Solar panel installations may fall this year for the first time in more than a decade as subsidy cuts continue to crimp demand.

The number of solar panels installed this year may fall 10% from last year to total 24.8 gigawatts, according to a Bloomberg survey. Demand is expected to ease largely because of subsidy pullbacks in Germany, the world's largest market for solar power. Panel sales may drop in other European markets such as Italy as well.

The drop in demand is pushing players such as First Solar (FSLR) to cut production targets and plan for production down times. Chinese solar firms like Trina Solar (TSL) and Yingli (YGE) are forecasting rising sales, however, anticipating that local demand will offset exports to Europe.

We are looking to revise our price estimate for First Solar to reflect this near-term outlook. The stock traded at about $27.50 Friday afternoon, a huge drop from $160 last April.

German exposure

Panel sales have risen steadily over the past decade, driven by demand from industrial-scale plants in Germany and other European markets where governments have offered renewable-energy subsidies. The difficult economic conditions in Europe forced governments to cut support last year, however, pushing down panel prices.

But those cheaper panels still resulted in Germany adding a record 7.5 gigawatts of capacity last year, more than double the government's target. Now the German government wants to cut subsidies by 30% followed by another round of cuts in May, despite opposition. Declining sales in Germany could have a major impact on First Solar's stock price.

A 50% drop in panel sales in Germany will exacerbate the oversupply situation, cutting panel prices even further. Panel prices have dropped sharply in 2011 because of excess production capacity, high inventory levels and declining demand from Italy and other European markets. Further declines in panel prices will result in a reduction in our price estimate for the company.

Chinese solar players seem to be more insulated from the German situation, as the Chinese government plans to boost local solar installations, easing the demand situation.