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* 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, Trina TSL.N, Yilgli Green Energy (YGE.N) and U.S. firm First Solar (FSLR.O), 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. [ID:nWEB3430]
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, Q-Cells QCEG.DE, SMA Solar (S92G.DE) and Phoenix Solar (PS4G.DE) between 0.1 to 2.9 percent higher on the day.
"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, 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