As European governments continue to slash solar energy subsidies, the industry is looking toward China, Africa and the Middle East to provide most of the demand that will ensure its future growth.

Guaranteed above-market prices allowed solar power markets to grow rapidly in Germany, Italy and Spain, with total installed solar capacity soaring nearly tenfold in Europe from 5.3 gigawatts in 2007 to 51.7 GW in 2011, according to the European Photovoltaic Industry Association.

But as the financial crisis strained government budgets, country after country began tariff cuts that are slated to continue at regular intervals. At the same time, solar panel prices have fallen precipitously, leading to huge losses for virtually all manufacturers.

The biggest of them all, Suntech, Trina Solar, Yingli Green Energy and LDK, are based in China, and the government there has decided to increase its solar power targets, which will indirectly help local manufacturers.

Last year, Beijing ramped up subsidies for solar farms almost sevenfold in terms of output capacity compared to 2011. The country's solar market grew 70 percent for the year and accounted for around 15.5 percent, or 4.5 GW, of the global market of 29 GW, according to consultancy NPD Solarbuzz. China ranked second after Germany, which installed about 8 GW of new solar capacity, and ahead of Italy. One gigawatt is enough electricity to power 200,000 U.S. homes.

"Just two years ago, the Chinese end-market was less than 10 percent of global photovoltaic demand," said Michael Barker, senior analyst at NPD Solarbuzz. "However, during the fourth quarter of 2012, a third of all global PV panel shipments ended up in China. This is the start of a new chapter for the solar industry, with China potentially taking center stage in both the upstream and downstream channels."

China plans massive solar increase

China, the world's largest emitter of carbon dioxide, wants to cap the growth of electricity consumption at 8 percent a year from 2010 to 2015 and will limit the installation of new coal-fired power plants while boosting wind, solar and nuclear energy, the government said this week. Under the plan, power generated by solar plants will increase by 89.5 percent a year over the period, wind capacity will increase by 26.4 percent, nuclear power by 29.9 percent, natural gas by 16.2 percent and coal by 7.8 percent.

The country plans to more than double its installed solar installations this year from 7 GW of total capacity last year, the National Energy Administration said earlier this month. China is also mulling subsidizing 15 GW of off-power-grid solar panel installation in the next few years and a separate subsidy program for rural communities. Meanwhile, solar subsidies in Germany and Italy will continue to be cut.

"The prevailing view that China is going to save the day has emerged a number of times over the past six years, only to be proven overly optimistic each time," said Gordon Johnson, analyst at Axiom Research.

In any case, the industry needs someone to replace Europe as the demand driver. After surging 40 percent in 2011, the global solar panel market grew 6 percent last year, NPD Solarbuzz data show. If it is not China providing the future impetus, it may be the Middle East or Africa.

Emerging markets are already beginning to see increased rates of growth for solar energy and are forecast to add 12 gigawatts of new capacity in 2017 from 1.6 GW last year, according to IMS Research. In the next four years, up to 30 GW of cumulative solar capacity will be added in emerging markets overall, helping to stabilize the industry amid the incentive cuts in Europe, IMS Research said.

"In Africa and the Middle East, low, highly subsidized power prices have prevented renewables from taking off, but heavy reliance on fossil fuels for power generation and an expected 26 percent demand increase by 2017 will reverse the trend," IMS Research said.

These regions are experiencing fast population growth and need new power sources. Many of the countries are gas and oil exporters and are currently wasting resources by using the fuel at home to make electricity that is sold at below-market prices.

Arab nations find a place in the sun

Analysts estimate that Middle East countries may lose as much as $90 in revenue for each barrel of oil they use domestically for electricity production instead of exporting it. They have a high CO2 output per person, while residential power prices are very cheap. Meanwhile, their significant sun and wind potential has been largely untapped until now.

But that is about to change. Abu Dhabi's state-owned renewable energy company, Masdar, is starting to invest in solar projects both in the United Arab Emirates and in other countries, such as Mauritania. Qatar is tendering its first solar power project in the first quarter of this year, a plant expected to generate 200 megawatts and supply 2 percent of the nation's electricity when it is finished in 2020. It is the first step toward the country's goal to have 1.8 GW of solar power by that year. Even oil king Saudi Arabia aims to supply a third of its electricity from solar power by 2032.

Solar-powered desalination could emerge as a major source of solar demand in the region. "The Saudis may have to deploy 68 GW of solar PV, powering 120 million metric cubes per day of desalination capacity to support the kingdom's water needs during the coming three decades," said Joe Osha, an analyst at Bank of America Merrill Lynch. "Photovoltaic power is an increasingly attractive alternative to the oil-powered plants in use currently."

Osha said that up to 70 percent of Saudi Arabia's water needs could be supported by desalination by 2050. Right now the country burns 1.5 million barrels of oil per day to power desalination plants. "That's about half of its total domestic daily consumption," he said. "That's not sustainable, in our opinion. If the desalination capacity necessary to meet the country's growing water gap is not powered by solar, oil consumption by the desalination sector could reach 9 million barrels of oil per day by 2050. We cannot imagine the Saudis allowing their entire current annual oil production to be devoured by domestic water consumption."

In the near term, Saudi Arabia may install as much as 4.5 GW of solar power used for desalination by 2020, Osha said.

Indian villagers try 'pay as you go'

Meanwhile, in India, small-scale solar installations are bringing electricity to rural areas that have never had it. Villagers can now install solar panels on their roofs and buy energy credits to unlock them via mobile phones, with a pay-as-you-go model. Each time they pay, they get back a code by text message that they can enter into a box, getting access to electricity from the panels.

When the full cost of the panels is paid off in about three years, they are unlocked and the rest of the power used becomes free. This system has only started to get off the ground in India, but it has a lot of potential. The country has 30 GW of diesel generators that could be replaced by solar panels, according to the government.

Worldwide, there are 150 GW of diesel generators working off the grid. To replace that capacity completely would require 660 GW of photovoltaic capacity. In theory, that should not be a problem. There is more solar energy that hits the Earth in one hour than all of humanity consumes in one year. According to Deutsche Bank analysts, India's solar market may triple this year to 4 GW, while China may see 10 GW of new installations.

The problem is that "China, while a large market, has very low electricity prices largely due to widespread use of coal. Same story for India," said Timothy Arcuri, an analyst at Citigroup.