The cost of solar electricity is likely to drop by 50 percent in 2009 from the previous year due largely to a big fall in solar panel prices, said New Energy Finance Monday.

The 50 percent drop refers to what's commonly called the "leveilized cost of electricity," or the cost of producing the power over the lifetime of a solar power plant (from building to operating power plants). Utilities and banks use these metrics to determine their investments and operational costs for these generation facilities over time.

The levelized cost for solar electricity fell to as much as $160 per megawatt hour in 2009 globally, said Jenny Chase, head of solar research at New Energy Finance.

The $160 per megawatt-hour came from installations in sunny spots – such as the deserts in the western United States – that used the cheaper thin-film solar panels, like the ones produced by Tempe, Ariz.-based First Solar. The cost of building solar energy systems using thin films can be as low as $3 per watt, New Energy Finance said.

A solar power project that uses the cheapest thin films could achieve a levelized cost that is 25 percent lower than a solar power project using the cheapest crystalline silicon solar panels, the New Energy Finance said. 

For projects located in less sunny locations that use the more expensive crystalline silicon solar panels, their levelized cost could more than double, Chase said.

The levelized cost for other types of renewable electricity, such as wind and geothermal, are expected to drop 10 percent in 2009 over 2008.

These levelized cost don't take into account any government subsidies.

"It's incredibly exciting. The price of photovoltaics has plummeted this year, and we are seeing that opening up new markets that wouldn't have made sense before," Chase said. "Governments around the world are going to cut subsidies, but they are still going to see a buoyant demand for solar."

Major solar energy markets are European countries, such as Germany, Spain and increasingly Italy, as well as the U.S. and Japan. China and India recently announced or implemented solar incentive programs, which will help create demand for their domestic manufacturers and enable them to meet any pledge for reduction greenhouse gas emissions (see India Wants 20GW of Solar by 2020 and Here Comes China's $3B 'Golden Sun' Projects).

Without government incentives, solar electricity remains more expensive in general than power from coal and natural gas power plants, however. Government subsidies are meant to help bridge the difference the costs of installing and operating solar power plants and the similar costs for fossil fuel-based power, Chase said.

The levelized cost for electricity from fossil fuel power plants range between $55 and $105 per megawatt hour, depending on whether they include a price for carbon emissions, she added.

The costs of installing and operating solar power plants differs not only in different countries but also within countries such as the U.S., where individual states offer their own incentives and wield the authority over setting electricity prices.

"Recently in the U.S., we've seen a number of rebate programs being reduced or eliminated. These incentive changes often have just as large an impact on the ultimate cost of PV generation as falling module prices," said Shayle Kann, an energy analyst with GTM Research, in an email.

For consumers, how much they pay for solar electricity also varies depending on the amount of government incentives. And that price, of course, also depends on whether they are paying for electricity from their own solar energy systems, or through their utilities who buy solar electricity from power producers. A recent report by the Lawrence Berkeley National Laboratory on the prices paid for installing each solar energy system in the U.S. showed the disparity between system prices for different states (see Solar Declines in Price by More Than 30%, Don't Credit the Panel). The lab relied primarily on data about small solar energy systems installed at homes or businesses. 

The significant pricing decline in solar energy equipment over the past year – from silicon to cells to solar panels – has played a big role in the levelized cost reductions. Solar panel manufacturers have reported anywhere from a 30 percent to 50 percent drop in their products' pricing. Supply outstripped demand as the recession dimmed the banks' interest in loaning money to solar power project developers.

The solar panel pricing decline has tapered off, while demand has picked up nicely in the third quarter, particularly in Germany, where generous government subsidies and banks' willingness to invest in solar power projects are making Germany this year's top market.

In fact, a solar energy industry association in Germany told Reuters that the country is likely to install between 2.5 to 3 gigawatts of solar energy systems in 2009, up from a forecasted 2 gigawatts. Market research firm iSuppli also recently revised its forecast for Germany installations to 2.5 gigawatts from 1.53 gigawatts.

The German government has reported that the country saw 1.47 gigawatts of new solar installations from January to September this year (see Germany Installs 2.34GW, FIT to Decline 9-11%).

Many manufacturers who posted a big drop in profits or even losses earlier this year have reported a big surge in sales for the third quarter.