The global solar market will shrink this year and system costs will decline, priming the market for growth by 2011 when solar power reaches a major milestone in pricing, according to a report released Wednesday.

The worldwide market for photovoltaic solar could decline nearly 20 percent to $29 billion in installed system sales this year from $36 billion in 2008,  Lux Research reported.

The decline will be driven by reduced solar module prices owed to manufacturing oversupply, according to the researcher. The total sales volume—from 5.5 gigawatts in 2008 to 5.3 GW this year—will remain relatively static.

Wholesale module prices could plunge more than 25 percent, from an average price of about $3.80/watt in 2008 to between $2.50 and $3.00/watt this year as manufacturers look to sell off their backlog of products, the report said. Module prices will continue to drop until stabilizing in 2011 at an average price of about $1.75/watt.

At that price, solar power will have reached a major milestone—so-called grid parity, when the cost of solar energy without subsidies is roughly equivalent to the cost of conventional power distributed on electric grids.

This will first occur in developed country markets such as the United States and Spain, and it should reinvigorate the solar industry, said Ted Sullivan, Lux Research analyst and lead author of the report.

“As costs come down, you unlock bigger and bigger portions of the market,” said Mr. Sullivan. “Volume will pick up.”

This resurgence could lead to a global solar market worth $70 billion in sales over18.5 GW of installation by 2013, the report forecasts.

Lux Research’s report is entitled “Finding the Solar Market’s Nadir.”