The Chinese Solar Supernova of 2009

The information is still spotty, but news broke today of a generous Chinese solar subsidy. That was all the solar bulls (and short-sellers) needed to hear, and together they sent stocks of firms like Trina Solar (NYSE: TSL  ) , Yingli Green Energy (NYSE: YGE  ) , and JA Solar (Nasdaq: JASO  ) through the roof.

What exactly are we talking about here? A statement today from the Ministry of Finance announced that China is going to subsidize solar projects in excess of 50 kilowatts (kW) of rated capacity to the tune of nearly $3 per watt. According to Jesse Pichel of Piper Jaffray (NYSE: PJC  ) , that's enough to cover at least 60% of the cost of installation, leaving only inverters and balance-of-systems costs to contend with.

Subsidies are exactly what transformed places like Germany and Spain into solar hotspots. With enough government support, China's domestic solar market could come to dwarf those markets, putting firms like Suntech Power (NYSE: STP  ) back on their former pedestals in the process. For both China's longer-term goals of reducing dependence on coal-fired generation and its near-term target of 10% renewable electricity generation by 2010, the move makes a tremendous amount of sense.

The order flow that can be expected to result should also save some of the more fragile firms like Solarfun Power (Nasdaq: SOLF  ) and China Sunergy (Nasdaq: CSUN  ) from flaming out.

I guess my three biggest questions today are:

• Will there be a cap, and at what level will China set it?
• How long will the subsidy last?
• What concrete steps will China take to avoid the kind of fraud perpetrated in Spain?

Once the details come out, analysts will be able to take a stab at some realistic valuation adjustments. Today it's all about animal spirits, and nobody really knows what the upside is. I would wait for some well-reasoned estimates before jumping in here, but that's just my reluctance to step into the shifting solar sands shining through.