* Norwegian producer takes $1.2 bln writedown after price slump
* Industry consolidation, flattening prices expected
By Gerard Wynn
LONDON, July 19 (Reuters) - A $1.2 billion write-down by solar equipment maker REC on Tuesday highlighted the pain being inflicted by aggressive Chinese competition and may herald wider consolidation in the sector and flattening of prices.
REC produces equipment across the supply chain from slices of raw, solar-grade silicon, called wafers, to finished solar panels.
But prices for wafers have almost halved since April, forcing REC to mothball its older Norwegian facilities and take a 6.5 billion Norwegian crown ($1.2 billion) write-down, in a possible foretaste of wider provisions and consolidation.
"You've got a shakeout starting now," said Gerard Reid, clean energy analyst at Jefferies bank in london.
"You want to have an industry which has 10 manufacturers maximum, not 400," referring to over-capacity.
China and Taiwan have emerged as dominant centres for production of silicon solar equipment, with a market share of about 60 percent in 2010, up from 50 percent in 2009, S&P said in report earlier this month.
"This growth is responsible for the current substantial over-capacity in the industry supply chain," the report said.
Prices for solar-grade silicon are down about 40 percent over the year, and panels, called modules, about a fifth.
Top Chinese module makers are now selling at about $1.50 per watt, compared with $2.25 on average in 2009.
Wafers have fallen fastest partly because of a developed spot market meaning product is less tied up in long-term contracts.
"Certain companies are just going to go bankrupt, they just can't compete," said Reid, who said significant write-downs were possible at German producer Q-Cells , and saw further falls in REC shares despite a 12 percent rally by midday.
On the positive side, REC had market-leading, U.S. polysilicon facilities, said Barclays Capital analyst Rupesh Madlani, which could become the main focus of the company.
REC has lost 60 percent of its value since February while solar stocks have underformed wider clean energy and benchmarks in a long-run slump reflecting the margin squeeze.
The United States and European countries support renewable energy including solar power to confront the twin threats of security of energy supply and climate change. But governments have tinkered with policies, creating a stop-start market.
Italy, the world's number two market, curbed demand earlier this year, leading to the latest slide in equipment prices. Italy finally announced in May smaller subsidy cuts than feared. [ID: nNLDE7440Z]
"What happens next all depends on how much demand picks up in Germany, Italy and the U.S.," said Matrix clean energy analyst Michael McNamara.
REC chief executive Ole Enger saw wafer prices bottoming out. Data gathering website energytrend.com recorded a rally in spot silicon and wafer prices this week.
REC's Tuesday stock rally may show investors trying to find the bottom of the dip, said one investment analyst who declined to be named.
Solar power is still far more expensive than fossil fuels, despite the price falls, while the discovery of cheap shale gas has further dented the economics of renewable energy.
A nuclear backlash after Fukushima may boost coal and gas as much as renewables, says the International Energy Agency. ($1 = 5.607 Norwegian Crowns) (Editing by David Cowell)