Solar's Day in the Sun

NEW YORK (TheStreet) -- At the end of July, solar industry bellwether First Solar(FSLR Quote) announced a knockout second quarter that blew past most estimates. But what got many talking afterward wasn't just the impressive numbers. It was the company's announced plan to offer rebates in Germany in order to maintain market share there.

Debates continue today about whether that was a good idea or a bad one. What isn't debated, however, is the importance of Germany in particular and Europe in general to the market for solar products. In fact, in order to truly understand what makes photovoltaic companies tick, you have to understand the incentives that have driven solar's exponential growth in Europe over the last few years.

According to most estimates, Germany and Spain are known as the top two countries in the world for PV installations. And business has been booming there of late.

In 2009, iSuppli estimates that Germany will bring in another 1.5 gigawatts, while Spain will add 400 megawatts. California landed near the top, but others on the list included European players like France, Italy, Greece and the Czech Republic.

As for why Europe has succeeded in building its solar markets? That goes well beyond sunny European skies. In fact, most if not all of the growth can be traced to a very simple, yet elegant decision to use feed-in tariffs.

Here's a quick primer: When an average person in a feed-in tariff system decides to put in a solar installation, that person then sells the energy produced by the system back to the electrical grid provider at a pre-determined rate set by the government. In Germany, that rate is set forth in its Renewable Energy Law and comes to four times the prevailing grid-electricity prices. Because the deals are locked in over an extended period of time, PV manufacturers like a Suntech Power(STP Quote) or a SunPower(SPWRA Quote) are assured of price stability that they can then plan for and build capital around.