The first bill is responsible for creating strong market demand for small renewable energy projects, especially solar photovoltaic (PV) energy.

Passing 48 to 1 in the Senate, SB 5101 will establish a renewable energy "feed-in" production incentive. Homes and businesses with solar PV and wind power systems would earn a credit of 15 cents per kWh of electricity generated by their renewable energy systems up to $2000 annually -- roughly tailored to the yearly output of a typical 3.5 kW PV system. The bill would also apply to anaerobic digesters.

Here's where it gets interesting. The production incentive couples economic multipliers to increase the earned credit if a solar or wind power project's components are manufactured in Washington state. This can increase the 15 cent per kWh credit upward to as much as 54 cents per kWh and this rate would be available for a fixed 10 year period beginning July 1, 2005.

With the first bill taking care of the demand side of the equation, the second bill would take care of the supply side by nurturing new, high-tech manufacturing of renewable energy components. SB 5111, which passed 49 to 0, will provide tax breaks for renewable energy businesses that currently reside in the state or choose to relocate there. And the bill goes above that to offer higher tax breaks to companies that locate themselves in economically depressed areas.

Renewable energy advocates often speak about how their industries are powerful job engines, but this bill goes so far to legislate items that would directly spur job creation in the state.

Both bills, which are now on their way to the House, could be effective on their own but are truly meant as a pair, with the first creating demand for state-based renewable energy products and the second helping to kick-start the new manufacturing to satisfy the expected need.

A New Policy Approach

The first bill -- the production-based incentive bill -- is particularly important because it reflects a new policy approach for promoting renewable energy that has been boiling up among supporters.

While it would represent a paradigm shift for solar legislation in the U.S., it's not an altogether new approach. Any solar PV installer trying to order or maintain a good supply of solar modules knows where else this approach has been staggeringly effective -- Germany.

Since enacting a national production incentive, Germany has been a veritable black hole for solar panels, sucking up worldwide supplies of PV at a time of increasing demand and constrained manufacturing capacity. The roots of this latest production bill for Washington state go back to what's known as the "Aachen model" named after the German town whose city council first enacted the production credit. The local success in Aachen soon spiraled throughout the country and was eventually enacted on a national scale. Germany is now the largest solar market in the world.

"The eyes of much of the country will be on this performance-based approach," said Tom Starrs, Chair of the American Solar Energy Society, and Vice President of Marketing and Sales with the Northwest-based Bonneville Environmental Foundation. "It's a very innovative idea. I've been a strong proponent for creating incentive programs that focus on paying for performance, as opposed to capacity-based dollar per watt incentives."

Capacity-based incentives, like those in California, require the state or utilities to pay an up-front rebate for the cost of a solar PV system based on a dollar per-watt of a system's installed capacity. For example, at the current California rebate rate of $2.80 per watt, a payment of $8400 is paid out for a 3 kW system. A production-based approach provides a rebate per kWh of energy produced over a fixed period of time. It's a more gradual approach that lends itself to flexible, creative financing mechanisms. It also promotes the maximum efficiency of the solar projects over the course of their 20-30 year lifespan. In a capacity approach, since the entire rebate is dolled out all at once, there is no guarantee the solar production capabilities are maintained by the owner.

Starrs said that during his 20 years in the industry he has seen capacity-based incentives "basically fail," leading to what he thought were counter-productive results with both wind power and solar thermal. Production-based incentives were later offered to US wind power which then thrived under the new model.

"Conceptually, performance-based approaches tie the incentive more closely to what the goal is," Starrs said. "It's not to get stuff on the roof, but to produce electricity. It discourages systems that don't perform as well as they could. It creates a better match between the policy goal of supporting renewable energy and the energy itself -- and therefore it's more defensible from a public policy perspective."

Getting State Utilities on Board

Where the bill is also defensible is from the state electric utilities' perspective. Or at least it hasn't incited their ire. In legislatures all across the country, many a worthy renewable energy bill has been crushed under the weight of influential electric utilities which have traditionally been against two items: renewable energy and mandates of any kind.

Mike Nelson, Manager of the Washington State University Northwest Solar Center, who had a technical role in crafting the legislation, said utilities have actually become some of the bill's strongest supporters.

Residents and businesses taking part in the production credit will be provided the per kWh credit (up to $2000 annually) from their local utilities but those utilities are not required to take part in the program. No mandate. What could be read as a toothless piece of legislation is really a case of offering a carrot and not a stick. The utilities are allowed to write-off the cost of providing the credits against their state taxes, so they see an inherent value to participating.

"The Public Utility Districts Association getting behind this really started to make this bill move," said John Friederichs, Conservation Director, for Ferry County PUD, one of the 64 utilities in Washington state. "If this passes the house, how can you miss, you get paid to create electricity. It's too good an idea not to pass."

Friederichs said the Ferry Country PUD is on the end of a 50 mile radial electric feed from the Bonneville Power Administration putting them at a higher risk of outages. While he admitted installation of PV would amount to a succession of small steps, he said that new solar power would help to stabilize the local electric grid.

"Whatever we can do on our end to reduce the load on Bonneville is a great thing," Friederichs said."

So if it's a tax write-off for utilities then where does the money come from? The production credit would be paid for by future sales taxes that would be generated by an expanded sales and manufacturing base for renewable energy. And instead of one lump sum being dolled out to projects like it is in California with their capacity approach, the cost here will be spread over 10 years.

"The state is basically a spectator in this," Friederichs said. "If it encourages businesses to come here, in the end the state will make more money -- it should be an encouragement for them."

Up until 2011 there is a sales tax exemption on solar products. Once that goes away, and the market has picked up, the program should return about $20 million in net cash flow to the state, said the bill's technical advisor Mike Nelson.

Industry Eyes Washington for Manufacturing Expansion

Between owning a Honda Insight hybrid-electric car and his own solar PV system, Nelson himself describes himself as "as green as they come" but when he talks to state lawmakers he pushes one angle above all else.

"I don't talk about green, I talk about jobs, that's why we have the bi-partisan support that we have," Nelson said. "We're losing industry, the US is loosing industry, we're loosing megawatts of production capacity."

Capacity-based incentives have spawned a strong solar market in California -- with roughly 80 percent of US solar business within the state's borders. But Nelson doesn't think the incentives have done enough to spur manufacturing and job creation.

"It's great that California has a program that's built up the Japanese PV industry," Nelson said, cynically referring to the mass importation of solar PV modules from Japanese manufacturing facilities.

Ironically, Washington state used to be national leader in renewable energy manufacturing but has since ceded that position. RWE Schott Solar, one of the biggest names in solar module manufacturing, was once based in Lacey, Washington after they acquired Applied Power. Now all of RWE's North American manufacturing is based in Billerica, Massachusetts and their recent expansions have been in Alzenau, Germany and the Czech Republic. Former Washington-based solar inverter company Trace Engineering was acquired by Canada's Xantrex Technology Inc. The company has transferred the manufacture of its industrial solar and wind converters to its factory in Arlington, WA, but has outsourced some of its other manufacturing to more competitive factories in China, with a net loss of approximately 100 jobs in the state since 1999.

But all that might change with these bills. Manufacturers like RWE are keeping a close eye on this legislation since it could provide the impetus for them to make a move back to the state.

"This particular legislation coupled with some economic multipliers may yield a good mix for us to build a module manufacturing facility," said Marc Roper, Vice President of sales and marketing for RWE Schott Solar. "My company is in the position where we're looking to expand module manufacturing not just for the Washington market but also to supply the North and South American markets."

Roper said RWE is looking initially to low cost countries like Mexico for manufacturing but sees a number of factors with both the proposed bills and Washington state itself that could help entice a PV manufacturing move to the state. The cost of Washington electricity is some of the cheapest in the country, which lowers the cost of manufacturing. The proposed business tax breaks (in SB 5111) would be the direct benefit for a company like RWE and the state-based feed-in tariffs would solidify a local market.

"It's important to have a local market, it helps a business to understand how their products are being used in terms of product development, quality and getting engineers out there on site where the product is being used," Roper said. "Something like an advance in a small growing market is the type of thing that could tilt the decision away from a low cost country."

If the bills passed and RWE were indeed to make a move to Washington, they would likely build a facility with an annual production no smaller than 20-40 MW annually with the possibility to expand beyond that.

"The performance-based incentive is an ideal form of policy," Roper said. "Making it work in Washington would be good for the whole country. For us it works out well, we have the capacity to serve North and South American, were just looking for the place to do it - these two bills make Washington a candidate."

Both bills' principal sponsors are Democratic state Senator Eric Poulsen (D) and Republican Senator Bob Morton. Other lawmakers have sponsored the bills. For more information see the following two links.