Even in a tough year for solar manufacturers, the world's biggest solar market reached a new record for installations. German regulatory agency Bundesnetzagentur said the country installed 7.5 GW of solar power in 2011, just beating out 2010's record of 7.4 GW.

The record has good and bad news for the industry. The agency said installations in December were 3 GW, a massive number that should mean strong quarterly sales for Suntech Power (NYS: STP) , Yingli Green Energy (NYS: YGE) , and JA Solar (NAS: JASO) , all of which get a large proportion of sales from Europe. But it also means that feed-in tariffs, which are now tied to installation levels, will likely be cut drastically in mid-2012.

The downside of success
With supply wildly outpacing demand for most of 2011, solar manufacturers were forced to cut sale prices for modules, making solar energy more economical in Germany. This brought up demand for solar power, resulting in the high installation rate in December. So the lower prices led to a successful fourth quarter, a short-term success.

The downside is that the German government is now talking about a solar cap, which could kill the industry there. At the very least a reduction in the feed-in tariff of more than 15% in mid-2012 is very likely. That alone should put a big damper on demand.

So falling costs and a record level of installations in Germany has its downside for the industry.

Another rough year ahead
Until the U.S., China, and India ramp up solar demand ,Germany fills much of the vacuum for manufacturers. If demand falls in the second half of 2012 because of feed-in tariff cuts, it could spell doom for many solar manufacturers, suppliers in particular. LDK Solar (NYS: LDK) , JA Solar, and ReneSola (NYS: SOL) have already had a tough time in 2011, and if Germany falls apart they would be in even worse shape.

Keep an eye on how German politicians handle this record and on the comments solar companies' management makes during earnings calls. It could reveal whether this is a sign of good things to come or the top of the market in the near term.

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At the time this article was published Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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