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In a prior article I laid out conditions where solar panel investing would reap risk-adjusted returns. Thanks to data provided by the California Solar Initiative, I will revisit some of the assumptions in my earlier article with real world data.

Unfortunately, the results are terrible for would-be solar installers and companies in the solar industry. Stock investors should avoid the industry altogether since its photovoltaic panel systems are not economically viable without government subsidies.

The Basics of Installing a Photovoltaic Solar System

At the end of 2011, California's average cost per watt for a solar system ran roughly $6.75 per watt, which is much higher than the $1-2 per watt attributable to the solar cell itself. For example, First Solar (NASDAQ:FSLR) has announced that its manufacturing costs have reached one dollar per one watt cell. Since photovoltaic (PV) panels have dropped in price over the past decade, PV cells are a minority of the total cost of installation. The remaining costs are labor for installation, the cost of wiring, and the cost of an inverter. Even if solar panel prices do drop to $1 per watt, retail solar investors will still pay about $5.75 per watt.

Depending on your geography, PV solar panels enjoy 6 to 3.5 hour equivalents of sunlight per day. This means that on average a 1 watt cell will produce 6 watt-hours per day to 3.5 watt-hours per day. On an annual basis, a one kW cell could produce 2190 kWh to 1280 kWh. These are idealized estimates, however.

How have solar installations fared in real life? Using the California Solar Initiative data for systems which applied for Performance Based Incentives, we can evaluate how many kWh of electricity were produced:

kWh produced each calendar month by 1 kW of nameplate capacity

A solar system with 1 kW listed on its nameplate produced 1630 kWh per year on average according to this data. This is a bit disappointing consider that these data hail from fairly new PV solar panels located in sunny California.

California consumers can receive incentives as high as peak $0.15 per kilowatt-hour rates. (Since there are 1000 watts in a kilowatt, the payout per watt-hour is $0.00015 per watt-hour.) It is very hard to reap meaningful savings for such a cheap commodity: a 1 watt solar cell has historically generated 1.630 kWh, and would save $0.244 per year for each kilowatt listed on a unit's nameplate.

Bear in mind that most of these data from the California Solar Initiative were collected from newer installations, which are not yet five years old. Would-be solar purchasers must anticipate degradation in their systems.

Fortunately, these data can provide estimates of degradation once seasonal fluctuations are removed from the dataset. Monthly averages reflect seasonality, and these values were used to seasonally adjust monthly kWh production values per nameplate kW:

Monthly Degredation
(Click to enlarge)

The output of a solar cell is subject to degradation. Based on data from the California Solar Initiative, Photovoltaic output has dropped roughly 0.15% per month or 1.84% per year.

The Finance of Photovoltaics

The payouts can be modeled based on actual data using degradation rates extrapolated many years into the future. For subsequent years the payoff of the investment depends on electric rates and the decline of the solar cell's output over time. After 30 years, the $6.75 watt would have paid back only $5.56. Thus, we must consider an incredibly long 40-year timeframe. (For homeownership-based investments a 40-year duration is a stretch.) The resulting internal rate of return (IRR) for installing the average photovoltaic system has been a tiny 0.275%.

These cash flows are horrible for a risky investment-and no, solar cells are not risk-free. Solar cell payoffs can be interrupted by acts of God, theft, the vacancy of their installed property, or many other causes that are not covered by a manufacturer warranty. SunPower (NASDAQ:SPWR) found many unforeseeable causes for power interruptions in their test fleet of solar cells including ant infestations of inverters and bullet holes.

Many solar cells are guaranteed by their manufacturers to maintain 80% of their quoted output for 25 years. This might serve as an assurance against randomly damaged units. However, if there is a systematic degradation that triggers warranties in large numbers of solar systems, this becomes a question of solvency. A company which has made promises it cannot keep could go bankrupt, and consumers with excessively degraded solar cells might find that bankrupt firms might not make good on their promises.

The myriad destructive forces which confront residential solar installations are similar to those which face residential real estate, and for that reason it is sensible to compare the returns of solar systems to real estate. A low-end return in a survey of real estate investment trust (REIT returns) was found to be about 3% in a prior article comparing real estate and REIT returns. If 3% is used as a (generously low) required rate of return, the net present value of installing a 1 watt solar cell is -$2.36. The investment is clearly not worth the risk.

Year

Output Wh

Incentive ($)

PV

1

1661

$0.249

$0.242

2

1630

$0.245

$0.230

3

1600

$0.240

$0.220

4

1571

$0.236

$0.209

5

1542

$0.231

$0.199

6

1513

$0.227

$0.190

7

1485

$0.223

$0.181

8

1458

$0.219

$0.173

9

1431

$0.215

$0.165

10

1405

$0.211

$0.157

11

1379

$0.207

$0.149

12

1353

$0.203

$0.142

13

1328

$0.199

$0.136

14

1304

$0.196

$0.129

15

1280

$0.192

$0.123

16

1256

$0.188

$0.117

17

1233

$0.185

$0.112

18

1210

$0.182

$0.107

19

1188

$0.178

$0.102

20

1166

$0.175

$0.097

21

1145

$0.172

$0.092

22

1124

$0.169

$0.088

23

1103

$0.165

$0.084

24

1083

$0.162

$0.080

25

1063

$0.159

$0.076

26

1043

$0.156

$0.073

27

1024

$0.154

$0.069

28

1005

$0.151

$0.066

29

986

$0.148

$0.063

30

968

$0.145

$0.060

31

950

$0.143

$0.057

32

933

$0.140

$0.054

33

916

$0.137

$0.052

34

899

$0.135

$0.049

35

882

$0.132

$0.047

36

866

$0.130

$0.045

37

850

$0.127

$0.043

38

834

$0.125

$0.041

39

819

$0.123

$0.039

40

804

$0.121

$0.037

Total

47291

$7.094

$4.394

Conclusions for Investors in Solar systems and Solar Companies

Retail solar installations require more strategy to be sensible investments to offset standard power bills. Investors might consider do-it-yourself installation or other clever strategies to reduce costs. However, earning an economic return on a residential solar installation would be the exception, not the rule.

Based on the performance of their installations, solar stocks are not recommendable as long-only investments. Investors should avoid First Solar , SunPower, Trina Solar (NYSE:TSL), Yingli Green Energy (NYSE:YGE), Suntech Power Holdings (NYSE:STP), LDK Solar Power (NYSE:LDK), and Canadian Solar (NASDAQ:CSIQ). Each of these firms had products whose performance featured in the California Solar Initiative data. Though some of their kWh/nameplate performance bested others, none of their performances could justify an unhedged long position. Investors should scrutinize solar industry firms which cannot produce cost-saving products for retail customers.

Additional research will investigate which "best of breed" stocks could be used in a long-short, solar-neutral investment strategy.

Source: Burned By Solar