Inventory buildup, solar incentive reductions and even a harsh winter are some of the reasons given by analysts and solar companies for what they expect to be a lackluster start for 2011. But how bad will it get and what is the prognosis for the whole year ahead? Here is the first of many of our forecasts.

There is some consensus that the first quarter of 2011 will likely be slow. To start, winter is traditionally a slow time of the year for installing solar power projects that make use of solar panels. Changes in feed-in tariff policies in key European countries will give developers pause about ordering lots of modules and other equipment in the early part of next year, according to a forecast issued by Standard & Poor’s Equity Research this week.

Feed-in tariffs are government-set solar pricing that utilities must pay, and utilities must buy all the solar power available for sale. Typically feed-in tariff programs come with mechanisms to control the amount of solar energy generation during a given year, such as a national installation cap. In Germany’s case, the feed-in tariffs are on a schedule to decline every year, and the degree of decline depends on whether the country exceeds a certain amount of installation. The decline will be greater if the new capacity exceeds a certain limit, and it will be smaller if the capacity falls below it.

Germany’s feed-in tariffs are set to decline at the maximum 13 percent in 2011, and its lawmakers have been talking about enacting cuts beyond the current rate schedule for 2012. France, meanwhile, has suspended its feed-in tariff program for any project over 3 kilowatts. The French government has made the move partly because it believes its policy somehow gives Chinese solar energy equipment manufacturers an unfair advantage. Most of the solar panels that have been installed in France have come from China.

With that context in mind, here are some of the predictions recently served up by industry analysts about different segments of the solar market:

*A Moderate Growth: Growth will slow in 2011 compared with 2010, several market researchers say. Solarbuzz expects global demand to reach 16.3 gigawatts in 2010 and rise by 25 percent in 2011. For iSuppli, the world will install 15.8 gigawatts in 2010, and the number will increase by about 22 percent in 2011, when another 19.3 gigawatts will be built. S&P, meanwhile, is predicting a 20 percent growth in 2011, compared with a two-fold boost in 2010.

*Costs and Prices to Fall: The production costs of solar cells and panels and the panels’ average selling prices set by manufacturers will fall in 2011 as the manufacturers react to a decrease in demand in the early part of the year, analysts say. S&P is forecasting a 15 percent reduction in average selling prices from 2010 to 2011, and the costs of making them will fall by 13 percent. Large crystalline silicon solar panel makers were able to cut their production costs to $1.28 per watt in 2010, and the cost should reach $1.12 per watt next year.

iSuppli, on the other hand, is expecting the prices for crystalline silicon solar panels to fall by 9 percent during the first quarter and another 6 percent in the second quarter. While iSuppli hasn’t publicized specific numbers, it has said that the price of a solar electric system could reach 1.9 euros per watt (US $2.49) to 2.7 euros per watt (US $3.50) in Germany. Solarbuzz expects to see the solar panel prices to fall more than 15 percent next year.

*Inventory build-up: Solar energy equipment makers have been carrying out big factory expansion plans to meet demand. The slower growth in the first part of 2011 will lead to warehouses full of equipment, analysts say. Solarbuzz believes solar cell and panel shipment will grow 46 percent in 2011 even though demand will rise by 25 percent. The result is a solar panel inventory of over 3 gigawatts in the first quarter, the market research firm says. In response, panel makers will cut prices and that should cause demand to pick up in the second half of 2011.

Inverter makers also will be contributing to the glut, says IMS Research. Inverter companies couldn’t produce fast enough for the first part of 2010. Now they are expected to have a collective production capacity of over 30 gigawatts by the end of this year, and their production already appears to have exceeded demand by more than 2 gigawatts in the fourth quarter of this year, IMS says. Production capacity can grow another 40 percent in 2011.

To put it another way, demand for inverters is set to be 13 percent higher in the second half of 2010, compared with the first half of 2010. Yet production could jump 56 percent higher during the same time, IMS says.

Installation demand is predicted to be 13% higher in the second half of the year compared to with the first half. However, planned inverter production is forecast to be 56% higher during that time. So for the first quarter, inverter companies should expect a “sharp fall in profits,” the market research firm says.

Photo courtesy of Shayne Kaye via Flickr.