Ontario-based Canadian Solar Inc. (NASDAQ: CSIQ) reported EPS well below estimates this morning, and just about every solar PV maker is paying the price. Canadian Solar posted EPS of $0.58 on revenue of $452.7 million, compared with estimates for EPS of $0.65 and revenue of $415.6 million. But what spooked investors was the revelation that some Italian buyers are trying to postpone shipments due to cuts in government subsidies. Shares in Canadian Solar fell by as much as -15%.

The contagion is spreading to other solar PV makers, particularly Chinese makers. LDK Solar Co. Inc. (NYSE: LDK), JA Solar Holdings, Co., Ltd. (NASDAQ: JASO), Suntech Power Holdings Co., Ltd (NYSE: STP), Yingli Green Energy Holding Co. (NYSE: YGE), First Solar Inc. (NASDAQ: FSLR) and SunPower Corp. (NASDAQ: SPWRA) have all lost between about -3% and -7% this morning.

There are already proposed changes to Italy’s subsidies for solar generation.  The big fear is that projects that are not already underway will not be funded, and that large projects may not be funded at all.

Italy has committed to a binding agreement with the European Union to get 17% of its electricity from renewable sources by 2020. Large, ground-based installations of solar PV panels take longer and cost more to construct than small rooftop installations. That does not augur well for the large projects.

The other issue with Canadian Solar and the other Chinese makers is that they are expanding their manufacturing capacity at a time when supply is expected to outstrip demand, putting more pressure on already stressed margins. Canadian Solar noted it its earnings report that gross margins fell will fall from 17% to 14%-15% in the first quarter. Building more capacity only makes that worse.

Aside from Canadian Solar, the two companies with the largest exposure to Italy are JA Solar and SunPower. The company least likely to take a big hit from changes in Italian incentives is First Solar. The others are simply going to take a hit every time incentives are slashed anywhere or that demand estimates fall.

Canadian Solar shipped 803 megawatts worth of solar modules in 2010, and forecasts shipments of 1,200-1,300 megawatts in 2011, although it only expects to ship 237 megawatts in the first quarter. Most observers think that the first half of the year will be the sweet spot for solar PV makers in 2011, and Canadian Solar is not off to a good start.

The hit to the individual solar makers is also being reflected in the Guggenheim Solar ETF (NYSE: TAN), which is down about -4% at about noon today.

Paul Ausick

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