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 (SPWR 2.25%). 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 (FSLR 2.70%) 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 (CSIQ -0.57%) ELPS module datasheet the company advertises a 21.1% efficient cell but the most efficient module is 16.5% efficient.

Suntech Power (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.