Washington State Passes Progressive Renewable Energy Legislation

The two bills -- SB 5101 and SB 5111 -- steamrolled their way through the state's legislature earlier this spring, winning overwhelming bipartisan support from lawmakers interested in creating a thriving market for renewable energy that would specifically foster new high-tech manufacturing in the state.

The first bill, SB 5101, is responsible for driving strong market demand for small renewable energy projects, especially solar photovoltaic (PV) energy. The law establishes a renewable energy "feed-in" production incentive, the first such application of this approach in a U.S. state. 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 market output of a typical 3.5 kW PV system.

In addition to the feed-in credit, the bill is progressive because it combines economic multipliers to increase the system owner's credit if the project's components are manufactured in Washington. This can raise the 15 cent per kWh credit up to as much as 54 cents 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 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.


A New Policy Approach

The feed-in credit, SB5101, is particularly relevant to the larger renewable energy effort in the U.S. because it reflects a new policy approach for the state-based promotion of clean energy.

Denis Hayes, founder of Earth Day, former director of the federal Solar Energy Research Institute and current President of the Bullitt Foundation, described SB 5101 "as the most important solar legislation ever introduced in any American state legislature."

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 limited manufacturing capacity.

"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 Washington-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

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 in 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."

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 spoke to state lawmakers about the bills he pushed 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 U.S. 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 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 residential and 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.

The relative slowdown of manufacturing could change, however, with the two measures now signed into law. As the bills were winding their way through the state's legislature, manufacturers kept a close eye on the measures since they could provide the impetus for them to make a move back into the state.

Now that the measures are law, Xantrex sees some potential positives impacts for their facility in Arlington.

"We expect this new price incentive will benefit demand for some of our Washington-manufactured products used by homeowners and small businesses," said Mossadiq S. Umedaly
Chairman Xantrex Technology. "Additionally, Xantrex manufactures some solar inverters outside of Washington and we will be evaluating the potential demand in Washington to see if these should also be manufactured in our Arlington facility as well."

Marc Roper, Vice President of sales and marketing for RWE Schott Solar, was reached for interview before the two items were signed into law, and was already hinting at what effect it might have.

"This particular legislation coupled with some economic multipliers may yield a good mix for us to build a module manufacturing facility," Roper said. "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 RWE were 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 America, we're just looking for the place to do it - these two bills make Washington a candidate."

Both bills' principal sponsors were 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.