The government announced an 11% cut in subsidies for projects approved in 2011. Installations will get 8 yuan, or $1.30 a watt, while projects that become eligible for support in 2012 will earn 7 yuan per watt. 

Governments across the world are curtailing benefits enjoyed by solar installers as panel prices drop because of industry overcapacity and low demand from traditional markets such as Europe. Companies like Yingli Green Energy (YGE) and Trina Solar (TSL) are counting on growing demand from China to mop up excess production capacity in the industry.

We have a $5 price estimate for Yingli, which is at a 20% premium to its current market price.

Click here for our full analysis of Yingli Solar

Golden sun

China launched an aggressive project, Golden Sun, to boost solar installations. Home to seven of the world's eight largest solar panel manufacturers, China added a meager 490 megawatts of solar installations in 2010. (See: Suntech CEO pins hopes on Chinese growth to drive sales.) 

Falling panel prices in 2011 led this number to increase to more than 2 gigawatts in 2011. A sharp fall in PV prices has helped the global installation base to grow despite countries pulling back subsidies. Many top executives are pinning hopes on the Chinese market doubling this year in order to avoid further deterioration in market conditions. Some hope that China will add as much as 5 gigawatts of capacity in 2012. In comparison, a last minute rush in Germany helped the world's largest market install 7.5 gigawatts of solar panels in 2011.

Dropping panel prices have made solar subsidies very attractive for installers around the world. This is in turn forcing governments to cut support to avoid excessive burden on budgets. Falling panel prices also help in inducing sales in emerging markets. We believe that sales in emerging countries including China are an important source of value for solar companies over the next few years.