Chinese and European solar industry insiders have expressed disappointment after Germany's parliament finalized a cut in subsidies, saying the move has "shaken the sector".
From April 1, subsidies to the industry were cut by as much as 29 percent. The move is expected to slow the annual pace of installations by 50 percent in Germany, the industry's biggest market, and reduce solar panel exports from China, the home of the world's biggest producers.
"The whole sector will be shaken by the legislative decision," said Andreas Damm, director of Solarprojekte Gmbh, which has been installing solar panels for a number of years.
Damm said that even before last week's parliamentary vote, the industry had already been deeply affected by the proposal to cut subsidies.
The German government said that the use of subsidies has triggered rapid growth in the use of solar products in the country and claimed that the subsidies have caused electricity prices to rise.
The UK, Italy and France have also started to cut the subsidies they provide.
"All these measures will bring a great transformation in the upper chain of solar panel production, which happens mainly in China," said Wang Lanfang, Solarprojekte's representative in China.
Because of the reduction in incentives and a slowdown in solar panel installation in Europe, demand for the panels will be greatly reduced this year. "This is bad news for panel makers in China, especially small and medium-sized factories," said Wang.
She said the price of solar panels has already hit its lowest level, while the average year-on-year price dropped by approximately 40 percent in 2011.
Wang said the company, which specializes in the installation of solar panels and related projects in German power plants, will be forced to adjust its strategy to deal with the challenge.
She said that over the long term, the cut could result in a structural transformation in the sector and may even push some Chinese companies into bankruptcy. "The coming half year will see a huge transformation in the solar industry," said Wang.
Damm said that in the week running up to the vote, clients rushed to buy panels and finish projects, forcing suppliers to resort to emergency deliveries.
He said large-scale projects will be the most severely affected because the cut in the feed-in tariff would result in difficulties in securing future financing.
Germany, followed by Italy, has been Europe's leading solar energy market for 10 years. However, unlike Italy, which has experienced constant policy changes, the country has been seen as one of the industry's most stable markets. That perception has seen many Chinese companies enter the German market.
"And now, feeling unsafe, the Chinese partners are complaining," said Damm, who added that the policy shift is the result of lobbying by Germany's biggest producers of electricity, who regard the solar sector as a major competitor.
David Fouquet of the Brussels-based European Institute for Asian Studies, said the decision has seriously affected the prospects of the industry and its ability to create jobs.
"It will also bring about a change in the overall energy mix, especially when seen against the backdrop of Germany's decision to phase out nuclear energy," said Fouquet.
He said that there is a contradiction in the actions of Germany and other countries that are planning to abandon nuclear power, but have taken decisions that will undermine their ability to do so.
Fouquet said that the possibility exists that those countries may amend their decisions at a future point.
Germany's biggest producers of solar panels, Q-Cells, reduced its workforce of 2,500 by almost 1,000 in 2011, a year when it reported a loss of 700 million euros ($ 935 million).
The sector is hoping that changes will happen if the current government is deposed at the next election, Damm said.