Spain’s national energy commission has approved a plan to reduce solar incentives and narrow the country’s solar market next year.

The new rules approved by the Administrative Council of the Commission de la Energia (also known as CNE) set Tuesday aren’t the final word. They still require approval from the parliament and the prime minister to become law.

But while the decision takes a step toward reducing uncertainty about the fate of the feed-in tariff program, it’s unlikely to reduce anxiety in the solar industry.

The commission’s plan limits the incentive program to 300 megawatts of new installations in 2009, after the current program had enabled 400 megawatts each year.

The country originally intended the 400-megawatt cap to last from 2007 to 2010, but the solar market reached the limit within the first year, and incentives were frozen as lawmakers debated a new program (see Is Spain Shining Too Brightly).

For months, solar power plant developers and their components suppliers have been frustrated by the uncertain future of the program, which requires utilities to buy solar energy through long-term contracts at prices set by the government (see Spanish Solar Group: Don’t Change Feed-In Tariffs and Spain Could Reduce Solar Subsidies by 35%). Those prices are higher than what utilities pay for conventional power.

The program has led to a rush of solar power plant developments in the country in recent years. Solar power companies from Europe, the United States and Asia have made good money from the program (see SunPower Revenue Up 120%, Stock Falls).

The CNE decision is likely to further boost that rush as companies scramble to finish projects before lower incentives kick in, analysts said.

And that’s good news for the solar industry, but only for the short term, wrote Morgan Stanley Research analyst Nick Allen in a research note Wednesday.

“Long-term, 300 megawatts for 2009 signals a rapid deceleration in the Spanish market,” Allen wrote. “The likely target repository for 2009 module production is now clearly the uncapped market of Germany.”

The proposed installation cap limits the total amount of new solar power generation capacity for the country in 2009. But the proposed electric rates would apply to solar power projects beginning after the current rates expire in September.

Unlike the current rules, the proposed rules make a distinction between solar-power systems installed on the ground instead of on rooftops. The proposed cap calls for 250 megawatts of ground systems and 50 megawatts of rooftop projects.

The mix is different than a previous version of the proposal, which would have allowed 100 megaw atts of ground installations, said Jeff Osborne, an analyst for Thomas Weisel Partners, in a research note.

Osborne called the higher limit for ground installations a welcome change because many public solar companies that do business in Spain have been working on installing ground-mounted systems.

The proposed electric rates fall to between 29 euro cents and 31 euro cents per kilowatt-hour, from about 45 euro cents today, depending on the size – not the location – of the installations.

Because of the rush to lock in incentives before the prices fall, Spain could see up to 1.2 gigawatts of new solar power plants this year if the government approves the proposed rules, Osborne said.

The goal of feed-in tariffs is to reduce the electric rates over time so that solar energy prices will eventually match those of conventional power. Germany recently reduced its solar incentives, which don’t include a capacity cap (see Solar Prices Set in Germany).