The decision by the world's leading solar power Germany to slash subsidy support will probably lead to similar moves across Europe and hasten a manufacturing shakeout through bankruptcies while sharpening the technology's competitive edge.
The announcement on Thursday of a 20-30 per cent support cut will cast a further pall over module (solar panel) makers, which will brace for added pressure on profit margins as they try to adjust selling prices in line with the new support tariff.
That will inevitably lead to more bankruptcies in a sector already labouring under 100 per cent or more over-capacity and where leading names have filed for insolvency, including US-based Evergreen Solar and Solyndra, and debt restructurings such as the one at Germany's Q-Cells.
But further cost cuts across the supply chain – and in particular the upstream manufacturers of raw solar-grade silicon – will sharpen the technology's competitiveness and see it mount a serious attack on offshore wind, shaking up the relative outlook for emerging technologies.
Larger solar installations in Germany over 1 megawatt will now get 13.5 euro cents per kilowatt hour support (from 17.9 cents), while projects over 10 MW will get nothing.
That is now less than offshore wind, which continues to get 15 euro cents, although over a shorter period.
That close competition is borne out by consultancy and industry estimates of the unsubsidised cost of electricity for each, with the two competing neck and neck at about 15-20 euro cents per kilowatt hour.
If solar economics can leapfrog those of offshore wind, this poses the question: why invest in such a complex, moving piece of machinery as an offshore turbine, stationed in an unpredictable weather environment with massive servicing costs, rather than a simpler, static and more proven solar panel array?
One answer is that there may be more limited space for solar panels in the best, south-facing spots compared with the available coastlines suited for offshore turbines.
Any benefit from whittling solar costs will come in the medium-term: a more immediate impact will be a withering among manufacturers as these brace either for price cuts or an equally damaging, more prolonged mothballing of capacity.
Sharp falls on Thursday of 6 per cent or more in the share prices of manufacturers worldwide illustrated the risk.
Germany's latest tariff cut is intended to slow a stampede to develop projects, which hit a fresh record last year.
Installations of solar panels have boomed due to feed-in tariffs, generous subsidies which have mounted into a growing burden passed on to energy consumers.
Berlin's move may be copied by other countries.
Britain on Tuesday signalled its determination to carry through a halving of solar support, from one of the most world's most generous levels, taking its case to the Supreme Court after setbacks at lower courts and opposition from solar developers.
London has often referenced the German model for continuing support cuts over time and will only be encouraged by the new German tariff for smaller installations, which is a little more than a third of the equivalent, present UK level.
Germany's move confirms a trend in all renewable energy towards lower subsidies, a shift recognised by leading companies such as US-based First Solar which says it is now targeting low-cost, utility-scale projects.
In a self-propelling, downward spiral, falling prices for solar panels have fed subsidy cuts, which in turn have forced manufacturers to cut prices, and so on.
That trend is likely to continue, with price stabilisation now looking more likely in 2014.
Analysts have recently downgraded the global outlook for the sector which has seen a meteoric compound annual growth rate of 42 per cent from 2000 to 2011, according to figures published by the industry group, the European Photovoltaic Industry Association.
The wild card is China, with wide-ranging estimates for how far growth there could make up projected falling demand in Europe.
This story was originally published by Reuters. Reproduced with permission.