State regulators have approved Hawaiian Electric Co.’s request to build a 20-megawatt solar farm that will provide Oahu the lowest-cost solar power yet.

The state Public Utilities Commission approved HECO’s plan Friday to develop a solar energy facility that would send power to the grid at 9.54 cents a kilowatt-hour. Two 2.87-megawatt solar farms on Maui ­— Kuia Solar and South Maui Renewable Resources — are the next-lowest-cost projects in the state, at 11.04 cents per kilowatt-hour.

“It’s in our efforts to continue, wherever we can, the downward trajectory of energy costs,” PUC Chairman Randy Iwase said. “I think it’s a win-win for all concerned.”

HECO is expected to begin construction of the facility in January at the West Loch Annex at Joint Base Pearl Harbor-Hickam. HECO is partnering with the U.S. Department of the Navy to get the facility up and running. HECO will own and operate the solar facility at the base.

In exchange for the land, HECO will provide $4.7 million worth of electrical infrastructure upgrades to Navy-owned facilities. The solar facility will serve all of HECO’s customers on Oahu as well as residents on base. HECO spokeswoman Shannon Tangonan said the upgrades would be considered payment for the utility’s entire 37-year lease with the Navy.

“These upgrades will be made in lieu of lease payments and are not required to interconnect the PV system to (HECO’s) electrical grid,” Tangonan said in an email.

The PUC’s Friday approval came just in time for the beginning of the lease between HECO and the Navy. The lease agreement for 102 acres of land began Saturday.

HECO said the $67 million project, which includes the upgrades made to the Navy’s grid, is expected to save ratepayers $109 million over the 25-year life of the solar facility. HECO said the savings are compared with what it would cost to use oil to generate Oahu’s energy.

“(HECO) committed to capping the project cost that is passed on to customers, and the commission subsequently made that a requirement in its project approval,” Tangonan said.

“(HECO) will also be providing an energy production guarantee. It’s important to note that the energy produced by this project will ultimately lower our dependency on higher-­priced oil.”

The West Loch project is expected to be in service by December 2018.

Iwase said he hopes HECO will follow the steps of Kauai Island Utility Cooperative and include more energy storage projects with the installation of larger renewable-energy facilities.

Earlier this year KIUC and Tesla Inc. brought online a 13-megawatt solar system connected to Tesla Powerpacks, which store enough power to service 4,500 homes during peak night demand. The solar farm has 50,000 solar panels. Coming in at a higher price than the West Loch project, Tesla is contracted to sell the energy produced at the facility to KIUC for 13.9 cents a kilowatt-hour over the next 20 years.

“As we move forward there is clearly a need … to make sure that the excess energy produced during the day will be stored someplace,” Iwase said. “Renewables tied with battery storage is important in the near-term future.”