For many Hawaii homeowners and businesses considering installing a photovoltaic power system, the deciding factor is the generous state and federal tax incentives that can cut the cost of projects by 70 percent or more.
After paying the upfront cost for the system, they can recoup a big chunk of their investment come tax time when they use tax credits and accelerated depreciation schedules to offset much of what they owe the state and federal governments in taxes.
While the tax breaks have been a boon to residents and businesses, nonprofit organizations have largely been left out of the picture because their tax-exempt status means they aren’t able to take advantage of the tax breaks.
That’s beginning to change, however, with more nonprofits opting to install photovoltaic (PV) systems under power purchase agreements that allow some of the tax benefits to flow back to them indirectly. In a typical power purchase agreement, a private investor installs and owns the PV system. The investor uses the tax benefits that would be wasted on the nonprofit. The investor then sells the power back to the nonprofit at a discount to what the nonprofit would be paying its utility.
So far, there have been just a handful of such deals in Hawaii, ranging in size from a 9-kilowatt rooftop on the Nature Conservancy’s office on Molokai to a two-phase project at Punahou School totaling more than 700 kilowatts.
Owners of PV systems in Hawaii can claim a 35 percent state tax credit and a 30 percent federal credit. Combined with the tax benefits of accelerated depreciation, the total savings can total 70 percent to 80 percent, industry players say.
The key to making a power purchase agreement work, both for nonprofit organizations and commercial customers, is finding investors to supply the financing for the PV systems. For big commercial projects sized at 250 kilowatts and larger, there is a large pool of banks and other institutional investors willing to participate. Because most nonprofit PV systems are less than 100 kilowatts, however, they tend to rely on smaller investors and hui that are almost exclusively local.
TAX BENEFITS
Because of their tax-exempt status nonprofit organizations that want to install solar power systems can’t take advantage of state and federal tax credits available for such systems. As a result, many nonprofits in that situation are opting for power purchase agreements in which the solar installer owns the system and claims the tax credits. The solar company can then sell the power back to the nonprofit at a reduced rate that reflects the tax savings.
Tax benefits include:
» 35 percent state tax credit, or 24.5 percent refundable tax credit (direct payment)
» 30 percent federal tax credit
» Federal bonus depreciation schedule that allows for 100 percent depreciation in the first year
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In the case of the 55-kilowatt PV system recently dedicated at Easter Seals of Hawaii, the investor was a local company that was interested in earning a return but also helping the community, according to officials at Energy Industries that did the installation and worked with a financier to set up the power purchase agreement, or PPA.
Energy Industries also recently completed a 170-kilowatt project at the Bishop Museum and has about 10 other deals with nonprofits in the pipeline, said Miles Kubo, executive vice president and chief operating officer at Energy Industries.
"We’ve recognized working in the industry here that there’s not that many opportunities for small users — Easter Seals-sized projects. So we spend the time and effort trying to develop a local PPA that’s really focused on this community," he said.
The attraction of a PPA for both nonprofit and commercial customers is the guarantee of a stable electricity bill for a period of 20 years. The rate in the first year is priced at a discount to what the utility charges, and there is usually a price escalator that increases the rate by 1 percent to 5 percent per year over the life of the agreement.
For Easter Seals the rate was set at 20 cents a kilowatt hour, or about a 25 percent discount to what they would be paying Hawaiian Electric Co. The 3 percent escalator set by Energy Industries is less than the 5 percent to 6 percent annual increase in HECO rates in recent years.
Being able to count on a stable electricity bill makes it much easier for Bishop Museum to plan for the future, said Blair Collis, president and chief executive officer.
"We want to keep revenue and expenses as stable as possible. It allows us to push out our forecasting and better weather storms, like economic downturns and funding cuts," he said.
Investors find solar PPAs attractive because they are relatively low risk and offer much better returns than alternative investments. The value of the tax credits, depreciation and income stream from the electricity payments can bring the cost down and translate into a return of 10 percent to 12 percent for investors, said Joe Saturnia, co-founder of Island Pacific Energy, which did the PV project at Punahou.
"That’s pretty attractive when the 10-year Treasury note is paying 2.8 percent," Saturnia said.
One of the developments that has helped attract investors to the local PPA market was a change in the law in 2009 that made the 35 percent state tax credit partially refundable. With the change investors can opt to get a 24.5 percent cash refund instead of the 35 percent tax credit. The cash refund means investors with no Hawaii tax liability still get a benefit.
"That really opens up the investor pool to mainland players," Saturnia said.
