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California Governor Arnold Schwarzenegger signed legislation Sunday that will create a European-style above-market tariff, called a feed-in tariff, for small solar-panel generators.

California's abundant sunshine, relatively high utility rates and solar subsidies have already made the state one of the world's top solar markets. The proposal seeks to expand the market by requiring California utilities to buy power from solar-panel generators of 1.5-3.0 megawatts in size, at set rates above what the utilities would pay for wholesale power from conventional sources.

Some solar companies said the bill's pricing scheme would create a feed-in tariff of about 15 to 17 cents a kilowatt-hour, which they said wouldn't be high enough to spur significant investment. But others said the program would create opportunities for lower-cost projects for which there isn't currently a market.

Supporters of the legislation, including the California Solar Energy Industries Association, said the bill's feed-in tariff will be high enough for schools, local governments, farms, warehouses and other low-cost property owners to take advantage of it.

Suntech Power Holdings Co. Ltd. (STP), SunPower Corp. (SPWRA), Applied Materials Inc. (AMAT) and other companies have pointed to a separate effort at the California Public Utilities Commission to establish a feed-in tariff-type program as more viable.

The CPUC staff has proposed requiring the state's three large utilities, owned by PG&E Corp. (PCG), Edison International (EIX) and Sempra Energy (SRE), to collectively buy 1,000 megawatts of power from solar-panel generators sized between 1 MW and 20 MW over four years through "reverse auctions" in which they would pick the projects with the lowest bids to meet their requirements. The agency is still reviewing proposals for the program and could make a decision sometime next year.

In a letter to the state Senate on Sunday, Governor Schwarzenegger said he was signing the bill because the state "will need to use all of the tools available" to meet its goal of using renewable sources for a third of electricity sold by utilities by 2020.

The CPUC should proceed with its own feed-in tariff program, he said.

-By Cassandra Sweet, Dow Jones Newswires; 415-269-4446; cassandra.sweet@dowjones.com