The increased penetration of solar photovoltaic (PV) energy sources into electric grids has increased the need for accurate modeling and prediction of solar irradiance and power production. Existing modeling and prediction techniques focus on long-term low-resolution prediction over minutes to years. This paper examines the stochastic modeling and short-term high-resolution prediction of solar irradiance and PV power output. We propose a stochastic state-space model to characterize the behaviors of solar irradiance and PV power output. This prediction model is suitable for the development of optimal power controllers for PV sources. A filter-based expectation-maximization and Kalman filtering mechanism is employed to estimate the parameters and states in the state-space model. The mechanism results in a finite dimensional filter which only uses the first and second order statistics. The structure of the scheme contributes to a direct prediction of the solar irradiance and PV power output without any linearization process or simplifying assumptions of the signal’s model. This enables the system to accurately predict small as well as large fluctuations of the solar signals. The mechanism is recursive allowing the solar irradiance and PV power to be predicted online from measurements. The mechanism is tested using solar irradiance and PV power measurement data collected locally in our laboratory.