Solar Energy

First Solar, based in Tempe, Ariz., was picked by China to build what promises to be the world's biggest solar-electricity plant: a Manhattan-size facility in Inner Mongolia providing 2 gigawatts of power, about twice the size of a large coal plant or average nuclear power station.

Photovoltaic cells that turn sunlight into electricity may play a potentially vital role in weaning the world from fossil fuels but the transition will take decades and the business metrics surrounding the solar-power industry currently are weak. After a period of rapid expansion, panel manufacturers today are reeling from a pronounced supply surplus, falling prices and stagnating sales. In 2009, industry revenue plunged by nearly 40% to about $25 billion from $40 billion the previous year, according to BankAmerica Merrill Lynch alternative-energy analyst Steven Milunovich. Solar-panel output far outstripped demand last year; manufacturers made 66% more product than they were able to sell, estimates research firm iSuppli located in El Segundo, Calif. Some analysts believe the dismal conditions will persist into 2011, setting up marginal players worldwide for failure.

The global glut has been building for a number of years as hundreds of solar cell and panel start-ups, attracted by a potential boom in alternative energy as oil prices climbed and by government solar-energy-subsidy programs expanded.  Industry profit margins, as high as 40% in 2008, have been devastated as a result, falling close to zero last year for many companies.

This burst in manufacturing capacity would have been tough to absorb even in the best of times, but the global recession has compounded the industry's growing pains as cash-starved customers shelved ambitious solar power plans. Another blow came early last year when Spain changed the way it subsidizes solar power projects. The country had been the world's biggest backer of "feed-in tariffs" that encourage the spread of green technology by requiring utilities to pay prices well above the commercial electricity rate for power generated by the sun. But a year ago, Spain slashed the amount of solar electricity eligible for such rates by about 80%, slamming manufacturers who had ramped up for Spanish growth. In 2008 the country accounted for 2,600 megawatts of the world's 5,362 megawatts of solar-electricity installations; last year it eked out 300 megawatts, according to iSuppli.

Spain's decline leaves Germany as the world's top market for solar electricity. Germany last year installed about 2,500 megawatts out of the world's 5,158.  Germany's Q-Cells, the world's  largest maker of photovoltaic cells, lost $1.4 billion through September, including the cost of axing 500 jobs in August.

The price war is even heightening trade tensions with China, home to roughly half of all solar manufacturers (four of the top 10 panel makers are Chinese, including No. 2 Suntech, according to iSuppli). In September, German solar-industry association Bundesverband Solarwirtschaft began investigating whether Chinese producers are dumping.

....solar panels still cannot compete with fossil fuels when it comes to generating electricity relatively cheaply. Even during periods of high oil prices, government subsidies are needed to encourage consumers and companies to install solar power, exposing the sector to sharp contractions when support is dramatically reduced, as happened in Spain in 2009 and could happen in Germany later this year.

Yet solar-panel companies are increasingly optimistic that, with technological advances and improvements in manufacturing efficiency, it won't be too long before solar power is equal to or cheaper than conventional energy sources  is reached, especially if oil prices remain high. .   First Solar and other manufacturers are improving on a type of solar-cell technology known as "thin film," in which an energy-generating substance is layered onto a glass, plastic or steel substrate. Thin-film cells are generally less energy-efficient than the crystalline variety but are potentially much cheaper to manufacture.

Observers say sales growth is rebounding as buyers respond to increasingly cost-effective solar power. Venture capital is starting to flow to the industry again after a severe slowdown, according to San Francisco research firm Cleantech Group.