A new bill that would significantly alter the long term outlook for Solar Incentives in Washington State is being developed by the House Committee on Technology and Economic Development.  Public hearings were held in Olympia Tuesday to discuss the proposed features of the new incentive program.  The new bill proposes several changes that would extend the lifespan of the current incentives while also allowing for a Market Correction Factor starting in 2018 that would lower the incentives if solar became more competitive with market rate electricity.

The most positive feature of the new bill would be to create a system that makes a ten year contract with each customer starting on the date their system is installed.  This would make the incentives a fairer playing ground for new owners.  Current Washington State Production Credit incentives have a hard cut off date of June 30th, 2020, which gives a better result to customers who install quickly.  With the new bill, each person would have the same ten year contract regardless of when they installed their system.

This new system, called Phase II, would begin on July 1st, 2013, with the current system, now called Phase I, being closed to new enrollees on June 30th, 2013.  Which engenders the question, “If I am going to install a solar system this year, is it better to do it during the Phase I period, or wait until Phase II begins?”  The current version of the bill, which is still subject to review and changes, has a key clause that directly effects the answer to that question: it extends the payout time period of Phase I to 2023.  That would give our clients, including those who have already installed, an extra three years of Production Credit Incentives.  For Washington manufactured systems, that Production Credit Incentive averages $1500 to $2500 per year – a significant windfall for already installed systems!

We at SolTerra are supportive of the clause to extend the Phase I payments to 2023, not only because it benefits our clients, but because it gives clients installing in the Spring the same number of years of incentives as clients who wait until the Summer.  Without that clause, our clients who installed in June would get three fewer years of payments, possibly a $7500 difference.  We would be afraid of be forced into temporary layoffs as customers waited to install until the longer incentive program kicked in.

Phase II also includes a feature that, while logical, would cause a lot of uncertainty about the true financial value of the incentive program.  Phase II includes a Market Correction Factor that would be calculated by the State starting in 2018.  The method of how this Market Correction Factor would be calculated is not specified, but it is implied that it is meant to allow the State to pay lower incentives if the cost and efficiency of solar systems installed in later years results in incentive payments greatly in excess of the cost of installing the system.

We find the idea of a Market Correction Factor to be reasonable.  Customer’s installing a system today, with Washington made components, are seeing 85% to 90% of the cost of their system covered by the full package of State and Federal Incentives.  If this Bill adds three years to the Washington State Production Incentive, customers will already see total incentives that are greater than the purchase price of the system.  As the cost and efficiency of the panels improve steadily over time and energy prices increase, receiving ten full years of the full Production Incentive will result in overly favorable results.  We support strong incentives, but not overly generous ones.

Hawaii and Germany are both examples of governments who set up overly generous incentive programs.  In both cases, the finances were so favorable to the owners of the system that the numbers of installations ended up far exceeding the budgeted amount.  Both states have had to cut back their incentives drastically and therefore caused a major disruption in the installation and manufacturing markets.  A more moderate program would have been more efficient in the long run.

The Washington State program has wisely included a hard upper-limit to total incentive payouts.  Under Phase I, the maximum allowable payout is .5% of electricity sales in any given year.  Representative Jeff Morris, prime sponsor of the current Bill, said during the public hearings (which you can watch a recording of here) that, since Phase I began in 2005, only about 10% of the total available funds have been actually used.  He also states that one of the key purposes of the new bill is to increase the rate of installations in the state and get people to actually take advantage of the program.  The challenge, therefore, is to design a system that encourages more people to take part, but that does not rush to the budget maximum too quickly.

The Market Correction Factor allows the state to make adjustments based on the way the market changes over the next five years and may prove to be a stabilizing factor over the lifespan of the program.  However, initially it will add an element of unpredictability for our clients.  Nearly every speaker at the public hearing referred to that unpredictability as a cause for concern.  If enacted, the Market Correction Factor will make it far more difficult, or perhaps impossible, to predict the full financial impact of the incentive program.

Therefore, as the Bill is currently written, getting in on the Phase I plan will be the most beneficial.  As written today (and it is subject to change), customers who install in June of this year will get ten years of incentives, just as installations in July will, but they will not be subject to the Market Correction Factor.  This seems to be the better option of the two.

Overall, we are excited to see the legislature addressing the issue of solar incentives so soon.  The 2020 cut-off, while seemingly far off, was a significant factor in our customers’ decision making processes and we are happy to see a longer range plan being put in place.  The process continues forward and we will continue to track it eagerly.  Look for subsequent posts that address additional aspects of the new Bill.

Please feel free to ask any questions in the comment section and I will respond as best I can.

If you want to read the bill yourself, you can find it on the legislative website here.

Dwayne Bishop