Is Germany Putting the Kibosh on Solar?

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After another record year for solar installations in Germany, driven by a massive 3 GW push in December, it was a matter of time before German officials acted to slow the solar machine. According to reports, the news may be worse than the industry had expected.

Citibank is saying that feed-in tariff cuts could be between 20% and 35%, exceeding the 10% to 20% it had expected. Deutsche Bank has said a 15% cut in April could be followed by 2% monthly cuts and an 800 MW to 900 MW cap. The monthly cuts seem especially harsh because they would lead to an annual 21% cut in feed-in tariff rates if not modified.

Solar stocks are crushed
Just days before we start to hear what solar manufacturers have to say about the industry's health, solar stocks are being beaten up on this news. Interestingly, it's big solar manufacturers like Trina Solar (NYS: TSL) , Yingli Green Energy, and Suntech Power (NYS: STP) leading the stocks down because investors think module demand will fall.

But lower-tier companies like LDK Solar (NYS: LDK) , ReneSola (NYS: SOL) , and JA Solar (NAS: JASO) would likely feel the most impact from lower German demand. These companies have seen demand fall for polysilicon and cells in recent quarters because top-tier manufacturers use in-house supply before outsourcing to them. Their stocks have run up recently because the hope was that top-tier suppliers would increase demand. So it stands to reason that they'll be the first to suffer if demand is low.

Silver lining
Costs in Germany have become so low that I'm starting to wonder if feed-in tariffs are necessary at all for a healthy solar industry. A cut like the ones reported would leave rates so low that they're below retail electricity rates. So larger installations may indeed see a slow-down in demand, but rooftop residential solar would still be financially viable to offset grid electricity use.

There's also a new feed-in tariff in China, increased demand in India, and a quickly growing solar market in the U.S. to consider when looking at the solar landscape. Germany may still be the world's No. 1 demand source, but these other locations are quickly picking up the pace. In fact, lower German demand may keep the industry from being undersupplied at the rate Germany is going.

Don't count out solar manufacturers on today's news alone. This is only a blip in the big picture, and it may be a good buying opportunity for investors.

Interested in reading more about solar stocks? Add them to My Watchlist, and My Watchlist will find all of our Foolish analysis on each stock.

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.The Motley Fool owns shares of Citigroup. 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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