The race to replace traditional energy sources with solar energy is just heating up. With declines in solar panel prices and government subsidies worldwide, manufacturers such as First Solar are jockeying to become industry front-runners in solar cell efficiency and cost.

The U.S. manufacturer announced last week that it set a new efficiency record with its thin-film cell made from cadmium-telluride (CdTe).

First Solar was already seen as the thin-film solar leader having the lowest costs in the industry. The company was the first to bring the cost of solar power below $1 a watt – 6 cents per kilowatt-hour for utility systems. At this price, the Department of Energy says solar energy systems could be “broadly deployed across the country,” competing effectively with other sources of electricity, such as coal.

That’s still 10 years off, if you ask the DOE, while some optimistic solar industry experts say it could be sooner with breakthroughs such as those experienced by First Solar.

The company’s 17.3 percent efficient solar cell record is impressive and closes in on previous records set by the more-common silicon-based cells, says Jonathan Goldman, a clean-tech entrepreneur in Atlanta who has been involved with two solar startups.

“[First Solar’s] much lower module production cost will give them a significant boost,” he said.

SunPower, majority owned by a French oil company, is the leader in silicon cell efficiency with its newly launched 20 percent efficient panel. The DOE’s National Renewable Energy Laboratory (NREL) held the previous record of 16.7 percent for a cadmium-telluride cell.

First Solar expects to double production by the end of 2012 to keep up with increased sales in the coming years, Goldman says. “Nonetheless, they will continue to face margin pressures as crystalline silicon solar pricing continues to fall.”

What does the new record mean for the industry? It’s too early to predict, according to some industry experts contacted for this story. Record-level solar cell efficiency can be a one-time event. It may or may not translate into production capacity or the ability to reach top efficiency at high volumes, the analysts caution. Performance improvements are necessary, they say.

Where CdTe cells have the competitive advantage is that they are known to tolerate a wider range of environments, such as places where there are a higher average of hazy or cloudy days, Goldman says.

At deadline, a First Solar spokeswoman said the company was awaiting release of its latest earnings results and couldn’t comment for this article.

Research worldwide continues with various innovations in solar cell technology hoping to more than double the present efficiency limits within 10 years.

Recent government cuts and price reductions created a more urgent need for improved solar cell efficiency. The solar industry’s two largest markets, Germany and Italy, saw a drop in demand as a result of the government cutbacks.

Still, the U.S. continues to have a decent order backlog, Goldman says. The U.S. solar market doubled in size in 2010 and is expected to do nearly the same this year, according to Solarbuzz, a market research company. The U.S. will be one of the most promising growth markets over the next two years, Solarbuzz reports.

Despite the positive forecast, some U.S. lawmakers have been trying to end loan guarantees and grants for renewable energy industries to help cut the deficit.

The DOE already has set a goal that solar energy systems be self-sufficient – without the need for government subsidies -- by the end of the decade. Its SunShot Initiative, which funds advanced solar manufacturing, aims to reduce the cost of photovoltaic solar energy systems by about 75 percent by 2020. At that point, the solar systems should be cost competitive on a large scale with other forms of energy and no longer dependent on government assistance.

First Solar recently received what was believed to be the DOE’s largest single commitment to a solar power company, nearly $4 billion in conditional loan guarantees for some of its solar panel projects.

It remains to be seen whether the company will end up on top for solar cell efficiency and cost amidst aggressive competition and current market trends.