It's been a banner year for solar energy in Palo Alto, with the city signing new long-term contracts for its supply of solar-powered electricity and newly installed panels gleaming from rooftops at residential and commercial buildings throughout the city.

Despite this progress, the city took some heat this week from the solar industry, with several executives warning that a proposal to change a popular program would abruptly halt the recent progress.

The controversy surrounds Palo Alto's "net energy metering" program, which allows residents with solar panels to save the energy they produce, according to John Abendschein, resource planner at the Utilities Department. Under the current program, customers bank the electricity they generate during hours of low consumption (say, when they are at work or in the middle of the afternoon) and then use it during high-consumption hours (after work). The program also comes with a 12-month "carryover period," the amount of time customers can save excess electricity. This is particularly helpful in banking energy produced in the summer for use in the winter, for instance.

The program was created to meet a state requirement, which calls for all utilities to establish net-energy-metering programs up to a certain limit: 5 percent of peak load. In Palo Alto's case, the cap on this resident-produced energy is 9.5 megawatts, according to the Utilities Department. The city is expected to reach this threshold later this year, Abendschein said.

Once that happens, new customers who wish to participate in the city's net-energy-metering program would be subject to a new set of rules (existing customers would be exempt). That's where there's disagreement.

According to the Utilities Department's new proposal, which the City Council approved Monday night, new customers would not be allowed to bank energy for a year; instead, the energy they don't use daily would be sold to the city for 7.5 cents per kilowatt -- roughly the rate the city pays for its solar energy.

Utilities Department officials said the price is both fair and generous and factors in the many benefits of solar energy that's generated locally. This includes reduced transmission costs, less energy loss during the distribution process and less of a need for the city to purchase credits, called renewable-energy certificates, to make up for its purchases of electricity from non-renewable sources.

"This is a higher rate than is proposed in any other community around the state," Abendschein told the council Monday.

Even so, participation in the net metering program is expected to become less lucrative. A customer who uses 12,184 kilowatts per year (roughly twice the average consumption) and relies on a solar system for half of that currently sees his annual bill drop from $1,825 (without solar) to $820 (with solar). Under the new program, the same customer would see the bill drop to $1,042 with solar.

Measured in terms of how long it would take for a resident to pay off the purchase of the home solar system, the new program would be less beneficial for those who get most of their electricity from a solar installation. For those who generate about 30 percent of their load through solar, the payback period for installing the system is expected to remain at about 11 years, much like it is today. For those who get 100 percent of their load from solar, the payback period is expected to increase from about 14 years under the current program to about 16 years under the new rates, which are known in the industry as "successor rates."

For some solar executives, the lower savings and the longer payback period present a problem. Carter Lavin, membership coordinator at the Solar Energy Industries Association, pointed to these factors as he urged the council to reject the new rates.

"Our stance is that this program, as currently proposed, would decimate solar development in Palo Alto," Lavin said.

Like others, he argued that the 7.5-cent rate that the city proposed falls short of the value that local solar provides.

"I think if we are to all get together, sharpen our pencils and work our way to something more comprehensive, we'd recognize that the wholesale rate of 7.5 cents is a tip of the iceberg -- but solar provides a great deal more value," Lavin said.

Gary Gerber, founder of the Berkeley company Sun Light and Power, noted that Palo Alto's already low electricity rates (which are more than 30 percent below PG&E's) make solar installations a tough sell. Making solar even less attractive through new rates, he argued, "is just going to drive solar out of the city."

These arguments did not sway the council, which voted 8-0 (with Eric Filseth absent) to adopt the successor rates. Vice Mayor Greg Scharff noted that all the speakers who challenged the rates are members of the solar industry who have a vested financial interest in opposing the changes. He also observed that there is absolutely no opposition to the new rates from Palo Alto's customers. More than 800 participate in the net-energy-metering program.

The council also recognized that it is facing some limitations in how much the city can pay for locally generated solar energy. Proposition 26, which was passed in 2010, restricts local electric rates to the cost of providing the service. Because local utilities are funded by its customers, the restriction effectively bars the city from overpaying for locally generated solar.

The council agreed that the staff proposal balances the state requirements with the city's desire to promote solar. Yet in a nod to the solar industry, the council also agreed to resume this discussion after the net-metering cap is reached and to consider possible changes that could be made to spur residents to install solar panels.