Powerful trends are forcing change in the solar industry, leaving many companies scrambling to survive. But those companies—the installers and project developers—closest to the businesses and homeowners that buy solar systems are in pole position for rapid growth. Once the economy stabilizes and credit thaws, solar 2.0 will be all about the guys with boots on the ground.

“There is a shift in the balance of power from upstream materials providers to downstream installation and service providers whose input costs are falling dramatically,” said Ted Sullivan, who heads the solar group at Lux Research, a market research firm.

The solar industry grew dramatically in recent years—62 percent rise in solar photovoltaic installations worldwide from 2006 to 2007 and preliminary figures suggest a 30 percent increase from 2007 to 2008. During this growth spurt, the polysilicon producers and the manufacturers that turned that material into solar cells lived in a world of more demand than supply. They retained high margins and saw their treasure chests balloon.

But the buzz caused a bubble as manufacturers built more production capacity. Now the high-flying stars of the solar manufacturing sector, like China’s Suntech Power Holdings, face an industry with an oversupply of solar panels. Prices are dropping and manufacturers are feeling the squeeze.

Overcapacity in worldwide module production could exceed 160 percent in 2009 and remain above 100 percent through 2012, according to market research firm iSuppli. This will bring silicon-based module prices “crashing down” to between $2.50 and $2.75 per watt, according to the firm, a more than 40 percent decline from the average U.S. price today.

What’s bad for the manufacturers, however, is good for the companies installing and developing solar projects. They can pass the cost savings to customers while maintaining their margins, said iSuppli analyst Henning Wicht.

“We’re entering a period that we’ve talked about—the end to supply-constrained pricing,” said Arno Harris, CEO of Recurrent Energy, a solar project developer based in San Francisco. “We built the business believing that was just over the horizon. As module prices come down, we can deliver at lower prices and the market potential expands dramatically.”

The combination of falling prices, continued tax credits, and increasing government mandates for renewable energy is leading to a “promised land” for the solar industry, Mr. Harris said.

But before they arrive, companies will have to survive the current economic slump. Businesses struggling to pay employee salaries hesitate to spend tens of thousands of dollars on solar power systems, even with falling prices. And companies with relatively healthy balance sheets aren’t finding banks eager to lend to finance solar projects.

“Frankly most customers who might want solar these days don’t qualify,” said Alexander Welczeck, CEO of Solar Power Partners, a Mill Valley, California, solar power developer. “They don’t have the credit rating to qualify for long-term financing.”

Still, Mr. Welczeck, flush with cash after closing a $100 million equity and debt financing round in September, expects his company’s business to grow by more than 50 percent this year. With so much money in the till, his company can continue to finance its own projects in which customers enter into long-term agreements to buy solar-generated electricity.

Lux Research’s Mr. Sullivan said the consensus from surveys he’s conducted of solar industry players is that there will be no growth between 2008 and 2009.

The economic stimulus bill making its way through Congress may bring some relief. It could contain a provision that will make tax credits for installing solar systems immediately refundable through the U.S. Department of Energy. Under the current system, companies need profits to benefit from the tax credits—and profits are few and far between these days.

“We’re very excited about what the future holds,” said Chris Anderson, chief technology officer for San Diego-based solar installer Borrego Solar Systems.

Borrego pulled in $60 million in sales in 2008, double its revenue in 2007. The company expects sales to reach $70 million this year.

“We’re taking this as a time to improve internally and get ready for the next wave,” Mr. Anderson said.