Gov. David Ige this week quietly approved a new energy tax on imported fossil fuels such as propane and liquefied natural gas along with a special tax break for coal that was sought by the state’s largest coal consumer.
The tax exemption for coal was requested by AES Hawaii Inc., which stands to benefit from the tax break for up to seven years.
AES produces about 20 percent of Oahu’s power at any given time by burning about 700,000 tons of coal per year at its plant in Campbell Industrial Park.
Jeff Walsh, former president and general manager of AES, has said the company needs the tax exemption because it sells power to Hawaiian Electric Co. by contract at a fixed price, so it has no way to pass the cost of any new tax on to HECO or the utility’s customers.
Walsh, who has since retired from AES, said the tax savings to the company from the tax break will be "significant," but declined to be more specific. Company officials were unavailable for further comment Friday.
The tax break for coal was included in a bill to expand Hawaii’s so-called "barrel tax" on oil. The barrel tax was first imposed in 1993, and is now set at $1.05 per barrel on all oil imported into the state. The proceeds are distributed among state environmental protection and cleanup programs as well as state programs to promote clean energy, reduce the use of fossil fuels and promote local agriculture.
Lawmakers this year originally proposed measures to expand the reach of that tax by imposing an additional levy on synthetic gas, liquefied natural gas, propane and coal.
House Energy and Environmental Protection Committee Chairman Chris Lee said lawmakers intended to amend the barrel tax to close a "loophole" that allowed fossil fuels such as propane and coal to avoid the barrel tax that was being paid by oil importers.
In particular, lawmakers said they wanted to levy the tax on liquefied natural gas, or LNG, because HECO is tentatively planning to use LNG on a large scale to produce power in Hawaii.
The original tax changes floated by House lawmakers would have applied the tax to propane, LNG and coal fuels according to their capacity to generate energy as measured in British thermal units, or BTUs, with the new tax set at 19 cents per million BTUs of fossil fuel.
But AES complained the bill would increase its operating costs and create a financial hardship for the company. AES has said its agreement to sell power to Hawaiian Electric would not allow it to pass the cost of the new tax on to HECO, "and thus would further burden an already financially struggling business."
The new tax would also make it more difficult for AES to adequately invest in maintenance and new equipment, which could affect the reliability of Oahu’s entire power grid, Walsh said.
AES operates the single largest generator connected to the HECO system, and the power it produces by burning coal is the least expensive electricity being produced in Hawaii.
Lawmakers then inserted language into the bill exempting coal that is used to generate electricity under power purchase agreements that were in effect before June 30, 2015. That would include the AES contract to sell power to HECO, which is scheduled to expire in 2022. AES is negotiating with HECO for an amendment to the power purchase agreement.
Ige signed Senate Bill 359 on Wednesday.
The special tax exemption for coal has been questioned by representatives from some local environmental groups, who argue the energy tax should logically apply equally to all fossil fuels.
Lee (D, Kailua-Lanikai-Waimanalo) said the tax break for coal was only a temporary step, and lawmakers intended that the exemption will end when AES signs a new power purchase agreement with HECO.
Lee said Friday that lawmakers will monitor the ongoing power purchase agreement negotiations between the utility and AES, and "if there is something that needs to be done, everything is on the table."
