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German Solar Cuts: Far From a Done Deal?

Germany's parliament is reportedly resisting the long-planned solar subsidy cuts, another twist in a long political battle over the future of solar projects in its biggest market.

BERLIN (

TheStreet

) -- Germany may be backtracking on its planned July 1 solar subsidy cuts again. Germany's Bundesrat upper house on Friday voted against the feed-in tariff reductions and called for a parliamentary mediation committee to resolve the matter,

Reuters

reported overnight.

At the same time,

Bloomberg

reports a different version of the same story that Germany is far from done with its solar feed-in tariff (FIT) politics.

Bloomberg reports that a new proposal was introduced by the upper house of Germany's parliament to trim the subsidy cuts for rooftop and large-scale solar projects to a maximum of 10%, versus the previous cuts that were approved by the lower house of parliament at levels ranging from 11% to 16%.

Yet the Upper House measure can be rejected by a second vote in the lower house, the

Bloomberg

article notes.

The solar sector has been operating at a feverish pace in the first half of 2010, with insatiable demand for solar modules ahead of expected feed-in tariff subsidy cuts in Germany, solar's biggest market.

Reuters sources are saying that the latest twist in the German FIT political theatre could mean that the feed-in tariff cuts will be delayed beyond the July 1 implementation date.

However, to complicate matters even more, the Reuters report indicated that the feed-in tariff cuts -- already approved by the lower house of Germany's parliament, could be applied retroactively.

The latest German hemming and hawing over solar FIT reductions looks like good news for solar in the short-term, particularly if the

Bloomberg

version of events turns out to be the correct scenario.

However, the concept of retroactively applying the solar cuts, as reported by

Reuters

, could complicate the economics of solar projects, which are predicated on a fixed feed-in tariff level.

In Spain, the recently introduced concept of retroactively applying subsidy cuts to existing feed-in tariff is being seen as a potential killer for solar projects if it catches on in other countries. Banks that finance solar projects and solar investors expect a fixed-rate of return over the life of a project based on a constant FIT rate.

Retroactive cuts, in the case of Germany, could mean no more than a few weeks before implementation, as the lower and upper houses of Parliament try to mediate the issue. That would make the latest news out of Germany more or less noise, with small upside if the FIT reductions are slightly reduced, and German demand picks up even more in the second half of 2010 ahead of annual FIT reductions.

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The solar market has already largely accepted the FIT reductions as planned and is operating on the assumption that Germany moves ahead with them.

Also, it is important to keep in mind that the upper house of Germany's parliament has played to its domestic base and invoked the rhetoric of protecting German jobs and industry throughout the debate over the FIT reductions.

Solar stocks were not reacting to the news in Friday's pre-market as if it were a major event, with more shares trading down on the weak macroeconomic outlook and negative sentiment on the weak U.S. jobs report.

Burt Chao, analyst at Simmons & Co., put out a research note on Friday morning saying that some solar companies were indicating to him that they would prefer if the FIT cuts went ahead as scheduled, rather than the German parliament introduce more uncertainty about the FIT reductions at this late day.

One fear triggered by the latest German political news is that any short-term incremental from an FIT reduction that the upper house can get through, would just make the lower house of Germany's parliament take a much harder line on FIT reductions in subsequent years.

First Solar

(FSLR) - Get Report

,

Yingli Green Energy

(YGE)

,

Trina Solar

(TSL)

and

Suntech Power

(STP)

were all down in early trading on Friday.

Solar stocks were down less than one might typically expect given the negative market sentiment, but in the least, the news out of Germany was not serving as a rally maker.

The euro, which has been the biggest recent overhang on solar stocks, also dropped to near the $1.20 mark on Friday morning.

-- Reported by Eric Rosenbaum in New York.

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