On Monday, you heard about the D.C. Council’s solar debacle: $700,000 worth of grants were cut from the renewable energy incentive program, putting 51 pre-approved homeowners who’d already contracted for solar panel installations in a pickle. That’s a problem that may or may not get solved.

But there’s a bigger problem with how the solar energy industry works in D.C. The explanation is pretty wonktastic, so stick with me for a second.

Federal and local subsidies are part of what has brought solar energy within reach of your average homeowner in the District. The other piece is the Renewable Portfolio Standard (RPS), which dictates what percentage of total energy sold must come from renewable sources by a certain date. To meet that standard, utilities can either generate the energy themselves, buy it from independent solar producers in the form of solar renewable energy credits (SRECs), or pay an alternative compliance payment (ACP) to the District. Right now, SRECs are trading for about $380 per megawatt hour.

In D.C., the levels have gotten out of whack. The solar carve-out in the RPS is only 0.4 percent by 2020, so pretty soon, Pepco won’t need to buy or generate much more solar energy than it already does, and there will be no more demand for SRECs.

To make matters worse, D.C. is one of the only remaining jurisdictions with an open market for SRECs—others have thrown up protectionistic trade barriers—which means that a) D.C.’s solar producers can’t sell their SRECs in very many other states, and b) D.C. has become a dumping ground for SRECs generated elsewhere. Towards the end of 2010, one producer in Chicago essentially flooded the market, driving the price down to the point where local generators can’t make enough money on their own panels to pay them off.

This is a huge problem for the infant solar energy industry in D.C. Local installers communicate about how much capacity they’re planning to build, which could create the kind of market stability they need to invest in infrastructure—but since out-of-state producers can flood the area with SRECs at any time, there’s no way of knowing whether the numbers will add up long term, which also impacts the willingness of banks to make loans for big projects.

This afternoon, Councilmember Yvette Alexander‘s Committee on Public Services and Consumer Affairs will hold a hearing on a bill that will fix these two related problems. The Distributed Generation Amendment Act of 2011 would raise the solar carve-out from 0.4 percent to 2.5 percent, and require utilities to buy their SRECs locally. That would mean the District would have to produce about 250 megawatts by 2020, period.

Could D.C.’s solar industry hit that target? Probably. Installations are growing by leaps and bounds: In the third quarter of last year, 0.8 megawatts had been installed in the District, total. Over the last three months of 2010, that number almost doubled. And in the first quarter of 2011, 1.5 megawatts are planned.

Unless this bill becomes law within the next couple months, advocates warn, that growth could stop in its tracks. If the SREC market isn’t resuscitated, installers essentially won’t be able to do any more deals, and a large chunk of the estimated 600 solar-related jobs could be terminated.

Meanwhile, the District is inching towards implementing another important part of the solar agenda: Approving a contract for the Sustainable Energy Utility, which will administer many of the energy efficiency programs now housed within the District Department of the Environment. DDOE has selected a team headed by the Vermont Energy Investment Corporation, which also includes Skyline Innovations and Weatherize D.C., and the Council just has to formally sign off on it. Once that happens, solar advocates hope that things like renewable energy incentives will be more reliably and efficiently administered.

But they’ve got to fix the RPS first. Long term, nobody wants the industry to depend on grants, which can be cut whenever the Council decides to plug another hole. Only when the market incentives are calibrated right can solar energy really scale up.