In the drive to increase solar power generation in Europe, Italy has trailed only Germany in subsidies and installed megawatts. Germany has lowered its subsidies for solar installations, though not as severely as feared just a few months ago. Italy, however, is now considering a plan that is much worse for solar makers than first thought. If the new law is enacted, the pressure on solar makers’ shares will increase almost instantly.

Some makers are already feeling the weight. Renesola Ltd. (NYSE: SOL) reported revenue and earnings above analysts’ expectations, but the company’s outlook for first-quarter revenue was disappointing and the shares are getting punished for it. Trina Solar Ltd. (NYSE: TSL), Suntech Power Holdings Co., Ltd. (NYSE: STP), Yingli Green Energy Holding Co. Ltd. (NYSE: YGE), SunPower Corp. (NASDAQ: SPWRA), and First Solar Inc. (NASDAQ: FSLR) have also all reported strong fourth quarter earnings. But 2011 could be a different story.

But if Italy goes ahead with its proposed changes, which are scheduled for a vote on Thursday, March 3rd, every company could be hurt. Under the Italian proposal, a cap on the amount of solar generation would be set at 8,000 megawatts. Once that total is reached, feed-in tariffs for new plants would be suspended.

The total installed solar capacity in Italy is officially pegged at 3,700 megawatts, but there are estimates that the actual amount installed is approaching 7,000 megawatts. The government is approving projects at the rate of about 1,000 megawatts a month, which means that the 8,000-megawatt limit would be reached in July or August.

The proposed law also imposes a cap of 100 kilowatts of installed ground-mounted panels per hectare of farmland (a hectare is about 2.5 acres), and limits an individual project on agricultural land to 1 megawatt of capacity.

In all, the proposed strictures are much more severe than anticipated, and the new law would go into effect immediately upon passage and there is no allowance for grandfathering existing projects. There is some speculation that if the Italian government does pass this law, it will immediately begin work on a new law that would set a long-term goal of around 20,000 megawatts of solar generation by 2020.

Solar makers’ shares are recovering some of the losses they took yesterday as news of the change in Italian law became available. The companies likely to be least affected by the proposed law are First Solar and SunPower, both of which have project pipelines in the US that could make up for any change in Italian demand. Also, both have very limited exposure to new projects in Italy, having already lined up their ducks in expectation of a slowdown.

Renesola shares are off more than -15% on nearly double average daily volume at about noon today. The Guggenheim Solar ETF (NYSE: TAN) is down about a quarter point as well.

Paul Ausick

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