage do you have in negotiating price with this 1.5-gigawatt behemoth?

If you're integrating a component into a solar module, you're now roughly akin to a solar backsheet or a junction box.  Try to imagine how solar vendors treat those suppliers.

The Next Act in This Drama

I spoke with Ron Van Dell, the CEO of microinverter startup, SolarBridge.  His firm has announced working relationships with module vendors SunPower  (NASDAQ: SPWRA, SPWRB) and Kyocera, with more announcements to come.  He sees the trends in residential rooftops as the "switch from DC to AC" and the "switch to integrated electronics of some sort."

He sees it as a "pretty big switch," with "new roles in the food chain."  If the microinverter undergoes true integration into the panel, Van Dell believes that "the market has to move towards an integrated warranty from a single source."

Van Dell also spoke of the new special interest group (SIG), PV Dock (founding members SolarBridge, Tigo and SunPower), for power conversion manufacturers. The group is looking to set open standards for interoperability.  Van Dell acknowledges that this is going to open up "some competitive intensity."  

In their words, "Members of this new SIG will create and drive standards between the rapidly evolving DPCS field, which includes DC/AC microinverters and DC/DC system optimizers, and module manufacturers.  In addition, the group will establish a common industry platform for advanced electronics integration, including a plug-and-play criterion for mechanical connections and communications protocols between the solar panels and distributed control systems.  A compatibility roadmap and implementation plan that addresses existing complexities, such as lowering costs and ease of field serviceability, will also be developed."

Van Dell called the docking procedure "an invasive procedure."

Bottom Line

The concept of distributed electronics, whether DC or AC, has been accepted in the marketplace.  The innovators, entrepreneurs and their investors have essentially created a new market sector.  It's an example of entrepreneurs and investors in Silicon Valley and elsewhere doing what they do best.

But now that the concept has broken through, we have a market developing multiple sources with soon-to-be standardized attributes.  Critically, the idea of an AC module subsumes the electronic device's brand and makes it a support component and no longer a stand-alone product.  And if the performance and reliability meet spec, then the differentiator becomes price more than anything else -- with vendors at the mercy of the solar module manufacturers.

In other words, these products are undergoing rapid commoditization and there's only room for a few VC-funded startups in the market.  There are some parallels with the centralized inverter market, but these distributed players are even more vulnerable as they lose their stand-alone device status and become integrated into the module.

The race is on now to scale large, win print position on as many designs as possible, and buckle down for a bit of a price war.  The end result is good for the consumer but will be painful -- and likely fatal -- for all but a few of the players in this market.