Rapid recent solar and wind price falls are likely to bring new markets and mass adoption a step closer over the next decade and raise the prospects of mergers.

The financial crisis coupled with a ramp-up in China, which now leads the world wind and solar manufacturing, have led to over-capacity and pressured prices in the past three years.

Natural gas is the main fossil fuel rival and still wins on price after US shale gas finds created a global glut.

But wind and solar are now competitive in niche markets after prices of turbines fell by a fifth and solar panels by a half since 2007. New markets are emerging as they fall further.

"We see it as an extremely potent and powerful trend for the coming decade," said Rupesh Madlani, renewables and clean technology analyst at Barclays Capital, adding that the rate of adoption may take people by surprise.

For renewable energy, 2010 was a year of contrasts.

The global wind market shrank for the first time in two decades, with fewer turbines installed than in 2009, but the world added a record amount of solar power, reaping the benefit of generous incentives in Europe.

The price of solar panels, or modules, is expected to fall another 10-25 percent in 2011.

Modules prices would halve again in the next two to three years, predicted Madlani. But other analysts said that the longer outlook is clouded by conflicting pressures.

Additional demand from new markets such as India, China and the Middle East may counter an expected paring of subsidies in key markets such as Italy and Germany, they said.

Wind

Wind turbine prices are not expected to rise this year or next, given a continuing glut and aggressive pricing by smaller suppliers, even while rising steel prices add inflationary pressures.

Price falls have coupled with technology development to increase competitiveness.

A wind turbine can now generate electricity at a cost of about 6-8 US cents per kilowatt hour (kWh), depending on construction and financing costs, compared with about 3-7 cents for gas and coal, say analysts.

Denmark-based MAKE Consulting reported strong growth in turbine orders in 2010 for delivery over the next couple of years, up 48 percent on 2009.

"Prices have bottomed," at about 1 million euros per megawatt, said MAKE Consulting's Steen Broust Nielsen.

In the windiest sites, in Scotland, Ireland and Brazil, wind is already competitive with coal, said Jefferies bank analyst Gerard Reid.

"That's a very significant moment," he said. "But in the majority of countries, like Germany, you're nowhere near that."

Wind turbines are quicker to install than large gas-fired, coal-fired or nuclear power plants, which is a big plus in emerging markets, where growing, more affluent populations are demanding more electricity, said Barcap's Madlani.

For the first time, China last year topped the world in cumulative installed capacity.

An advantage of solar power is that it supplies electricity at the hottest time of the day, in line with peak demand for air conditioning and when electricity prices are highest.

Even so, solar panels generate power at a cost of more than 15 US cents per kWh even in the sunniest climates, making it competitive only in a very few retail power markets such as southern Italy and Hawaii. Elsewhere it depends on subsidies.

Italy is expected to rein in its support for solar energy from 2012, with implications for global demand. "The pace of (global) price declines could accelerate," said Shyam Mehta, at GTM Research.

Merger

Those solar companies that weather the price storm could be set up for a mass market with strong returns, driving expectations of acquisitions by leading electronics and semiconductor companies.

"The number one company in the world holding solar patents is Samsung, but they're not sure how to jump into it," said Jefferies' Reid. "Semiconductor companies like Intel are also looking closely."

In the wind market, a merger among existing niche players could create a global player to rival Vestas, GE and Siemens.

Buyers could include emerging eastern giants, or outsiders. China's Goldwind acquired Germany's Vensys in 2008, while diversified U.S. manufacturer United Technologies bought Clipper Windpower last year.