A 500-megawatt solar energy development quota set by the Spanish government for 2009 might already be filled.

That's because an ongoing government investigation has uncovered widespread fraud that could in effect reward those who falsely claimed to have completed solar power projects by a September deadline when they didn't, wrote Jeff Osborne, an equity analyst with Thomas Weisel Partners, in a research note Monday.

Projects that weren't completed in time by Sept. 28 will now get first consideration to fill the 500-megawatt cap the government has set for solar power development in the country through 2009, Osborne said.

"As a result of this bonanza of greed that occurred in the Spanish region pre-September 28th and the fraudulent project developer activity, we could see these fraudulent solar farms take up the entire 500MW cap next year given the new scope of the investigation. This would lead to no new shipments into this key region of demand," Osborne wrote.

Spain has a lucrative feed-in tariff program that requires utilities to buy solar electricity at high rates set by the government. After seeing an explosive growth of solar energy projects that far surpassed its estimates, the government reduced the solar electricity rates for solar power plants installed after Sept. 28 this year.

The new rates – and a cap that the new rates would only apply to 500 megawatts worth of projects – would be in effect through 2009 (see Spain Approves 500MW for Solar).

A rush to install solar energy systems by Sept. 28 has led to reports of fraud by developers claiming they had finished their projects when they only installed some of the panels or, in some cases, put in fake solar panels to buy time, said Francesco d'Avack, a solar analyst with New Energy Finance in London.

The National Energy Commission, or CNE, began investigating these reports in late October (see Solaria Has a Solar Park Deal for You). After checking 287 solar farms, investigators found that only 97 of the projects (roughly 44 percent) were legally completed by September, Osborne wrote.

Spanish newspaper El Pais published a story on Dec. 7 about the government investigation, noting that six government workers resigned after evidence showed they gave solar energy development permits to relatives.

The corruption also has caused an oversupply of solar panels. Paula Mints, market researcher for Navigant Consulting, jolted the solar industry two weeks ago with her assessment that as much as 1.7 gigawatts of panels were bought for installation in Spain by Sept. 28, only 800 megawatts of them were actually installed (see Solar a Bust in Spain).

"Spain is a bit of a mess," Mints said. "Where are those panels going to go in this economic downturn? We are in a precarious situation."

Spain has been a great market for Chinese panel makers, who were able to sell their goods at premium prices earlier this year. El Pais quoted a businessman saying, "There have been caes of merchant ships from China that auctioned off their load before they even reached port."

No solar panel makers have publicly or specifically discussed the oversupply problems in Spain. Some of them, such as Chinese company Suntech Power Holdings, have predicted a price drop of as much as 30 percent for their products next year.

The decline will come as a result of cheaper and more abundant silicon, the key ingredient in most solar panels made today, and a rapid expansion of solar equipment factories worldwide (see Polysilicon Prices Head for a Steep Fall).

The weak economy will also contribute to lower prices. Some solar companies already planned to cut production (see Q-Cells Cuts Sales Forecast After Customers Delay Deliveries).

The excess panels, some of which are also sitting in warehouses in China and Taiwan, that were initially destined for Spain would now have to be sold cheaply in other countries, Osborne said. He believes some panel makers already tried to get rid of their surplus goods in Germany, the world's largest solar market and one with a feed-in tariff program as well.

Chinese solar panel makers might not be the only ones making more products than the market can absorb. Evidence suggests that some of First Solar's thin-film panels also are sitting in warehouses in Europe, according to an financial analyst with ThinkEquity (see First Solar Panels Piling Up?).

First Solar, based in Tempe, Ariz., is known for being able to make the cheapest solar panels in the industry.