This Week in Solar

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After starting the year on a tear, solar stocks came crashing down to reality this week after Germany said it would lower feed-in tariff rates more regularly. The market saw that as a red flag and sold off solar stocks across the board yesterday.

After a year of uncertainty in 2011, it looks like we are in for more of the same in 2012.

Germany changes the rules midstream
The feed-in tariff system Germany implemented just a few months ago, with biannual cuts based on installation levels, wasn't adjusting fast enough for German officials and now it looks like they'll be moving to monthly cuts. The logic behind more frequent cuts is that it will give the country the ability to adjust to cost changes more quickly and keep installations closer to the 3.5 GW it has set as an annual goal.

But for manufacturers, installers, and investors, it means more uncertainty in one of the few steady markets in recent years. One of the biggest problems renewable energy is having these days is that governments can't seem to make a plan and stick to it. This leaves the entire industry in the lurch because systems installers can't make plans months out if the rules change week to week.

Module prices jump, for now
IMS Research has said that solar module prices jumped 7% in December due to the rush of installations in Germany. That's great news for manufacturers who have seen margins squeezed over the past year.

Earnings season for solar companies will begin in a few weeks and it will be interesting to see who was able to take advantage of the good conditions at the end of the year. Chinese manufacturers Suntech Power (NYS: STP) , Trina Solar (NYS: TSL) , and Yingli Green Energy (NYS: YGE) should be the first to benefit with not only improved margins, but also lower inventory to end 2011.

What we should watch closely for is whether or not the increased demand was a boon for lower-tier suppliers LDK Solar (NYS: LDK) and ReneSola (NYS: SOL) , which saw sales slip in the third quarter as installers fled to higher-end modules. These two stocks have rallied sharply to start the year on hopes that their demand picked up in the December rush.

So far, so good
Despite the drop in shares this week, most solar stocks are trading higher this year on renewed hope for the industry. Strong pricing during the fourth quarter probably won't last long into 2012, but it should lead to relatively strong earnings for the best manufacturers. The uncertainty in Germany isn't good for the industry, but the country will likely continue to be one of the world's largest sources of demand, so I don't think monthly feed-in tariff cuts are a reason to panic.

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At the time this article was published Fool contributorTravis Hoiumdoes not have a position in any company mentioned. You can follow Travis on Twitter at@FlushDrawFool, check out hispersonal stock holdingsor follow his CAPS picks atTMFFlushDraw.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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