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Going Green

As seen in our October 2012 digital edition

Hawaii's Solar Tax Credit:
Real Problems & Real Solutions

Since it first emerged in 2008

in response to historically high oil prices, Hawaii's photovoltaic (PV) industry has enjoyed support from the state via a 35 percent nonrefundable tax credit1. A refundable option (at 24.5 percent) followed in 2009, but the form of the credit has otherwise remained unchanged, even as the prices have fallen and the center of gravity in the PV industry has shifted from rooftop commercial to residential and utility-scale projects. The fact that the PV credit has remained the same as the industry evolved raises the issue of whether it is currently offered in a form/level that serves the needs of solar consumers and the State of Hawaii. Today the answer is "No," which raises the issue of what system would work better?

A compromise bill (HB2417) that addressed this situation narrowly missed passage at the end of the recent legislative session. In its proposed final form, the bill had agreement from the House, Senate, Department of Taxation (DoTax), environmentalists and the solar industry, and would have set the industry on a clear and sustainable path forward. It did so by resolving several key issues.

The first real issue that the compromise bill addressed is the administrative inefficiency of the current tax credit system. Compared to the federal solar tax credit, which is calculated simply as a percentage of the total PV investment, Hawaii's credit is complicated because it is capped on a per system basis. In September 2007, the DoTax issued guidance clarifying that a single PV project at a home, business or utility scale development site can, from a tax perspective, include more than one system. This guidance has been reaffirmed in various letter rulings and dozens of pieces of specific public guidance by the department. Though effective, the system is unwieldy and challenging to administer in the face a rapidly changing PV market. One key accomplishment of the 2012 legislative compromise was that it simplified DoTax oversight by eliminating the per system cap and using the same method the IRS uses to administer its own solar credit.

Eliminating the system cap raises a second issue: What is the appropriate level of the credit? At 35 percent (or 24.5 percent), Hawaii has one of the more attractive solar incentives in the country. Of course, we also have the highest utility rates and therefore the most to gain as a state by converting from fossil fuels to solar energy. Ultimately, the right credit level is in the eye of the beholder. If you care most about climate change you feel differently than if you worry only about the state budget. In any case, the final proposed conference draft was a compromise and would have reduced the nonrefundable credit to 20 percent (14 percent for the refundable tax credit) over several years and eliminated it after 2018. The measure would have reduced the state's investment in each PV project while not doing anything disruptive in the process.

The final major change addressed also dealt with the state general fund's exposure to the solar credit by reducing the burden of the large-scale wind and solar projects. It did this by converting them from an investment-based credit (paid out in a single tax year) to a production credit, which gets paid out over time. The measure would have taken the money currently due to developers in the tax year the project is completed and spread it out over 10 years. In this way the state can still encourage the private sector to develop energy projects that offset Hawaii's crippling dependence on fossil fuels without breaking the bank.

Despite achieving consensus after months of wrangling, the proposed conference draft of HB2417 simply ran out of time for a vote. It is the hope of many stakeholders involved in the process to begin the 2013 legislative session where 2012 ended - with a fair and reasonable compromise endorsed by all parties that is built to resolve the budgetary impact and administrative efficiency challenges, while ensuring that the solar industry continues to drive construction sector job growth, reduce oil dependency, and lower the electrical expenditures of Hawaii's homes and businesses.

* Please note that Mark Duda is not licensed to give tax advice and you should not rely upon or construe the information in this article as legal advice. Nor should you act or fail to act based upon the information herein without first seeking professional counsel from a competent specialist. In writing this article, he is not providing or intending to provide, you with tax advice.

 

1: A non-refundable tax credit is one that must be used to offset taxes owed. In contrast, a refundable tax credit is one that, if it exceeds tax owed, is paid out to the tax filer, similar to a rebate.
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As seen in our April 2012 digital edition

Renewable Energy
& Island Resource Stewardship

By Mark Duda

Stewardship of land and natural resources is a core value that evolved independently in island nations and cultures worldwide. Such thinking served islanders well for hundreds or even thousands of years. Over the course of the 20th century such thinking came to be considered outdated, however, as expectations of abundance overwhelmed deeply rooted ideas about scarcity and sustainability.

Nowhere is this more true than in the energy sector – what need
is there to live within your means when energy-dense fossil fuels are plentiful and cheap? We now know that such thinking was flawed. Fossil fuels only seemed inexpensive. Their true costs were disguised in the impacts of climate-altering compounds that gradually have begun to undermine human health and well being. And, more immediately, today's fossil fuels, especially oil, are no longer cheap, even though their market price remains well below their true social cost.

For island economies like Hawaii, fossil fuels function as an enormous tax, lowering quality of life and economic well-being for everyone. According to the state Department of Business, Economic Development & Tourism's 2011 State of Hawaii Energy Data and Trends Data Report, at $6.9 billion, petroleum accounted for 96.9 percent of our primary energy expenditures in 2008 – an astounding 10.4 percent of state gross domestic product. Data for 2011 and 2012 should be back at similar levels. Once the global economy recovers (or even before due to unforeseen geopolitical events) oil prices will almost certainly rise again, in all likelihood faster than households and businesses can handle. Energy costs will threaten the financial sustainability and livelihoods of many in our state.

In order to address this creeping catastrophe, Hawaii needs to draw on the "cultural capital" embedded in the island values of sustainability and self-sufficiency. First and foremost this means planning for a not very distant future in which imported fuels are both unaffordable and undesirable energy sources. In the electric industry, it means using a mix of energy resources that are locally available and do not require fuel. In practice this means solar, wind, and geothermal, perhaps augmented at some point by wave or ocean thermal energy conversion technologies.

As an island chain utterly exposed to oil via price fluctuations and supply disruptions, Hawaii cannot wait until the 'perfect' renewable technology becomes available or the current mix become as cheap as oil was several decades ago. We need to view not acting decisively now as the biggest risk, and not be concerned that some energy investment today will be cheaper 10 or 20 years from now. We have already squandered far too much time without any action that will decisively and irreversibly move us toward a future in which energy is a source of economic and social strength rather than vulnerability.

Given where we are today, the best case scenario from the perspective of the electric power industry is that we are able to look back on the last 50 years as a necessary evil in which Hawaii traded energy security for development. In order to achieve this best-case outcome, however, we need to move aggressively away from that system immediately. Hawaii has already shown what happens when islanders think like mainlanders when it comes to energy. If we can reverse course decisively, we will set an example for mainlanders, who will need to think about energy like islanders in order for humanity to achieve an ecologically sustainable energy economy. This Earth Day, the best thing Hawaii can do is use its island-based wisdom to set an example the rest of the world can follow for the sustainable use of energy.

Mark Duda is chair of the government affairs committee for the PV Coalition and a principal with RevoluSun, a locally owned solar design and installation firm. For more information visit www.RevoluSun.com or call (808) 748-8888.
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As seen in our March 2012 digital edition

How to Think about the Market
for Residential Solar Leasing

By Mark Duda

Homeowners considering solar photovoltaic (PV) systems must consider not only which system to buy and which contractor to use but also the best strategy to pay for it. Broadly, this boils down to three options: 1) purchasing the system, 2) leasing it with a single up front payment, or 3) leasing on a monthly basis. Leasing is almost always the right option for customers that cannot use federal and state tax incentives, but other factors can influence the choice as well.

Buying a PV system outright makes the most sense from a purely financial perspective if the owner can monetize all of the state and federal tax credits. That is, at today's lease rates, a PV system cost net of tax credits will be a somewhat less – on the order of a few thousand dollars – than the amount of a prepaid lease. Of course, this is only based on comparing the initial cost. Under a prepaid lease, the system owner (i.e., the lessor), not the homeowner (the lessee), takes responsibility for all operations and maintenance costs, including inverter replacements, which may more than make up the difference over the long run.

In any case, a lease is clearly the way to go for those who do not owe enough in taxes to monetize the tax incentives available. Among households in this group, prepaid leases, in which the lessee makes a single payment for twenty years worth of electricity, works best for those with cash on hand. Conversely, households without cash reserves can put little or no money down and pay less to the lessor for their power each month than they are currently paying the utility. Savings vary but are around one-third of the utility retail rates today and are guaranteed to increase only slowly over time, whereas utility power seems only to increase.

For lessees, the prepaid versus monthly payment decision is not the only one to consider. Different leasing companies may offset differing amounts of the total energy bill with their lease. When comparing pre-paid leases from different providers, it is worth calculating the cost per kilowatt hour over the entire term of the lease, as well as the cost of any power that must still be purchased from the utility. In general, the larger share of the total bill that can be offset the better.

Another area to focus on is the end-of-term provisions of the lease. Lessees should have a number of good options at the end of the lease, such as the ability to purchase the system or extend the lease. Further, owners should have the option of having the system removed by the lessor, at no cost. Since these leases typically run for 20 years it is difficult to predict exactly what you will want to do at that time. Therefore, it's important to maintain flexibility and ensure that whatever option you ultimately choose is not too onerous to pursue.

In summary, the solar leasing market in Hawaii is new but it is here to stay. Leasing is expanding PV options for electricity users and expanding access to PV in the state, while also making energy more affordable for more families and reducing Hawaii's dependence on imported fossil fuels. Those in the market for a lease should enter the process with a sound understanding of their tax and financial circumstances and an appreciation for the variation in other key lease terms. Thus armed, they can make an informed choice about the right system option for their specific circumstances.

Mark Duda is president of the Hawaii Solar Energy Association and a principal with RevoluSun. For more information visit www.RevoluSun.com or call (808) 748-8888. top of page

As seen in our digital edition

Commercial (Retail) Building: Sustainability and Energy Efficiency

By Mark Duda

Energy opportunities on commercial property can be looked at from the perspective of two types of investors – landlord and tenant – facing two types of investment opportunities – making money or saving money. This brief article considers some useful strategies for each of these scenarios.

Commercial landlords have a rich set of revenue-generating opportunities by investing in renewable energy. They can install photovoltaic (PV) systems on the roof to produce power to sell to the utility (under the feed-in tariff) or to tenants at the site via a power purchase agreement (PPA). In either case, they are treading familiar ground – using the property to derive a stable revenue stream that increases the value of the asset. If some or all of the energy offsets the common area electrical load at a fixed cost per kilowatt hour (kWh), landlords make the property more attractive to current and future tenants in the process.

The same is true when property owners and managers undertake energy efficiency improvements. Devoting capital budgets to expenses that lower operating costs for tenants makes properties in Hawaii more desirable, as our state's energy costs continue to rise. Examples of such energy efficiency improvements include replacing or retro-commissioning HVAC (heating, ventilation and air conditioning) equipment and upgrading lighting systems. In many cases making these changes can be simpler than those that generate energy because they there are no utility or Public Utilities Commission regulatory requirements involved.

In general, tenants may be more constrained in their ability to develop renewable energy projects, minimally because their lease terms may be shorter than the economic life of such systems. For those who have long-term leases or who are able to make suitable arrangements with their property owner/manager, then investing in PV can substantially or completely offset a key operating cost. Tenants also typically have scope to make energy-saving investments, even if they do not make decisions about central systems such as HVAC or the building envelope.

Of course not all property owners are simply landlords; many occupy their own buildings. For them, it makes sense to invest in reducing energy consumption as well as to generate on-site the remaining energy they consume. In fact, owner-occupiers of commercial property have been among the leaders in PV investments in the state because they reap the benefits of these investments so directly.

With Hawaii's energy costs three times the national average, both landlords and tenants in the state are motivated to reduce energy costs in whatever way possible. Historically, these motivations have sometimes been mitigated by the mismatch between who pays for the improvement and who reaps the benefit. In today's soft economy, however, landlords should find that offering tenants lower and stable energy costs via PV and energy efficiency investments can be a compelling source of competitive advantage in their core business.

Mark Duda is president of the Hawaii Solar Energy Association and a principal with RevoluSun, a locally owned solar design and installation firm. For more information visit www.hsea.org or www.revolusun.com, or call (808) 748-8888.
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Mark Duda Hawaii PV coalition

Mark Duda is president of the Hawaii PV Coalition and a principal with RevoluSun, one of Hawaii's largest locally owned solar design and installation firms. For more information visit www.RevoluSun.com or call (808)748-8888.

Archives

Renewable Energy & Island Resource Stewardship

Digital Mag. Apr., 2012

How to Think about the Market for Residential Solar Leasing

Digital Mag. Mar.., 2012

Commercial (Retail) Building: Sustainability and Energy Efficiency

Digital Mag. Feb., 2012