Last night the Senator Harry Reid introduced a bill designed to extend the Bush-era tax cuts—the ones that Washington has been abuzz about all week. The bill (pdf) is in line with a deal that President Obama made with Republicans, which would extend the tax credits to the wealthy, as well as the middle class, in exchange for a package of incentives that Democrats want, including a payroll tax reduction and an extension of unemployment insurance benefits. It also includes something the original deal didn't have—an extension of a popular grant program for solar, wind, and other renewable energy projects.

The program, established under section 1603 of the Recovery Act of 2009—and often referred to as the 1603 grant program—gives grants instead of tax credits that had been previously authorized to renewable energy project developers, which makes it much easier to get financing. The program had required construction to start on renewable energy projects by the end of this year—a deadline that came too soon for many projects mired in lengthy approval processes. Without the new extension of the grant, financing for renewable energy projects would be cut in half, according to one estimate (pdf).

The bill also extends almost a dozen energy-related incentives programs, including production credits for biodiesel, tax credits for energy efficient home manufacturers, and ethanol subsidies.

One of the smart things the Chinese have done—for decades now—is to take waste heat from coal power plants and use it to heat homes and businesses, something that's done in the United States, but not widely. The system works by using some of the steam produced at a power plant to heat water, which is distributed in pipes through a city to radiators or floor heaters (pipes in the floor). Called cogeneration, it's a relatively easy way to get far more use out of the energy in coal or other fossil fuels.

But as it turns out, cogeneration can make it more difficult to shift from fossil fuels to renewable energy. When cities depend on heat from power plants, there's a limit to how much grid operators can lower power output from coal plants, while still providing enough heat. Especially in winter, then, power grid operators have to keep coal plants running, even when there might be sufficient wind power to shut them down, or at least turn them way down. As a result, some of the wind power can't be used.

To use more wind power, the grid operators in northeast are building "pumped hydro" systems, which use excess wind power that's generally produced at night, to pump water uphill into a reservoir. Later, when there's less wind power, the water flows downhill and spins turbines to generate power again. This way, spikes in wind power that couldn't be absorbed by the grid because of the minimum power requirements at coal plants can still be used by spreading the power generated throughout the day. But adding storage for wind power will drive up costs, a major challenge for technology that is already more expensive than coal-fired power plants.

"We're in a death match," says Mark Duda, president of the Hawaii Solar Energy Association, which is in a heated battle with the Hawaiian utility over the terms of a new subsidy that's meant to encourage renewable energy installations. It's a key part of the state's ambitious effort to use 70 percent clean energy by 2030. Other states and island nations are keeping a close eye on what's happening here: Hawaii could be an almost ideal laboratory for understanding how to incorporate vast amounts of renewable energy into the power grid.

Tonight the "death match" seems more like a friendly rivalry: one of Duda's main opponents is standing next to him, Peter Rosegg, an amiable tanned man who represents the Hawaiian Electric Company, who sees working at the utility as a chance to be "doing good." As a group stands around drinking beers at a reception in an art gallery, he and Duda banter and joke, but there's a strong undercurrent of seriousness. The stakes are high. If the terms are right for the proposed subsidy, a feed-in tariff, it could lead to an explosion of solar installations in Hawaii, helping the island state use one of its main resources--sunshine--to escape its almost exclusive dependence on oil for its electricity and transportation. A supertanker arrives every week to keep the island running. "If the ships don't come, we're stuck," says Linda Lingle, the governor of Hawaii, who has spearheaded efforts to use more renewable energy. "We have no choice but to make this shift."

Yet if solar does take off, it could be a nightmare for the utility. The state is known for its brilliant rainbows, induced by the brief bursts of rain and mist in one area, while the sun shines brilliantly n nearby. As clouds moved quickly overhead, power output from solar panels will plunge and then soar again, creating a variable supply of power that the utility can't control. "We're the ones responsible for reliability," Rosegg says. "We're the ones who get the calls when there's a problem with the power."

The debate rages on because no one has concrete data about just how much solar the Hawaiian grid can take and still remain stable. Decisions are being based on models and theories, with speculations about what might go wrong. The utility wants to play it safe, and set relatively low levels for the feed-in tariff subsidy, to moderate the introduction of solar power. But that could make it harder for the state to meet its goals. The state will have to rely more on wind, another variable resource, but one that the utility will have more control over. (It can control how much power it lets onto the grid from a wind farm, but not from hundreds or thousands of distributed solar installations.) The utility also wants to use rely more on biofuels to power its oil-fired power plants. This would give the utility what it calls "firm" power, because these oil power plants aren't vulnerable to passing clouds and changes to the wind. And biofuels could displace the oil used for cars and planes as well. But it's not clear the islands can generate enough biofuel economically to reach the state's targets--there isn't very much land here to work with. One of the biofuel sources that could be grown in high density here--algae-- has been notoriously expensive so far. Another abundant renewable source, geothermal energy, has faced opposition from some Hawaiians on cultural and religious grounds, and faces some technical challenges. Harvesting thermal energy from the ocean is also a hope--it could provide steady power, but it's very expensive to do, and no one has proved it can work on a large scale.

It's not at all clear how Hawaii will meet its goals--or even if it can in the time frame it's set up. But what happens here is worth keeping an eye on. The high electricity prices here (about two to five times the price on the mainland), and the real need to diversify the islands sources of energy, are providing the motivation that many of the mainland states lack. And if Hawaii can solve some of the problems around renewables, it could make it easier to introduce them at a very large scale elsewhere.