Solar stocks are back in vogue, starting the week scorching hot before taking a tumble yesterday. With the future of nuclear energy in question, it may just be the right time to take another look at the feasibility of solar. After all, it must be safer than nuclear power!

But before you go buying solar stocks at random make sure you understand the three most important words in solar.

1. Cost per watt
OK, that's already three words, but you get the point. This is the headline number observers like to look at but manufacturers seem scared of sharing. Cost per watt gets to the core of how efficiently a manufacturer can produce panels.

For manufacturers who don't explicitly state cost per watt we can use margins to approximate. For example, Suntech Power (NYSE: STP) has a higher cost per watt than Trina Solar (NYSE: TSL) based on similar efficiencies and lower margins at Suntech.

But approximating cost per watt can be tricky because not all manufacturers are created equal. In our example, Suntech produces 27.8% of its own wafers, whereas Trina Solar produces 62.5% of its own wafers. This leads to Suntech having lower margins, which the company is working hard to remedy. Ideally, manufacturers will share internal cost per watt like the three examples I have below so we know exactly where they stand.

2. Efficiency
This is where the rubber meets the road. We know how much a panel costs, but efficiency will help determine what other costs we are going to incur to install the panel. Below I have a peek into how efficiency and cost per watt changes from a low efficiency panel like First Solar (Nasdaq: FSLR) to SunPower's (Nasdaq: SPWRA) industry-leading efficiency. Since Chinese manufacturers make panels that are very similar, I have chosen Trina Solar to be a low-cost example (it's also one of the few Chinese manufacturers that explicitly states cost per watt).


Cost per watt

Highest efficiency panel

First Solar $0.75 11.6%
Trina Solar $1.16 16.4%
SunPower $1.71 19.5%

These aren't necessarily the actual cost of a company's highest efficiency panel since most manufacturers make multiple models, but it paints the picture of generally how cost per watt and efficiency are related.

Efficiency is important because it drives balance of system costs. These are the costs of installing a solar panel beyond the panel itself, including land, inverters, labor, wiring, etc. In general, higher efficiency leads to lower balance of system costs. To illustrate this, when comparing First Solar and SunPower we can approximate that a First Solar development will take 68% more land to install the same number of watts. Lower balance of system costs is how SunPower is able to compete with First Solar, whose cost per watt is much lower.

3. Bankability
The first two concepts are very easy to understand and can often times be observed directly on a company's website. But bankability is a different story.

Bankability measures a bank's (or other financing source's) willingness to finance a solar project based on the manufacturer's panels. If panels have a long history of performing up to expectations or projected models, bankability goes up. If the company is new or is trying some sort of new technology, there is higher risk and bankability goes down.

The safest thing an investor can do is stick with companies that have a long history of making panels and obtaining financing. SunPower may be at the top of that list after completing the first public bond issuance for a solar project. Generally, we can assume that manufacturers like JA Solar (Nasdaq: JASO), First Solar, Yingli Green Energy and others who have large capacities and a history in the industry are relatively safe.

But be leery of smaller manufacturers like Ascent Solar (Nasdaq: ASTI), which has a really cool technology but a pile of losses on its financial statement and no history of product sales.

A bad balance sheet can also affect bankability if creditors worry that warranties or service contracts won't be fulfilled. This Fool once even had hope for Evergreen Solar (Nasdaq: ESLR), which makes panels that should be less expensive than rivals but is now drowning under debt and trying to change its business model.

If you understand how these three concepts affect a company's position in the market you're well on your way to making well-informed solar investments.

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Fool contributor Travis Hoium is long First Solar and SunPower and has sold put options on JA Solar. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

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