2 Things Every Solar Investor Needs to Know

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One of my missions in following the solar industry is to help educate investors about the industry and inform them about how they should look at solar investments. In this fast moving industry it's difficult to stay on top of all of the changes and the key factors we should be watching.

Today, I want to look at two concepts that are commonly misunderstood, but are key to investing wisely in the industry.

Cost per watt vs. cost per kW-hr
One of the misconceptions of many casual industry observers is that cost per watt is the number that matters most. Cost per watt for Company A is lower than the cost per watt of Company B, so they must be better, right? That statement may be true, but it's only meaningful when you put the numbers into context.

The number that really maters in solar is cost per kW-hr because a kW-hr is a measure of the energy produced by solar and it's the unit of measure we use to pay for electrical energy. Cost per watt can be a proxy for cost per kW-hr but they aren't the same thing.

To demonstrate the difference, I have three example project costs below. I've laid out systems of the same physical size built with panels that have very different efficiency. The 10% efficient module is a proxy for thin-film, 15% a proxy for Chinese panels, and 20% a proxy for high-efficiency modules like SunPower's (Nasdaq: SPWR  ) . I've used the 15% efficiency case as my baseline and used a total cost per watt of $4 (below the national average but in line with costs in more mature markets) and assumed that a total of half of that cost is variable in other scenarios. Some of the variable cost comes from the panel itself, some from other parts. The fixed costs would be things like permitting, labor, and other costs that would vary little in this example.


10% Efficient Module

15% Efficient Module

20% Efficient Module

System Size

2 kW

3 kW

4 kW

Module Cost per Watt




Total Module Cost




Variable BOS Cost




Fixed BOS Cost




Total Installation Cost




Annual kW-hrs




Cost per kW-hr (assuming 8% ROI)

24.9 cents

20.3 cents

19.0 cents

As you can see, using these assumptions the most efficient module actually leads to the lowest cost per kW-hr even though it has by far the highest cost per watt.

This is why First Solar has struggled mightily despite having the lowest cost per watt. It's one of the reasons the company may have to change its strategy, a risk I detail in our in-depth report on the company. Click here for more details about this report.

Cost per watt and cost per kW-hr are clearly not equal. The model above is only an example and the numbers will change based on a number of factors around the world, but it's clear that understanding efficiency and balance of system costs are just as important as cost per watt.

Cell efficiency isn't module efficiency
One of the most common mistakes people make when looking at solar products is not understanding the difference between cell and module efficiency. Companies like to advertise cell efficiency in press releases because it's higher than module efficiency and investors often make apples to oranges comparisons as a result. Even a company's own efficiency pronouncements and production can vary wildly.

SunPower is touting its Maxeon cell technology, which  supposedly can make a 24% efficient cell. Right now, the company's datasheets tell us that 22.5% cell efficiency and 20.1% module efficiency are the best modules in production.

First Solar (Nasdaq: FSLR  ) said a year ago that it had made a 17.3% efficient CdTe solar cell. Six months ago it translated the technology to a 14.4% efficient module. But look at the company's average module efficiency last quarter and it only reached 12.6%.

On Canadian Solar's (Nasdaq: CSIQ  ) ELPS module datasheet the company advertises a 21.1% efficient cell but the most efficient module is 16.5% efficient.

Suntech Power (NYSE: STP  ) and Trina Solar (NYSE: TSL  ) are also touting cells that are 20% efficient or more but don't make modules that are anywhere near that efficient.

As you can see, no matter what company you're talking about cell efficiency and module efficiency don't line up. What we need to do is talk about module efficiency, which is comparable (although not quite equal) across all solar modules.

What's next?
The other big differentiator in solar is the balance sheet. I'll be back on Thursday to discuss why the balance sheet is so important and who stands out in the industry.

Fool contributor Travis Hoium owns shares of SunPower in both personal and managed accounts. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (22) | Recommend This Article (60)

Comments from our Foolish Readers

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  • Report this Comment On October 09, 2012, at 6:04 PM, thedelias wrote:

    I'm confused by this article. A watt is a measure of power. A watt-hour is a measure of energy. The former is a rate of energy use or production, the latter is a quantity of energy. (It is simple physics.) Thus, a 15-watt bulb operating for one hour would use 15 watt-hours of electricity. We pay for electricity based on the number of watt-hours we use.

  • Report this Comment On October 09, 2012, at 6:10 PM, dcorley wrote:

    BOS is ? (Apparently from Google- balance of system.)

    WTF (You probably know what that is.)

    FT (f... that).

    Because I'm supposed to be smart, but more importantly, very clever building things cheeeep, it would be interesting to see the real costs.

    Is labor $200 an hour?

    In California where my last PG&E bill had 47 cent kW hours, if I would have stayed there, I would have installed a 10 KW system on my roof.

  • Report this Comment On October 09, 2012, at 7:30 PM, pixal wrote:

    You have an informed article, except you seem to have missed one of the key features of solar power...the subsidies. I suggest in your next article you investigate how much of the taxpayer's money is used to subsidize both the solar producers and the solar users. Unless things have recently changed dramatically, you'll probably find solar has one of the highest total costs (with or without subsidies) of any generation technology. I suggest you calculate the cost per kilowatthour that includes both the seller and buyer subsidies paid for by taxpayers. By the way, you may want to look at how long solar has been receiving subsidies in order to make it an economic source.

    Solar has some wonderful and economic unsubsidized applications, but they are very limited.

    As an investor, I want to invest in sources of power that are competitive. If the politicians decide we can no longer afford subsidies, then economic generation will still prevail.

  • Report this Comment On October 09, 2012, at 7:43 PM, neelvk wrote:

    Solar-based electricity can really help us in the long run. And in order to make the technology viable faster, we have decided to provide subsidies. Just as we have invested heavily in our military prowess to guarantee the flow of oil (another subsidy).

  • Report this Comment On October 09, 2012, at 7:54 PM, ladevinie wrote:

    I don't think this is a very insightful analysis.

    The "variable BOS" cost scales linearly with the number of Kw. If you bought 4 Kw of the 10% system, its total cost, and cost per kw/h, would be more advantageous than the 20% system at the same output.

  • Report this Comment On October 09, 2012, at 9:15 PM, truman1987 wrote:

    All energy is subsidized. If you added up fossil fuel tax breaks, the fact that pollutants are dumped in the air free of charge, health care for illnesses caused by pollution are all borne by taxpayers then you would see that solar competes very well.

    I also like the fact that with solar we don't need to beg our enemies and fund terrorist groups to get our energy. I'll pay solar subsidies as long as it takes. Oil weakens the US. Solar strengthens it.

  • Report this Comment On October 10, 2012, at 12:16 AM, kthor wrote:

    Obama need to subsidized my broker fees!

  • Report this Comment On October 10, 2012, at 5:38 AM, Samadd wrote:

    I believe BOS stands for building on structure or some such thing and is the same for all systems discussed because the size has been kept constant. While it would be useful to see more details of costs if you are thjinking of installing solar you must remember that the article is about investing in the companies who make solar . The point is to look at cost per KwH rather than just Kilowatts. If you want to install then get quotes from installers and look up subsidies yourselves. The installer will give you a cost based on Kw peak output rather than on size. Size only matters if you are short of roof space.

  • Report this Comment On October 10, 2012, at 1:07 PM, TMFDarwood11 wrote:

    Good article.

    I assumed the "cost per watt" was the cost to the purchaser for one watt's worth of solar panel.

    I'd suggest the author send a copy of the article to the U.S. Department of Energy and to the Obama administration.

  • Report this Comment On October 10, 2012, at 1:36 PM, StopPrintinMoney wrote:

    one word for ya'll - SOLYNDRA

    The sucker couldn't survive even with $.5 bill injection.

  • Report this Comment On October 10, 2012, at 1:44 PM, SailingDude wrote:

    BOS is Balance of System and generally includes the cost of everything except the PV modules. Some people also pull the inverter cost out of BOS and list it separately.

    Keep in mind that the Watt that is used in $/W is almost always the PV module output under standard test conditions (STC) which while great for comparing modules it is not an indicator of the module output under real world conditions. So a 4kW STC PV system should not be expected to produce 4kW of power.

    The $/W is widely used because the W value is based on the type and number of modules. This is a pretty easy to calculate value. The kWhr of energy produced by a PV system is variable and depends on factors related to the site and the weather. That makes it hard to compare the cost of systems and hard to compare the cost of different installers to install the same PV system.

    As an example, you can get a 10kW PV system installed for $4/W on a roof of a building with a clear view of the sky or in a cave. It's the same system for the same price but the one in the cave will not produce any energy. But if all you are looking at is $/W installed they will both look the same.

  • Report this Comment On October 10, 2012, at 3:29 PM, TMFFlushDraw wrote:


    I've covered Solyndra in the past. Yes, it was a dumb use of taxpayer money. The technology was not competitive and was a longshot to begin with.

    However, Solyndra is not indicative of the health of the industry, ie. the cost to install solar for consumers or utilities. A company's health is something different entirely.


    You're correct that a million factors go into how many kW-hrs are actually produced by any installation. Far too many for me to cover here.

    My table above is a very simplified version that was used to make a point that $/watt and $/kW-hr are not the same, something that isn't well understood.

    Thanks for the great comments everyone,

    Travis Hoium

  • Report this Comment On October 10, 2012, at 7:00 PM, frankwindes wrote:

    Useful information. However, I read somewhere that thin film cells, such as First Solar makes, generate energy at a lower incident light level than the crystal cells, meaning that they would start producing earlier in the day and end later in the day. If so, the amount of energy generated would be greater than determined by a simple cell efficiency calculation.

  • Report this Comment On October 12, 2012, at 12:33 PM, theQsWorld wrote:

    So here's a question. Can someone buy solar cells, have them installed and sell the energy produced back to the grid as an enterprise for profit?

  • Report this Comment On October 12, 2012, at 12:57 PM, prof41 wrote:

    As ladivinie notes, the analysis is flawed. Double 10% efficient module from 2kW to 4kW and it has lower cost than the 4kW 40% system. What is missing in the computation of annual kWhr is the efficiency factor. Both the 2kW and 4kW systems have exactly the same efficiency. Each kW in both systems produces 1,577 kWhr per year.

    Furthermore, to properly compare two systems you need to use the same annual kWhr for each. Even with proper computation and a fixed efficiency, the larger the system the more efficient--lower cost/kWhr--it will be due to the fixed cost.

  • Report this Comment On October 12, 2012, at 1:18 PM, boogaloog wrote:


    If you double the size of the 10% 2kW system, you also need to (roughly) double the cost of that system. So the cost is now $19,600 compared to $15000 for the 20% system.

    Again, the point of the article was to note that anyone looking at a system needs to UNDERSTAND all the information. The point was not "you should buy this system".

  • Report this Comment On October 12, 2012, at 1:48 PM, TMFFlushDraw wrote:


    The basis for the comparison was three systems with generally the same physical size. You could double the 10% efficient system, but you would also need to double the size of your roof.

    @boogaloog is correct that some (not all) costs would also double if the physical size of the system doubled. This was an illustration that cost per watt does not equal cost per kW-hr, not an analysis that will hold true in every case in every location everywhere.

    As @frankwindies says, thin-film has advantages in low-light, which makes the calculation even more complicated. The table above is an oversimplified example, but I hope it shows that investors and installers need to understand more than cost per watt.

    Thanks for the great comments and emails everyone.

    Fool on,

    Travis Hoium

  • Report this Comment On October 12, 2012, at 2:07 PM, geobabe54 wrote:

    @ Qsolar2012, if you mean can you sell the electricity generated back to the utility (or get a credit for future energy needs), the answer is yes. If you are thinking of a strictly for-profit venture, you may have to check with the utility and/ior state regulations.

  • Report this Comment On October 12, 2012, at 3:31 PM, theQsWorld wrote:


    Thank you for the comment. Just starting to look into solar. Asking lots of questions every little bit of info helps. Thanks again.

  • Report this Comment On October 12, 2012, at 8:39 PM, patf1024 wrote:

    I already understood that one needs to know cost per kWh and not cost/W.

    But I'm trying to understand these particular calculations and why the most expensive module works out to the lowest cost/kWh. How did you arrive at the total Kwh for each efficiency? What for example was your assumption for how many hours/day?

  • Report this Comment On October 13, 2012, at 2:59 AM, vangary wrote:

    One number (or two or...) does not tell the consumer the value of the panel. Watts and Watt-hours/panel are useless for computing value. The spec sheet efficiency is measured with the panel directly facing the sun. In the real world of low cost systems, the sun is rarely on the panels axis (perhaps twice a year for a few seconds).. More valuable numbers are the total kWh per day based on location, date, and mounting angles, for one calendar year.

    Even with Sun tracking systems, the insolation to the site varies continuously due to the amount of atmosphere and pollution in the path. When the sun is low, solar energy passes though more atmosphere and looses energy. The energy lost varies with the light wavelength, so some panels will be more affected than others. This full-day performance variation is huge and should be requirred information for the consumer.

    Panel sales literature must analyze performace effects of both off axis performance and atmosheric losses.

  • Report this Comment On October 13, 2012, at 10:41 AM, juanslayton wrote:

    A couple of years ago we paid about $9 per watt for a 2KW Sunpower installation on our home in Azusa CA. This went on line in June of last year. In the following 16 months it has produced as much power as we have used, plus almost 200KWH extra.

    The numbers looked good enough that I just sprung for a c. 4KW installation on my mother's home in Sierra Vista, AZ. This cost me almost the same as the earlier 2KW installation, which I think reflects the rapidly declining cost of the panels. The AZ installation very closely matches the high efficiency example that you use in the article. We anticipate that the output will be significantly higher than your example (AZ is a favorable location), and the local cost of conventional power is significantly less than you assume in the example.

    In a few months we should have some hard numbers, but based on the performance of the Azusa installation, I expect a fair immediate return on investment even without including the considerable tax and utility incentives. One reason: alternative investments generally are taxable, while utility bill savings are (to my knowledge) not.

    I recently bought a few shares of Sun Power....

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