When America's most-populous state and the world's fifth-largest economy decides to invest billions in an industry, chances are that the ramifications are felt far beyond US borders.

That's exactly what happened when state energy regulators in California last week approved the "California Solar Initiative," the biggest incentive program for solar energy in the US so far. It foresees providing $2.9 billion in consumer rebates for solar panels and installing 3,000 megawatts of solar electricity on the rooftops of one million homes, businesses and public buildings by 2017.

Within days of the announcement, the shares of German solar companies such as Q-Cells, Conergy, Ersol and SolarWorld shot up by an average 1.5 percent. They also bagged the first four spots in the Tec-Dax technology share index in which almost half of all businesses are focused on the solar energy sector.

A little bit of California sunshine

And, that isn't the end of the story. German companies, who have already established themselves as leaders in the solar energy industry, are hopeful that the new developments in California will have a positive ripple effect.

"The program in California will secure the growth of the industry," Hartmuth Schüning, head of the supervisory board at Q-Cells told Berlin daily Der Tagesspiegel last week. "For Q-Cells, the US will, in the long term, be the most important market after Germany."

The view is echoed by Frank Asbeck, head of Bonn-based Solarworld, who said that his company had already received plum contracts from California totalling two-digit million figures.

Germany is already one of the largest European markets for solar power, with state financing helping to support the sector by making roof-top solar panels affordable for households via subsidies.

Investor interest in solar energy has also been soaring after oil prices rose to record highs, increasing the attractiveness of renewable energy.

Foreign potential and challenges

But most experts see foreign markets providing the most crucial potential for growth.

The Federal Association of Solar Economy (BSW) estimates that German solar companies will register a 3-billion euro turnover abroad by 2010. Solarworld reckons that by the end of 2007, its share of revenue in foreign markets will rise to 60 percent from the current 40.

In addition to the United States, Greece, Italy, Portugal, Spain, South Korea and a few provinces in China are also investing in solar energy.

Spain, whose solar energy sector has increased threefold in the past year, and Italy, where experts expect tenfold growth in the industry in 2006, remain crucial markets for German solar companies.

But German firms face challenges when it comes to sustaining their edge in the industry.

Asian companies, such as Sharp, Kyocera and Sanyo, which discovered the power of the sun in tapping energy long before German firms, pose tough competition. And even giant US multinationals such as BP, Shell and General Electric are investing massive sums in solar energy.

A further problem hindering the growth of the photovoltaic industry is the lack of silica, a basic raw material needed in generating solar energy. Experts estimate that silica producers would need until 2007 to fulfill growing demand.

Rosy future

In the long run, experts foresee a rosy future for the industry.

"In the short term, the current share rises might seem a bit exaggerated," Patrick Hummel, an analyst at the Landesbank Baden-Württemberg told Der Tagesspiegel.

"But the overall prospects for the sector are fantastic," he said, adding that more countries needed to follow California's example.