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Recently, Energy Conversion Devices (NASDAQ:ENER) warned of a reduction of up to 50% in FQ3 sales due to recent policy developments in France and Italy.

According to Mark Morelli, President and Chief Executive Officer of Energy Conversion Device:

"The dramatic and abrupt shift in the French and Italian solar incentive structures has impacted our business and forced us to reconsider our near-term financial outlook. Recent events have injected disruptive uncertainty into the markets which is causing financing sources to put projects on hold and may impact as much as 50% of this quarter's forecasted revenue. We expect better visibility on the timing of our projects after the announcement of the new Italian feed-in-tariff program and the French tender process. Nevertheless, for the quarter ending March 31, 2011, we are reducing production to 25 megawatts and are also aggressively pulling back on our cost structure. Thus our financial results will be affected due to restructuring and factory under-utilization charges."

I wrote in one of my previous articles that over installations in Italy can likely influence subsidy policies of the government, which in turn, can affect solar stocks negatively.

Going forward, the pending feed-in tariff cut in Italy and the potential hard cap on installation should continue to have a negative impact on module shipments. There are virtually no new projects getting financed in Italy and everyone is waiting for more clarity on a new subsidy regime. Solar companies with exposure towards Italy are expected to be most affected. Sunpower (SPWRA) is most likely to see similar issues as ENER in the near-term, as the majority of its current UPP business is in Italy. Other solar companies with high exposure to Italy include Power-One (NASDAQ:PWER) and Evergreen Solar (ESLR) and they are likely to underperform in near term.

U.S. Solar stocks like First Solar (NASDAQ:FSLR), GT Solar (SOLR), MEMC (WFR) are also likely to react negatively on the absolute basis. However, First Solar appears to be better insulated than others, as it has greater flexibility to shift those modules that were supposed to go to Italy to the U.S. market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Energy Conversion Devices Warning Is Negative for Solar Stocks