Solar energy production in Washington state is due for a makeover that could see it undergo a massive expansion, and open up its tax incentive program to companies that lease installation and operation of solar panels like SolarCity.

A new report from a stakeholder group formed following Gov. Jay Inslee’s executive order on climate change this spring calls for the state to set a target of 150 megawatts of solar energy generation over the next 8 years, using a mix of residential, commercial, community and third-party owned solar projects to get there.

The group held its final meeting Monday afternoon, and will deliver its report to the Governor’s Office, which serve as the basis for draft legislation aiming to substantially overhaul an incentive program the Legislature implemented in 2005.

While the number of solar panels installed in Washington has rapidly increased in recent years, mirroring a downward trend in the cost of installation, the 150-megawatt target would mark a significant uptick in statewide solar energy generation.

In 2013, 8 megawatts worth of solar panels were installed in Washington, a 54 percent increase from the year prior, according to the Washington State University Extension Energy Program. Total, the state has roughly 5,600 solar energy systems that produce 29 megawatts of power currently, according to WSU. Wind energy produces more than 2,800 megawatts every year currently, and hydropower can produce more than 20,000 megawatts.

The state is currently grappling with how it should comply with renewable energy standards mandated under a voter-approved ballot measure in 2006, Initiative 937, which says utilities with more than 25,000 customers have to get 15 percent of their energy from renewable sources by 2020. A target of 9 percent is set to go into effect in 2016.

Solar energy and wind energy have been the primary vehicles for meeting I-937, as Washington’s vast supplies of hydroelectricity don’t count. Republicans have been pushing for years to reopen I-937 and revise it, although those efforts have gone nowhere in the Legislature.

The report on solar energy follows a hearing last week on the possibility of expanded nuclear energy production in Washington state, an energy source favored by Republicans. This could lead to some legislative tug-of-war in the upcoming session as Democrats and Republicans look to guide policies toward their preferred energy sources.

The system of tax breaks for solar energy needs revising as well, the stakeholder group concluded. The current system heavily incents using in-state manufacturers of solar panels and equipment, which allows some consumers to get 54 cents in subsidies per kilowatt hour generated. Out-of-state incentives amount to 15 cents per kilowatt hour.

Under the program the group pitched Monday, the rate of subsidy would come down to 14 cents per kilowatt hour for residential and community-owned solar projects, and just 10 cents for commercial and third-party scale solar projects. An additional 10 cents per kilowatt hour can be added on top of that for using modules built in Washington for residential and community projects, for a total subsidy rate of 24 cents.

 Utilities currently pay solar energy generators to produce electricity, up to $5,000 each year, and then claim an equal amount as an exemption from the public-utility taxes they owe the state. Their exemption is capped at $100,000.

The report says the state should lift those caps, and argues they’re inhibiting growth in areas of high demand for solar electricity, mostly in the Puget Sound region with pockets elsewhere in Washington.

It also proposes doing away with a sales tax exemption for solar equipment and labor, with a goal of minimizing the overall cost of the subsidy program to state tax coffers. A fiscal note for the proposal is still forthcoming, but Rep. Jake Fey, D-Tacoma and leader of the stakeholder group, said its proponents have to as cost-conscious as possible.

“If the numbers go up, the costs go up, and it makes it harder to get a bill passed,” Fey said.

Rep. Jake Fey

The total costs of the sales tax incentive over the last 10 years have been tough to gauge because it’s not typically reported to the state Department of Revenue. The DOR says it’s refunded $387,000 such claims in 2012 and 2013.

The state has also given in-state manufacturers a reduced business-and-occupation tax rate, which was worth $2.8 million total over the last three years. It’s provided $8 million worth of the public-utility tax credits.

The other major elements of the program are to open up the tax incentives for third-party ownership models, which are currently barred, and to re-organize groups of investors in a solar energy project — referred to as community-scale solar — under the umbrellas of the state’s utilities.

Third-party owned solar allows companies such as SolarCity, which is based in California, to pay for the upfront installation costs of solar panels and then sell power back to consumers on long-term leases, typically 20 years in length. That’s made the company eligible for the tax incentives on production in other states, but the leasehold system doesn’t qualify in Washington.

That could change, according to the report. So long as the companies register with the Utilities and Transportation Commission and receive consumer protection oversight from the UTC and the Attorney General’s Office, the leasehold system would be able to participate in the incentive program.

However, the report says that the state should stipulate that the utilities pay the production incentive directly to the customer, but it can then be transferred to the third-party company that owns the solar system. They would be eligible for the 10 cents per kilowatt hour production incentive.

“We want to open up and provide new opportunities in the marketplace,” said Jaimes Valdez, policy manager for NW SEED and a consultant to the stakeholder group. “We want oversight and accountability. The intent isn’t to do economic regulation.”

Fey acknowledged the difficulty some members of the stakeholder group had with the notion of bringing an investor-run solar project into the fold of a utility, but contends it’s a needed step to ensure transparency in how the program is administered. Other members balked at the utilities’ willingness or interest in these kinds of projects, while representatives of the utilities said they’ve been held up by difficulties in the current structure of the state law.

The proposal would break up the incentive program over two-year increments in the next 8 years, shrinking the total bill the state would have to foot while parsing out the potential gains in solar energy production.

While the incentive program will be capped at 150 megawatts, other opportunities for large-scale solar projects of more than 1 megawatt — called utility-scale — should be pursued, the report says. The report calls for the state’s clean energy fund to develop a competitive incentive or grant program for building these large scale projects.

“The idea is to get solar systems out there at the lowest cost,” Fey said.

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