Climate Change Minister Greg Combet said the subsidy would be reduced to around $3700.
"We will be announcing today a reduction in the level of federal government support for the installation of solar panels on people's roofs," he told ABC Radio.
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"However, the cut we are making still means that a subsidy of around $3700 will be available."
Mr Combet said there had been such strong demand for the solar panels that it had resulted in higher electricity prices.
"The government is very keen to take pressure off prices," he said.
The problem stems from feed-in tariffs, particularly in NSW where the former Labor government introduced a very high rate to encourage solar panel take-up, the minister said.
Under feed-in tariffs people who install solar panels are paid for electricity they feed back into the electricity grid.
Mr Combet said the tariffs paid by states and territories supplemented the federal government subsidy to install panels and the NSW tariff had been a key driver of demand.
"There just needs to be some heat taken out of that market while we still provide encouragement for people to use renewable energy in this way," he said.
