Steep declines in the cost of solar panels are a sunny situation for installers, but not necessarily for suppliers.

Brendan Neagle, chief operating officer for Borrego Solar in Lowell, Massachusetts, which installs solar systems on commercial and government buildings, said the total installation cost in Massachusetts has dropped about 20 percent from a year ago.

While declining costs of solar panels may be a boon to integration firms—which install the panels, electrical components and mounting systems—it challenges panel makers to lower production costs to protect profit margins.

And some of the savings from solar-panel price declines are being eaten up by reduced rebates, financing issues, and increased labor costs.

For instance, the volatile environment has actually driven down the number of solar projects being undertaken by Safeway, the supermarket chain that has been an enthusiastic supporter of solar.

“Solar is harder for me today,” said George Waidelich, vice president of energy operations for Safeway. Waidelich said even though solar panels are much cheaper than last year, that benefit is heavily outweighed by the increased cost of borrowing money to finance installations and declining incentives.

Evergreen Solar Inc., the Marlborough, Massachusetts, solar-panel maker, said in its second-quarter conference call that while it has been able to reduce its manufacturing cost to around $2.70 per watt from around $3.16 per watt in the first quarter, average selling prices declined just as fast.

“This market does not have the elasticity that most markets tend to have, so people are dropping prices to move inventory—not because of increasing demand,” Terry Bailey, senior vice president of sales and marketing, said in the call. “Until credit starts to flow, we don’t believe there is much more we can do.”

Overall, panel prices have declined from last year’s peak of $4.20 per watt to around $2.40 per watt today, according to London research firm New Energy Finance. Some analysts expect panel prices could fall below $2 in the near future. But panel prices make up roughly half of the total cost of installation, several integrators said.

And savings on panels are being eaten away by increased labor costs and reduced rebates.

The nature of the tax credit and rebate system pegs rebates to the total cost of the systems. In Massachusetts, for instance, officials recently recalculated the rebates for commercial and industrial applicants to its Commonwealth Solar program. Massachusetts energy office spokesman Robert Keough said the rebates had grown to between 35 percent and 40 percent of installation costs, and now will refund roughly 30 percent of costs.

“This was always the intention, that as the installation industry grew and became more comparative that prices would go down and we would be able to scale back the incentives,” Keogh said.

In addition to shrinking state incentives, other costs, particularly labor costs, are going up. Regulations now require licensed electricians to handle all components of solar installations. Electricians command higher wages than laborers.

“We had to retrofit with all new electricians, and so at the end of the day the total price has remained relatively constant,” said Dan Leary, president of integration firm Nexamp Inc.

Indeed, Leary said the payback period for most solar panels has stayed around five years for most installations.

Yet Neagle said he believes the recovering economy, new financing plans, and a net metering law that allows large installations to resell power back to the grid provide enough incentives for many companies to pull the trigger on solar.

“For a number of customer classes this is a perfect storm, and it’s the right time to really take advantage of what’s happening in the market,” he said.