German lawmakers voted Friday to cutsolarfeed-in tariffs by as much as 10 percent in each of the next three years.

The decision comes as a relief to the solar industry, as the reductions are far more palatable than the 30 percent some lawmakers had been advocating.

Still, next year’s cut is slightly larger than the 9.2 percent drop for rooftop projects and 9.8 percent for ground-mounted projects, that Germany’s environmental ministry suggested in December. The decrease differs according to the type of installation, but the average decrease amounts to 10 percent in 2009, 7 percent in 2010 and 8 percent in 2011.

The vote by the lower parliament, led by Chancellor Angela Merkel’s coalition, arrived a week after the two ruling parties negotiated a deal that became the basis for the new measure approved Friday (see German Solar Subsidies to Fall Less Than Forecast). The measure also provides more incentives for wind and geothermal industries.

German solar companies had feared a far more dramatic decrease in the feed-in tariffs. The tariffs are prices that utilities are required to pay for solar energy at a fixed price for 20 years, locked-in the year the installation is completed.

The tariffs had begun to drop at a rate of some 5 percent each year, the idea being to help make solar power competitive without government support.

Still, solar companies say they will have to invest more heavily on their own to offset the lower incentives provided by the government.

“The industry thinks it’s quite tough but fair,” said Francesco D’Avack, an analyst with London-based New Energy Finance. “It’s quite painful for the big plants, but it’s doable.”

Solar companies will also have to deal with the possibility that the solar market is heading for a period of oversupply and lower prices, as some analysts have predicted.

A new report by the large accounting firm KPMG predicts a bubble for the renewable industry. One-half of the report’s respondents agreed that a bubble in the renewable energy sector is a “real risk.”

The report also suggests the market could be getting crowded, and is heading for a period of mergers and acquisitions. The industry has witnessed “an explosion” in the number of deals, with $55.7 billion in M&A transactions in 2007, up 47 percent from the previous year, according to KPMG partner Andrew Cox in the report.

Shares did not appear to move that much based on the news, even though the industry had been eagerly awaiting it.

Q-Cells’ (Frankfurt: QCE) stock dropped by 1.33 percent to close at €73.51 ($115.66) per share Friday, while SunPower’s (Ndsq: SPWR) stock rose 1.52 percent to $80.91 per share in recent trading.

The German government passed the feed-in tariffs in 2000 to promote renewable energy, which costs more than conventional power. The policy, which requires utilities to buy all available solar energy, has been credited with jumpstarting the solar industry and making the country the top solar market in the world. It also has prompted people, from homeowners to farmers, to set up solar panels on their rooftops or in the fields to make a tidy profit.

Friday’s bill establishes a decline of 8 percent in 2009 and 2010 and 9 percent in 2011 for small rooftop plants that can generate up to 100 kilowatt of electricity. For large roof and ground installations, the decline will start at 10 percent for 2009 and 2010 and 9 percent for 2011.

As a result, the prices for small, 30-kilwatt rooftop installations will be 43.01 euro cents per kilowatt hour; 40.92 euro cents for installations with the 30 to 100 kilowatt capacity; 39.58 euro cents for installations with 100 kilowatt to 1 megawatt capacity; and 33 euro cents for rooftop installations with more than 1 megawatt capacity. Ground installations will receive 31.94 euro cents per kilowatt hour.

The measure will eliminate the extra 5 euro cents energy producers get if they install solar panels that are designed to blend in with the rooftop architecture, making them less visible to the public.

The new measure also includes incentives for the wind and geothermal industry. Wind energy producers will receive an additional 7.95 to 9.2 euro cents per kilowatt hour over the next three years. Geothermal power generators will get an additional 4 euro cents per kilowatt hour until 2015.

The bill is heading to the upper parliament for a final vote. The upper house is consisted of 16 state governments, and it typically approves legislation passed by the lower house.