David Benjamin: Great. Thanks very much.
Operator: Thank you. And our next question comes from Austin Moeller with Canaccord. Please go ahead.
Austin Moeller: Hi, good afternoon. Just my first question here, what does the market or growth opportunity look like for home battery sales on new installations versus upgrades of existing solar arrays that are already installed on homes?
Badri Kothandaraman: Yeah, Raghu will take it.
Raghu Belur: Sure. I think both opportunities are equally valuable. Again, it depends on the geography. So, if you’re in California, for example, all new homes must have solar, and you are going to be part of NEM 3 install, so you obviously need to have batteries, because if you did a solar-only install in NEM 3, your bill offset is going to be at about 55%. You add 10 kilowatt hours of NEM 3 grid-tied battery, your bill offset could be as high as 80%-85%. So, I think it makes complete sense to go ahead and add a battery in that case. In the retrofit case in California, if you’re in a NEM 2 environment, not a lot of incentive to go ahead and add battery, at least for bill offset, because you already get that with NEM 2 where in that case basically the grid acts like your battery.
The only other use case for battery in that case would be if you want to do it for resiliency or backup purposes. In other geographies, outside of California, the case for batteries would be — again, you’re seeing more and more of these what are called VPP programs or grid services programs, and so people may come in and retrofit a battery on their system and avail themselves of whatever the utility provides in terms of incentives, whether that is an upfront dollar per kilowatt hour incentive for adding a battery or an ongoing incentive for participation in the VPP program. Very similar situation in Europe as well. If you, for example, look at the Netherlands, obviously, that’s a net metering market, but there is a push for retrofitting batteries there because just given the penetration level of solar there, which is about 28%, you do get penalized for uncontrolled export of solar.
So, it makes sense to move towards what’s called self-consumption. And the way you do that is by adding a battery and then managing that solar plus battery system through software, especially by participating in what’s called a dynamic tariff program. You also have obviously VPP that same thing applies to Germany and other countries in Europe as well.
Austin Moeller: Great. And just to follow-up, what do you see as that key growth driver in demand for Europe and Germany in particular? Is it primarily current utility rates? And do you see changes to tax credits in countries like Italy as a potential impediment to that?
Raghu Belur: Yeah. So usually, you’re seeing more and more, particularly in Europe, I refer to it as feed-in tariff inversion, wherein the buy rate is significantly higher than sell rate. So, the amount of what you get paid for feeding energy into the grid is significantly lower than retail cost of energy. So, it makes no economic sense to export even a single electron into the grid. So that’s the driver. It is self-consumption. Layered on top of that is if you participate in supporting the grid through a VPP program, you get paid additional monies. So, it’s all a driver towards better ROI. But it goes beyond that. It goes beyond solar plus batteries, because now you’re seeing in Europe you’re adding EV chargers and heat pumps, and those are additional steerable assets that are sitting behind the meter.
And if you have a very sophisticated home energy management system, which like we do with all the AI and ML work that we are doing, you can really do some very, very fine optimization and deliver the best economics for the homeowner, a combination of solar, battery, EV charger, and heat pump. For that matter, any combination thereof. So, you’re going to see, Italy included, all of these markets in Europe moving towards a whole energy management system with all of these assets. Now imagine what happens a year or two from now when EVs become fully bidirectional, you get yet another powerful asset that’s sitting behind the meter that you can use to optimize your consumption and optimize your bill.
Operator: Thank you. And our next question today comes from Dylan Nassano with Wolfe Research. Please go ahead.
Dylan Nassano: Yeah, hi. Thanks for running a little long to fit me in here. Just a quick one from me on buyback. So, it looks like share repurchases in the quarter more or less matched up with your free cash flow generation, whereas in 4Q I think you bought back a little more than you actually generated. So, just curious, how are you thinking about the attractiveness of repurchases at these levels? And how should we think about your cash allocation as demand hopefully ramps back up from here? Thanks.
Badri Kothandaraman: Yeah, I’ll add some color and then Mandy can add more. We did approximately a similar amount in both quarters, but I’ll explain the nuance. In Q4, we did — we bought back shares for $100 million. While in Q1 what we did was we did a combination, which is we bought back shares for about $40 million-odd, and we — some of our stock options, which basically were actually vesting, those stock options, essentially, Mandy didn’t allow them to dilute the market. So, we basically spent about $60 million as anti-dilution there. So, in a sense, we spent the same money, $100 million; $40 million for buying back shares out of the market, $60 million for preventing shares into the market. We did that and we continue to — I mean, you should expect us to continue to do a similar amount as long as the stock is attractive, which it is right now.
Dylan Nassano: Okay. Fair enough. Thank you for clarifying.
Operator: Thank you. And our next question comes from Dushyant Ailani with Jefferies. Please go ahead.
Dushyant Ailani: Hi, thank you for taking my question. Just one on, how much NEM 2.0 backlog is remaining with the installers? I think you talked about 50% being NEM 3.0. So, going into 2Q, how can we expect the backlog cadence to dwindle down for NEM 2.0?
Badri Kothandaraman: Yeah, I mean that’s an interesting question. All our conversations with installers — there was one installer who had a backlog of nine months, and there are installers with a backlog of three months. So, we don’t really know what the answer is. Like you, we were surprised that the number is still 50%, NEM 2. But installers are learning on NEM 3 rapidly. They are depleting through their NEM 2 backlog. I’m not sure. I can’t forecast the number. But I’m sure that within six months, it will dwindle down.
Dushyant Ailani: Okay. Thank you.
Operator: Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Badri Kothandaraman for any closing remarks.
Badri Kothandaraman: Yeah, thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again next quarter. Bye.
Operator: Thank you. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.
