Lighting up the solar industry, a California agency on Thursday approved $2.9 billion in solar incentives to encourage consumers to switch to sun power, creating the largest solar-incentive program in the United States.

The money will be used for rebates for solar photovoltaics, solar water heating, and solar heating and cooling systems over 10 years, with 10 percent of the money slated for low-income customers and affordable-housing projects.

In its move, the California Public Utilities Commission (CPUC) also agreed to emphasize solar-related projects in the additional 5 percent of its budget it dedicated to energy research, development, and demonstration.

At the same time, the California Energy Commission agreed to provide an additional $400 million in incentives for new homes through 2016.

“Our plan is to offer a subsidy now to push the deployment of an important part of our sustainable energy future in the long run,” said CPUC President Michael Peevey.

The new program takes effect in 2007. During December, the CPUC passed an interim program for 2006, which adds $300 million in customer incentives to the $58 million already slated for homeowners and small businesses (see Suntech IPO Jumps 41%).

The U.S. solar market is far outsized by the market in countries like Germany and Japan, but California is by far the leading state, ranking as the fifth-largest solar market in the world.

The California Solar Initiative, which takes the place of the $2.8-billion Million Solar Roofs bill that failed to pass the state Assembly during September, is expected to install 3,000 megawatts of solar power in the state (see California Solar Bill Fails).

That’s the equivalent of six large natural-gas power plants spread out over about a million roofs, according to the Solar Energy Industries Association.

Industry Rejoices

Industry watchers rejoiced at the news Thursday.

“This long-term, visionary policy will save ratepayers money, create high-paying jobs, and reduce our dependence on foreign sources of energy,” said Rhone Resch, president of the national SEIA.

The initiative will drive the U.S. solar industry to invest in technological innovation and to scale up manufacturing, he added. “California will be a leader in the next great high-tech growth industry—solar energy.”

Others were more cautious is their enthusiasm. Matthew Cheney, CEO of Renewable Ventures, a VC firm in San Francisco, said the initiative fails to address some of the short-term challenges.

“Although the level of financing provided by the initiative will certainly help, more efficient technology options and creative financing structures will be necessary to drive adoption of solar projects in the face of global competition for limited solar supply,” he said.

Production-based Incentives

A global shortage of polysilicon, the grade of silicon used for crystalline solar photovoltaics (PV), has kept solar companies from producing enough PV to meet the skyrocketing demand driven by high energy prices and heavy government subsidies in Germany and other countries (see Shortage May Hit Solar Power).

To compete on a world scale, California needs production-based incentives like those, which offer high prices for solar power, Mr. Cheney said.

Billy Stanberry, CEO of solar company HelioVolt, said the initiative is unlikely to affect the production of solar power, but could end up raising demand—and prices—for the limited supply of PV.

That’s good for HelioVolt, which has a thin-film solar technology that doesn’t use silicon, said Mr. Stanberry. Other companies with no- and low-silicon technologies include Konarka, Evergreen Solar, and Q-Cells.