The dramatic cuts to German feed-in-tariffs for rooftop solar late last week – which went quicker and deeper than almost all expectations – may be the just the first in a European-wide backlash against solar PV.

Analysts in Europe expect Italy and other Europeans to adopt similarly drastic cuts in incentives for solar PV, and not so much because of the problems of trying to match a tariff rate with the plunging costs of solar, or the potential cost of consumers, but because solar PV is starting to create a large hole in the business models of the conventional power industry.

Deutsche Bank solar analyst Vishal Shah noted in a report last Friday that German utilities are being significantly impacted due to excess solar generation – a result of the “merit order” impact that this website has reported on. This is true not just of the German market, but Italy as well, which actually exceeded Germany last year for the amount of solar PV installed in 2011.

So much so, Shah noted, that prices in peak power periods in the middle of the afternoon on sunny days are running lower than base power prices of 2am. The merit order impact was detailed in a recent study by IZES, which found that solar power has reduced the price of electricity on the EPEX exchange by up to 40 percent in the early afternoon when the most solar power is generated.

This causes massive problems for generators of conventional power, who rely on increases in peak power prices to deliver their profit margins. “This phenomenon is unsustainable and already creating a huge backlash from major utilities,” Shah noted. “With Germany adopting a drastic cut, we expect major utilities in other European countries to push for similar cuts as well.”

Australian generators have not been as greatly impacted by the solar merit order effect, possibly because not enough has been installed – Germany has more than 25GW of solar PV compared to Australia’s 1.4GW. However, utilities such as Origin Energy have conceded that the installation of solar PV has been one of a number of factors that have contributed to lower wholesale energy prices in the past year, and TRUenergy has also conceded that the effect is real. A study led by the Melbourne Energy Institute modelled a scenario that showed that the benefits of solar energy on the National Electricity Market could outweigh the costs of feed-in-tariffs, in a similar manner that IZES discovered.

But while utilities are pushing back against solar feed in tariffs – and have argued with varying degrees of success that they should be abandoned completely in Australia – what is not clear is how they deal with solar PV when its costs fall sufficiently that they no longer require a subsidy.

As Suntech CEO Dr Zhengrong Shi says in this interview with Fortune magazine published today, within 5 years the solar PV industry will not need subsidies, and its growth from there will only accelerate. He says that by 2050, 25 per cent of the world’s electricity will come from solar, compared to just one per cent now.

Indeed, China’s Ministry of Industry and Information Technology unveiled its five-year plan over the weekend, saying it anticipates the cost of solar PV to fall to around 0.8 yuan per kilowatt hour (11.8c/kWh) by 2015 and to 0.6 yuan (8.8c/kWh) by 2020. At that point, it anticipates the cost of solar to be cheaper than the wholesale cost of coal. (Note: This is the Chinese government speaking, not the solar lobby).

To prepare for this, and to ensure it has a major slice of the market, the Chinese government is requiring leading polysilicon manufacturers to reach 50,000 tonnes of production by 2015 and for individual solar panel manufacturers to reach 5GW of annual production capacity.

It aims to have at least one solar company boasting sales of more than 100 billion yuan ($15 billion) by 2015, and up to five others with annual sales of more than $7 billion. Suntech, the biggest group by sales, currently has revenue of around $3 billion. In other words, China wants its biggest solar company to grow at least five-fold within the next three years.

As Seeking Alpha noted in an analysis on Friday, solar is heading for grid parity in a broad range of geographical areas by 2015 (by that it means wholesale. Not retail), so the result will be significant volume growth. It would seem that the only way that the utilities can protect their position over the medium to long term is to have an arbitrary limit on the growth of solar. In Germany, that was exactly what they were looking for, a legislative cap of 1GW per year. They haven’t yet succeeded, but they will continue trying.