Written by Ucilia Wang

BP Solar a subsidiary of BP ( BP) has canceled a $97 million plan to expand manufacturing in Maryland, citing increasingly intense competition in the global market.

The solar company, which makes, installs and operates solar-power systems for homes and businesses, told Frederick County officials last week that it still plans to complete the building that was meant to house a new silicon ingot factory. But BP Solar will use the building as office space and a warehouse instead, said Tom Mueller, a spokesman for BP Solar.

The solar company won't be spending the $67 million it had set aside for buying equipment and outfitting the interior of the factory, Mueller said, adding that the competition among solar-panel makers is getting too intense.

"It's really about the competitive space that solar operates in today," Mueller said. "It's a highly competitive market right now in manufacturing side. It's growing more so with new players from Asia entering the space, with lower-cost manufacturing."

The company expects to finish building the $30 million, 140,000-square-foot space next year. Employees from two BP's offices in the same county will move into the new building. The new building is located at the company's North American headquarters, where it also makes solar cells and panels.

The company broke ground on the factory project in July 2007, and expected to nearly double its silicon-ingot production capacity to 150 megawatts. BP said at the time that the new building would have enough space to grow its ingot and wafer production to more than 400 megawatts later.

BP decided to cancel the factory plan at a time of a dismal U.S. financial market prompted by the bankruptcy filing of Lehman Brothers Holdings Co. and the sales of several large U.S. banks and mortgage lenders.

The turmoil has triggered fears that raising money to carry out solar power plants will be difficult. Companies that do line up financing could see a rise in project costs, said Mark McLanahan, senior vice president of corporate development at MMA Renewable Ventures, on Thursday after the company announced a joint venture with solar-panel maker Suntech Power Holdings ( STP). (Don't miss " Suntech Breaks Into Solar-Power Financing")

"You can assume that it will bring up the price of delivered kilowatt or megawatt hours because your debt costs are higher, the conditions are more onerous and the transaction costs will be higher," McLanahan said.

BP Solar's move also could reflect the possibility of an oversupply that some analysts predict will lead to fewer solar companies and lower profit margins in 2009 and beyond. (Don't miss " Analysts Pick 2009's Solar Winners: Suntech")

"We believe the pace of capacity being added, relative to actual demand expectations, is alarming," wrote Jeff Osborne, an analyst with Thomas Weisel Partners, in a research note last month. "We look forward to the coming shakeout of the sector, when prices will fall over 20 percent and winner will be separated from the losers.

All year long, some solar industry analysts have been forecasting that a glut of silicon, which is turned into wafers to make solar panels, will arrive on the market as early as next year. It they're right, the oversupply would reverse a trend that began in 2005, when solar companies competed fiercely against integrated-circuit companies for silicon and couldn't secure enough to meet the demand for panels.

Since then, many silicon makers have built new factories and signed long-term agreements with solar companies. Like farmers who plant too many acres when prices are high, these silicon makers could end up producing more than needed in the next few years. Recent research by the Prometheus Institute and Greentech Media predicted an end of the silicon shortage by the end of this year ( GreentechMedia.com: " New Research Predicts End to Silicon Shortage" and " Oversupply of Silicon to Be Worse Than Expected").

But all that, of course, depends on demand. U.S. President Bush signed a bill Friday to extend renewable-energy tax credits -- and to enact a $700 billion bank bailout plan -- after the House of Representatives approved the bill earlier in the day.

The plan is nowhere as large as the incentive programs in Germany and Spain. But if the credits boost solar demand, and the bailout improves the financial markets, the situation might not be quite as bad as some analysts -- and companies -- fear.

Mueller said the extension of the renewable-energy tax credits wouldn't change BP Solar's decision to nix the factory plan. He also said oversupply is not a problem for the company, which is "selling everything we can make."

"We don't need additional casting and sizing of silicon ingots ," he added. "The facility is sufficient to supply its needs."

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