Tax credit for renewable energy faces reductions, curtailed caps

High electricity bills, sunny weather and improved technology have made solar power an increasingly popular option in Hawaii.

As an incentive to move consumers away from fossil fuel, the state and federal governments have offered sizable tax credits to reduce the upfront costs of expensive photovoltaic systems. But while many state legislators want to encourage the solar industry to thrive, some believe the state’s renewable energy tax credit is not being applied as intended and is costing far more than expected.

Homeowners are eligible for a 35 percent state tax credit for a photovoltaic system, with a cap of $5,000 for each system. Yet because of the way solar technology has evolved and tax guidance has been interpreted, many homeowners are installing multiple systems on their properties, claiming a state credit for each system and effectively eluding a cap.

“It’s just overly generous and being abused,” state House Majority Leader Pono Chong (D, Mau­na­wili-Kane­ohe) said.

House lawmakers want to restrict the tax credit to one for

each property, rather than each system, but would raise the cap to $7,000. The solar industry and

environmental groups have warned that such a restriction would be too radical, jolting the emerging market for solar systems and undermining the state’s goal of reducing its reliance on imported oil.

“Our intent is not to kill the industry,” Chong said. “At the same time, it’s our job to be fiscally responsible with the taxpayers’ money.”

Senators, working with the solar industry, have instead proposed lifting the cap and gradually reducing the tax credit to 20 percent over several years.

The state Department of Taxation estimates that the renewable energy tax credit — which covers photovoltaic systems, solar water heaters and wind projects — costs the state about $30 million a year. The cost is expected to surge through the next few years as more homeowners opt for solar power and several businesses roll out utility-scale solar projects.

Confusion about the tax credit for photovoltaic stems from the definition of the term “system,” as solar equipment has taken different forms and state tax analysts issued various guidance. The standard, according to the state, is that the number of photovoltaic systems on a property is determined by the number of independent connections to the main utility meter or circuit breaker.

Fred Pablo, director of the Tax Department, said the original legislative intent was to bring down the cost of photovoltaic for consumers, not offer tax credits for multiple systems at the same residence.

Solar industry executives say that whatever confusion existed in the past has mostly been resolved, and that some consumers need multiple systems for valid engineering reasons or physical site limitations. Most solar companies, they say, have relied on state tax guidance and have responsibly advised consumers to choose photovoltaic systems based on their energy consumption, not tax credits. The state has threatened to pursue taxpayers and solar companies who claim improper credits.

Mark Duda, a principal and founder at RevoluSun, a leading solar company, said he supports a gradual reduction in the credit over several years because he expects the industry will continue to grow, reducing the need for the incentive. But he said limiting the credit to one for each property would be too abrupt.

“If the House wants to see the solar industry continue to contribute in the way that it has, it doesn’t have to incentivize it at the same level that it currently does, but it can’t change this current system so radically that the industry falls off a cliff,” he said.

State Sen. Mike Gabbard (D, Waikele-Ko Olina), chairman of the Senate Energy and Environment Committee, said he hopes consumers will soon have the option of financing renewable energy systems through the savings on their electricity bills, lowering the barrier of high upfront costs. The idea, known as on-bill financing, is being studied by the Public Utilities Commission.

“I want to make it as affordable as possible for homes and for businesses,” Gabbard said.

He said eliminating the cap on the tax credit would deal with concerns about consumers or companies gaming the state. Reducing the credit over time would allow the industry to adjust while still giving consumers an incentive to convert to renewable energy, he said.