Solar Subsidy Mayhem!

A reminder about investing today in the solar sector: It's not about technology. It's not about earnings. Right now, it's all about government largess.

Witness Spain's disappointing plans for 2009 subsidies. Basically, Spain is reportedly considering an aggregate subsidy cap of 300 megawatts on new solar installation for 2009 and offering a lower price on electricity produced from solar systems. Discussion includes paying a rate about a third less for energy produced in rooftop systems and 41 percent less for ground-based systems. The total cap is also a far cry from the 3,000 MW of new capacity that some analysts said would be needed to keep Wall Street happy.

Stocks started falling Friday after Lehman's Vishal Shah warned of the possibility of stingier subsidies. Bloomberg is reporting that cuts of up to 35 percent in the rate paid for photovoltaic solar generation systems could be on the table. It cited reports in Spain's Cinco Días newspaper.

Here's the damage so far today (as of about 3 p.m.):

Canadian Solar (CSIQ): down 6.7 percent

Suntech Power (STP): down 6.49 percent

SunPower Corp. (SPWR): down 7 percent

Solarfun Power Holdings (SOLF): down 5.95 percent

First Solar (FSLR): down about 1 percent

Evergreen Solar (ESLR): down 3.4 percent.

Lehman's Shah had this to say today about the solars tanned with Spanish rays:

[Block]In the near term, we continue to advocate a more selective approach toward the sector as increased volatility due to concerns about potential outcomes in Spain beyond September could continue to weigh on stocks with high Spain exposure. Companies with high Spain exposure include CSIQ, STP, SPWR, SOLF (Not covered), YGE. Companies with low Spain exposure include FSLR, ESLR. Maintain longer term constructive view of the sector. [EndBlock]

It's important to note that today's news simply considers what future subsidy plans might look like, not a concrete policy. So shares could move back up. But the day's volatility (and similar swooning around previous subsidy announcements from other big solar markets like Germany) provides a primer on what the near future holds for the sector.

Industry hopefuls point out that with oil above $140 and new technological breakthroughs on the horizon, we could be just a few years from doing away with the need for government subsidies to support the solar energy market. In the meantime, however, investors will remain mired in the challenging business of divining bureaucratic whims.

Disclosure: The author owns shares of ESLR.