China and Germany have new competition at the top.

By Michael Fitzpatrick

FORTUNE -- Until recently less than 1% of Japan's electrical power output came from renewables. But following the catastrophe of Fukushima and the power blackouts that followed, Japan has seen an explosion in investment in alternatives. Solar, in particular, in this averagely photon-blessed country, has seen a seismic rise of late and is this year poised to become the world's largest solar market in volume after China.

According to a report by energy analyst IHS on Japan's energy mix, Japan's solar installations jumped by "a stunning 270% (in gigawatts) in the first quarter of 2013." That means by the end of 2013 there will be enough new solar panels equal to the capacity of seven nuclear reactors. Such massive growth will allow Japan to surpass Germany and become the world's largest photovoltaics (PV) market in terms of revenue this year.

"Japan is forecast to install $20 billion worth of PV systems in 2013, up 82% from $11 billion in 2012," IHS said. "In contrast, the global market is set for tepid 4% growth. The strong revenue performance for Japan this year is partly driven by the high solar prices in the country." Germany still leads with the total number of units and capacity, however, with its 32,192 megawatts. Japan is now closer to the U.S.'s 8,069 megawatts at 7,429 megawatts, according to London-based BNEF.

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Solar energy in Japan has come to dominate thanks to government incentives now offered to the producers of renewables and rules which require public power utilities to buy alternative power at above-market rates. A deal forged by the last government desperate to wean Japan from its addiction to oil and nuclear power led to the implementation of a very generous feed-in tariff (FIT) for renewable power generators.

Starting at 42 yen per kilowatt hour last July and now reduced in April to 37.8 yen (39 cents) the FIT is more than twice those of Chinese and German offerings.

A mountainous landscape and deep seas make on- and off-shore wind farms unattractive ventures. So solar, for the moment, is the best bet -- accounting for 94% of all applications for clean energy tariffs since July.

Investors saw it coming says Hisashi Hoshi of the Institute of Energy Economics. "Despite a shortage of available land in Japan, many corporations who had unused land have rushed in. They can now exploit those plots, once earmarked for expansion that never came, to make money by building solar panels and selling on that energy to the utility companies at a good profit."

A 26.5 gigawatt solar power plant in western Japan, enough to power 9,000 households, opened last month, typically built on an unused factory site. Even mothballed golf courses from the '80s bubble years are being pressed into productive service, says Hoshi.

"The ridiculously generous FIT is allowing for a very a lucrative business. It's brought investors scurrying to apply especially for the so-called mega solar projects. Such projects make up the bulk of the vast increase of PV seen in Japan recently," he says.

The provenance of the hardware has also seen a sea change with domestic panels now outselling cheap imports. Japan has a strong solar panel manufacturing industry and companies like Sharp, Kyocera, Sanyo, and Mitsubishi Electric would benefit from the new energy polices and emphasis on solar power, according to IHS.

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Those same failing companies are now banking on a technological edge to push the quality up of made-in-Japan solar panels while keeping prices down. Doing so could make solar one the few bright points of the Japanese electronics industry. Sharp recently unveiled new solar panels that it claims not only use just 1% of the expensive silicon used in conventional models but are thin enough and clear enough to replace windows.

Others are focusing on efficiency. To make solar electricity affordable on a large scale, researchers have long been trying to develop a low-cost solar cell, which is both highly efficient and easy to manufacture with high output -- silicon-based solar cells typically have an efficiency of around 21% for converting sunlight into electricity.

According to Panasonic its prototype solar cell has achieved the world's highest conversion efficiency at 24.7%, verified by tests performed at Japan's National Institute of Advanced Industrial Science and Technology.

"How long the boom in solar can last in Japan is hard to tell, but as land runs out, there will be slowdown," says Hoshi. "Of course there are still the rooftops to exploit as mobile carrier Softbank is doing. It's renting rooftops for solar -- a very smart and interesting business model. Perhaps, unlike previous attempts to deregulate Japan's electric utility industry, this should be a success."