What happened 

Solar stocks took a beating Monday after China cut its national incentives to install solar projects. Shares of solar panel manufacturers Canadian Solar Inc. (CSIQ -5.70%) fell as much as 14.5%, JinkoSolar Holding Co. (JKS -3.67%) dropped as much as 17%, and Daqo New Energy Corp (DQ -5.35%) fell as much as 31.3% while inverter manufacturer Enphase Energy Inc (ENPH -3.94%) fell up to 13.5%. By early afternoon, most major stocks in the solar industry were down double digits.

So what

There were two pieces of China's solar ruling, one having to do with distributed generation (DG) and the other with utility-scale solar.

Rows of solar panels at a solar farm in the desert under a blue sky.

Image source: Getty Images.

On the DG side, China put a cap of 10 gigawatts (GW) for new solar projects in 2018, down from 19 GW installed in 2017. According to Asia Europe Clean Energy Advisory Co (AECEA), there may already be more than 10 GW of DG projects installed in China, so that could make it tough to build any projects in the second half of the year.

Utility-scale projects may be in even more trouble because China has issued a notice that its utility-scale deployment target of 13.9 GW has been abolished and no new projects will be given feed-in tariff contracts under the old 2018 rules. Feed-in tariffs are the contracted rate developers are paid for solar power sent to the grid, so a cut in the feed-in tariff rate is a direct cut to each project's top line. In China in 2017, 34 GW of utility-scale projects were built, compared to a total of 100 GW of solar built globally, so killing the utility-scale market will have global implications.

Early indications are that local governments will be given financial control of future DG and utility-scale solar deployments, so the industry could recover, but we don't know when a recovery could happen or how much demand there will be.

Now what

China is arguably the most important market in the solar industry today and if it shrinks from 53 GW in 2017 to around 30 GW, as  AECEA and Daiwa Capital Markets's Dennis Ip predicts, it'll have a widespread impact on the industry. Solar panel prices will likely fall on lower demand, which will impact margins in China and abroad. We could see companies start to lose money again and some may find it hard to stave off bankruptcy. 

There's also uncertainty as to when China's solar market may recover. If local governments implement stringent rules on how solar installations are compensated, it could dampen demand for years. There's simply no positive way to spin today's news and that's why solar stocks are falling across the board.