UPDATE 3-Italy sets new incentive rules for renewable energy

* No 8,000 MW cap on incentives, but annual caps from June

* Current incentive scheme to be replaced from June

* Limits will be put on farmland use for solar plants

* Italian associations concerned, could appeal

(Adds reaction in 7th and final paragraphs)

By Alberto Sisto

ROME, March 3 (Reuters) – Italy removed a much feared cap on
incentives for solar power production on Thursday when it set
new rules for renewable energy, but other measures in the
package could slow down solar growth.

A new renewable energy decree, part of the European Union’s
efforts to fight climate change, removed an 8,000 megawatt limit
on photovoltaic production incentives, which had been expected
to rein in galloping growth of the Italian sector.

The cap had been included in a previous draft of the decree
seen by Reuters.

“No cut, no cap, no stop to the manufacturing sector
development has ever been envisaged,” Industry Minister Paolo
Romano said in a statement, adding the decree aimed to boost
productivity in the renewable energy sector and offset financial
speculation, which weighs on Italian power bills.

Italy’s solar market has boomed since 2007, when some of
Europe’s most generous production incentives were launched.

It has attracted the world’s biggest PV module makers such
as China’s Suntech Power Holdings Co (STP.N: Quote, Profile, Research), Trina (TSL.N: Quote, Profile, Research),
Yilgli Green Energy (YGE.N: Quote, Profile, Research) and U.S. firm First Solar (FSLR.O: Quote, Profile, Research),
whose shares were up about 2 percent in early trading in New
York.

Six associations representing solar operators said in a
joint statement, however, they were concerned about the “grave
consequences” the decree would have on the photovoltaic sector.
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The current solar power incentives, which originally were
supposed to run to 2013 with a gradual reduction of support,
will apply only to plants that connect to the grid by the end of
May, according to the text of the decree approved by the
government and obtained by Reuters.

Italy’s government will draft a new support scheme by the
end of April for plants that connect to the grid after June 1,
which will set a annual cap on the cumulative capacity eligible
for incentives.

“Making adjustments to funding is the right step. Prices in
the small roof-top system segment in Italy … are much higher
than those in other European countries such as Germany, Spain or
France,” said Markus Hoehner, CEO of Bonn-based EuPD Research.

Solar incentive cuts in Italy come after similar steps in
Germany and Spain, Europe’s renewable energy leaders.

“Europe is going to slow down as a growth engine,” said Rob
Stone, a solar analyst with Cowen & Co in Boston.

Shares in German solar companies were little changed after
the news, with SolarWorld (SWVG.DE: Quote, Profile, Research), Q-Cells (QCEG.DE: Quote, Profile, Research), SMA
Solar (S92G.DE: Quote, Profile, Research) and Phoenix Solar (PS4G.DE: Quote, Profile, Research) between 0.1 to 2.9
percent higher on the day.

MIXED BAG

“It’s kind of a mixed bag,” Stone said of the new decree.
Removal of the cap as well as limits on farmland use, instead of
a ban on big installations, are positive elements, he added.

Under pressure from the farming lobby, the decree has set
limits on the use of farmland for solar plants, saying they
should not exceed 1 MW of capacity to qualify for incentives and
should not take up more than 10 percent of the land.

“The timing of the change is sooner than people had
expected,” Stone said, as many market watchers had predicted
that changes in feed-in-tariffs, a key support mechanism, would
not be implemented until September or October.

Milder-than-feared changes in Italy should be a relief for
SunPower Corp (SPWRA.O: Quote, Profile, Research), which is developing some large projects
there, and for Suntech and Trina, which distribute modules.

The declines in the feed-in tariff will help push down module
prices in the second half of the year, and that could benefit
utility-scale project developers in the United States such as
SunPower and First Solar, analysts said.

But Italian solar power project developers feared
investments in the sector would stop and bank financing freeze
because of a sudden change in the rules of the game.

“It is a tragedy for the photovoltaic sector,” said one
renewable industry source. “The incentive plan, which was meant
to run for three years, will run only a few months. It will
block all investments. A lot of companies will go bankrupt
because they will not be able to pay back bank financing.

In a joint statement associations Aper, Assosolare, Asso
Energie Future, Ises, Grid Parity Project and Gifi said they
would appeal to Italy’s president not to sign the decree if they
were to find parts of it could be unconstitutional.

(Reporting by Alberto Sisto and Stefano Bernabei in Rome,
Stephen Jewkes and Svetlana Kovalyova in Milan, Matt Daily in
New York, Christoph Steitz in Frankfurt, editing by Jane Baird)