Forecast for solar power: Sunny

Solar power has long been the Mercedes-Benz of the renewable energy industry: sleek, quiet, low-maintenance.

Yet like a Mercedes, solar energy is universally adored but prohibitively expensive for most people. A 4-kilowatt solar photovoltaic system costs about $34,000 without government rebates or tax breaks.

As a result, solar power accounts for well under 1% of U.S. electricity generation. Other alternative energy sources, such as wind, biomass and geothermal, are far more widely deployed.

The outlook for solar, though, is getting much brighter. A few dozen companies say advances in technology will let them halve the price of solar-panel installations in as little as three years. By 2014, solar-system prices will be competitive with conventional electricity when energy savings are figured in, Deutsche Bank db says. And that's without government incentives.

If that happens, solar panels would become common home and business appliances, says Brandon Owens of Cambridge Energy Research Associates.

Innovations — led by semiconductor firms and a new crop of "thin-film" solar makers — wring more power from sunlight, use less silicon to make panels and make factories more efficient.

Venture-capital firms pumped $264 million into solar companies in 2006, up from $64 million in 2004, research firm Clean Edge says. The start-ups also have benefited from $159 million in U.S. research grants this year, largesse from efforts to reduce power plants' global-warming emissions.

Sharp price swings

High costs of solar panels have been due to volatile silicon prices, low production volumes and high setup costs.

Solar panels generate electricity when photons in sunlight knock loose electrons in silicon — the same material used in PC chips. The silicon is sandwiched between two metal plates; electrons flow from one to the other.

Several years ago, SunPower, a unit of Cypress Semiconductor, cy realized the top metal plate was reflecting the sun's rays, cutting efficiency by reducing the percentage of sunlight converted to electricity. So the company decided to put both plates beneath the silicon. It now has an industry-high efficiency of 22% vs. an average of 16%, says analyst Dan Ries of Monness, Crespi Hardt & Co. That means fewer panels are needed to produce power, shaving installation costs and making systems more affordable for homes, which have smaller roofs than most commercial buildings.

SunPower, which says it will earn about $90 million on $740 million in sales this year, expects its prices to be competitive with grid power by 2012, says Vice President Julie Blunden.

Also poised to stir up the market is Applied Materials, amat the No. 1 producer of machines that make computer chips. It charged into the industry last year by paying $464 million for solar maker Applied Films. Now, it's transferring to solar the efficiencies it brought to flat-panel TV and laptop manufacturing. Its machines carve an ultra-thin solar cell into a giant, 55-square-foot sheet of glass to slash production and setup costs.

"We want to get demand going," says Applied CEO Mike Splinter.

Like wind power, solar energy is spotty, working at full capacity an average 20% to 30% of the time. Solar's big advantage is that it supplies the most electricity midday, when demand peaks. And it can be located at homes and businesses, reducing the need to build pollution-belching power plants and unsightly transmission lines.

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