One in ten Australian homes now has solar panels but takeup has levelled off and the solar industry is facing significant job losses due, in part, to unhelpful government policies, according to a new report.

The study found that falling installation costs have fuelled adoption of household solar, with 1.1m solar panel photovoltaic (PV) systems, encompassing 13% of Australian households, now installed.

But while Australia now ranks seventh in the world for solar market share, albeit a long way behind world-leading Germany, growth has tapered off, with installations in 2013 set to be 22% down on last year.

This contraction, the report warns, risks 3,400 solar industry jobs over the next 12 months. Currently, the sector employs around 18,500 people.

The report was commissioned by the REC Agents Association (RAA), which represents companies that trade in renewable energy certificates, and was undertaken by Green Energy Markets.

“The level of activity in the residential solar industry may well have peaked,” the report states. “The industry is now going through a consolidation process and faces a number of challenges.

“The future of the residential solar market in Australia may depend on finding new ways of refinancing the cost to customers, tax changes to make solar leasing more attractive and finding new markets, such as renters and low-income earners.”

The report identifies a number of challenges facing the solar industry, including the removal of feed-in tariffs by state governments and an upcoming review of the 20% Renewable Energy Target, which the renewables sector has blamed for creating investment uncertainty.

RAA called on the government to “reaffirm its strong support” for the Small-scale Renewable Energy Scheme, which creates a financial incentive for small solar systems. The organisation said it does, however, welcome the Coalition’s Million Solar Roofs program, which helps low-income households install solar.

Ric Brazzale, CEO of Green Energy Markets and president of the RAA, told Guardian Australia that the industry was going through an “adjustment phase”.

“There are a few factors for this – all the states have removed feed-in tariffs and we are seeing some states, such as Queensland, reach saturation point,” he said.

“We’ve also got a new government that wants to review the Renewable Energy Target, which creates additional uncertainty for solar companies.

“There are issues, but we are taking a positive view. We’ve been engaging quite well with the government. I think they are more pro-solar than wind, because they can see it has been embraced by a lot of Australians and it is a significant employer in regional Australia.

“Renewables will certainly have to play an increasing role in meeting the 5% emissions cut target. Solar will have an important play.”

A spokesman for Greg Hunt, the environment minister, told Guardian Australia that the solar industry has a “very bright future”.

“The government is committed to a million roofs solar policy,” he said. “It is part of our Cleaner Environment Plan for Australia. It supports our commitment to both reduce electricity prices for families while also meeting our climate change targets.

“This will not only assist households and community groups with the cost of electricity, but provided stability for the solar industry.

“The government supports local manufacturing and the solar industry and will ensure the industry has a stable policy framework for the future.”