Source: US Dept of Energy, 2008

This is the year that the cost of electricity from solar power will drop below the cost of grid-generated power.

The long-awaited fall in the cost of solar power is just around the corner. As huge amounts of additional manufacturing capacity come on stream over the next few months, the price of grid-electricity continues to rise.

Prices for solar components are set to drop by next year from about $3.80 per watt to about $1.40 a watt. According to Dean Cooper, an analyst at Ambrian Capital, the global manufacturing capacity for solar modules is set to increase “dramatically”, from 3 gigawatts last year to 15 to 20 gigawatts of production by 2010.

Much of the growth is coming from China.

Jenny Chase, senior associate at analyst group New Energy Finance, told the Financial Times: “We expect there to be overcapacity from the second half of 2009.

To underline the booming nature of the market, Bosch are planning a €1.1bn takeover bid for Ersol, the German solar energy company, marking the first big move by one of the world’s major industrial groups in this part of the renewable sector.

Bosch already makes solar collectors for hot-water generation and has a partnership with BASF and Heliatek, both of Germany, to produce cheaper organic photovoltaic cells used in the industry.

However the offer for Ersol, which had €160m in sales last year and is expected to have €300m this year, represents a significant increase.

The high cost of solar components has been a major impediment to consumer take-up. A supply shortage of silicon has added to the problem recently. And many countries are beginning to reduce their subsidies for renewable energy in anticipation of the price fall.

Germany, which is the biggest market for solar, accounting for nearly half of world demand, will cut subsidies by 7 per cent next year.

“There’s a double-whammy coming of subsidy cuts and supply pressures,” said Tim Arcuri, an analyst at Citigroup. Yet Lux Research is forecasting that revenues in the sector will more than triple in the next five years, to $71bn in 2012.

The solar power business is bracing itself for a shake-out as the collapse in prices bites.

However, a price slump could hasten the take-up of the technology which would help boost the overall volume of future activity, even as margins fall, industry analysts and officials add.

Expectations of falling prices have been partly sparked by a surge in the level of manufacturing capacity for solar panels.

That could prompt consolidation in the sector within the next six months, with smaller players falling prey to longer established companies