FRANKFURT (Reuters) - Solar power will be a bright investment prospect as the appetite for green energy grows, even though the global credit crisis is making banks more wary of providing financing.

In the short term, the sector will also have to contend with a shortage of silicon, a key ingredient for solar cells that turn sunlight into electricity, and possible changes in political support as elections take place.

"This year will be a very volatile year," said Sven Hansen, chief investment officer at clean technology investor Good Energies, which has about 7 billion Swiss francs ($6.38 billion) under management.

"The industry will see fantastic growth, but it will be a bumpy ride in terms of how financial markets value photovoltaic companies."

The number of new large-scale solar energy plants has been growing rapidly particularly in sun-drenched countries like Spain and Italy, but also in Germany and the United States, where regulatory conditions offer incentives and stable returns for investors.

Conditions could change because of a presidential election in the United States and general elections in Spain in March.

"Whether there are support programs in place has a strong impact on markets' development," Hansen said.

Growth is still expected to be strong, driven by increased interest from institutional investors, such as pension funds and insurers, which are seeking alternative stable and long-term opportunities.

Experts also expect the silicon shortage to ease next year as silicon makers hike up capacities and production.

"Leverage ratios are more difficult, but we will ride out the storm. The business is not shut," said Peter van Egmond Rossbach, director of investment at Impax Asset Management.

The firm provides finance for renewable energy projects around the world and has $2 billion under management.

Thirty percent is invested in solar, 40 percent in wind and the rest in other renewable energy projects, it said.

"It just means that (project financing) is getting more expensive and we have to bridge with equity," he added.

RISK AVERSION

Tighter liquidity on global financial markets resulting from a crisis in the U.S. subprime mortgage market last year has made banks more risk-averse.

As a result, conditions have become tougher, pushing up interest payments for loans and other financing costs, which reduces the cashflow and leads to higher purchase prices for investors.

"We notice it in the purchase prices," said Barbara Flesche, head of equity sales at Epuron, a project developer, which is fully-owned by German solar group Conergy (CGYG.DE: Quote, Profile, Research).

Epuron develops, finances, develops and operates large-scale renewable energy projects, bringing together investors, banks and equipment producers.

It has completed deals worth about 800 million euros ($1.18 billion) since 1998, it said.

Banks were less willing to provide high gearing for such major projects, which dampened investor hopes of a higher return on equity, Flesche said.

But she added: "The risk for purchase prices is not something that's hurting us dramatically -- so far."

Flesche said demand from institutional investors for such large-scale renewable portfolios was still strong and was now also reaching into new markets such as Turkey, Greece or Italy.

"It will become more difficult to get bank financing, but not impossible," Epuron's Flesche said.

The European Photovoltaic Industry Association (EPIA) expects the global market to be five times bigger than it was in 2007 within the next five years.

It said it expected annual installations to reach a 10.9 gigawatt peak by 2012 globally, up from a peak of about 2.2 gigawatts in 2007, adding that annual growth rates of well above 25 percent could be expected.

The European Energy Council has forecast that by 2010 about 1.6 percent of total energy generation will derive from photovoltaic sources, which compares to a share of 0.01 percent in 2003.

By 2010 the council expects about 19 percent of generation will derive from renewables, 15 percent from nuclear and 66 percent from fossil sources.

(editing by Barbara Lewis)

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