Makers of solar cells and panels in Germany, expected to become the world's biggest solar market this year, have been propped up through a global credit crisis and recession by incentives paid to household producers of solar energy.

Tariffs are the solar industry's lifeblood as long as "grid parity" -- the point at which renewables cost the same as fossil fuel-based forms of power -- has not been reached, so cutting them could mean another significant setback.

Although no party has clearly announced such a step, the markets expect it once a government emerges from Sunday's general election.

"We believe that the government is likely to cut PV (photovoltaic) subsidies in 2011 because domestic installations are growing so strongly," said Commerzbank analyst Robert Schramm.

"This, in my view, will happen regardless of what shape the next government will take. However, I think that the cut could be significantly bigger under a CDU/FDP coalition."

A poll published on Wednesday showed that Chancellor Angela Merkel's conservative Christian Democrats had just enough support to form a center-right coalition with the Free Democrats (FDP) [ID:nBAT003163], ending four years of a CDU coalition with Social Democrats.

Analysts suggest that exposure to overseas markets will not fully offset the negative impact solar companies would suffer from a potential cut in feed-in tariffs. Still, it may reduce the pain for some.

Solar equipment suppliers such as Centrotherm and Roth & Rau "should suffer to a lower degree due to their strong Asian exposure" in contrast to Q-Cells, SolarWorld and Solon with high German exposure, DZ Bank analyst Sven Kuerten wrote.

Q-Cells, one of the world's largest makers of solar cells, made 30 percent of 2008 sales in Germany, while SolarWorld and solar module maker Solon generated 46 percent and 24 percent, respectively. Solar-Fabrik made 46 percent of 2008 revenue in Germany.

By contrast Centroterm generated 67 percent of 2008 sales in Asia, with Germany's share at 14 percent. At Roth & Rau, the equivalent numbers came in at 49 percent and 14 percent.

Equipment maker Manz Automation made 61 percent of 2008 sales in Asia, with Germany in second place at 24 percent.

BIG CUT NEXT YEAR?

"The big German solar companies are more flexible in their distribution channels and could therefore shrug off a potential cut in tariffs more effectively," said SES Research analyst Karsten von Blumenthal.

"It (the potential incentive cut) would mean a lower return for installations, but there would still be a profit to make."

Q-Cells and SolarWorld have already taken steps to expand sales abroad, albeit for a different reason. Price slumps for cells and modules force players to go abroad to match the much lower production costs of Asian peers.

Germany's renewable energy act already envisages a "degression" in feed-in tariffs -- the incentives that utilities pay producers of renewable electricity -- of 8-10 percent in 2010.

The feed-in tariff drops slightly each year, potentially hitting demand and so forcing solar companies to lower production costs.

DZ Bank's Kuerten wrote that the next government may step up cuts in feed-in tariffs.

And analysts at Morgan Stanley saw a one-off reduction in Germany's feed-in tariff of 25 percent to 30 percent as being most likely in the second half of next year.

However, "the most harsh cut would be the introduction of a (installation) capacity limit, which would be clearly seen as very negative by the market in our view, since a significant capacity limit already impacted the Spanish market very negatively," DZ Bank's Kuerten wrote.

Such a cap caused Spain to shrink from the world's biggest market in 2008 to an expected number five this year, according to industry association EPIA. A similar development could hurt Germany's 9.5 billion euro ($14.1 billion) solar sector.

Morgan Stanley analysts pointed out that a tariff cut "could result in a series of adjustments in many other 'attractive countries'."

The United States and China already have or are in the process of implementing solar subsidy programs, being one of the few rays of light for the battered industry.

For the industry as a whole, however, lower tariffs will be unavoidable in the long term.

"Cutting tariffs is a good sign as it shows that the industry is maturing," said Philippe de Weck, fund manager at Pictet.

"How can you have (only) an 8-10 percent degression when module prices have fallen by 50 percent since last year? If you're not cutting tariffs, it will create hypernormal growth, a bubble."

Source: Reuters

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