Property tax assessments jeopardize Oahu’s clean energy projects

The Honolulu City Council is weighing a bill that would provide renewable energy projects with substantial relief from an unexpected and steep increase in property taxes.

As currently drafted, Bill 39 would exempt the projects from 80% of the property taxes imposed. The proposed discount comes on the heels of Honolulu Hale this year moving the projects from the agricultural tax category to the industrial tax rate.

The upshot for Clearway Energy Group’s Waipio and Lanikuhana solar projects was a combined annual real property tax bill that soared from last year’s levy of $30,000 to upwards of $800,000.

Supporters of the bill, which is slated to go before the Council’s Budget Committee on Wednesday, assert that in the absence of a sizable tax break, placement of renewable energy projects in the higher tax category could hinder Oahu’s progress toward making good on a state law, enacted in 2015, mandating that all electricity in Hawaii come from renewable resources by 2045.

At the end of 2020, Hawaii’s largest electrical utility, Hawaiian Electric, reported that about 35% of its power was from renewable sources.

Clearway’s tax rate switch occurred after an appraiser team with the city’s Office of Budget and Fiscal Service’s Real Property Assessment Division spotted solar panels on agricultural land while conducting a site inspection, and later deemed solar energy production at the sites as industrial use.

The team determined that because of “higher use being done on the land,” with power being sold to Hawaiian Electric, city ordinance requires grouping with industrial rate properties, said Andrew Kawano, who serves as the city’s Budget and Fiscal Services director.

If the tax classification holds, the state Energy Office estimates the industrial rate would be imposed on a total of 12 existing projects and nine under development — all with solar panels on ag land.

For the projects that are up and running, passing the tax burden along to customers by way of higher bills for electricity use is not a option within easy reach.

These projects have secured long-term contractual agreements — spanning up to about 25 years — with Hawaiian Electric that set firm utility rates, which were approved by the state Public Utilities Commission. So they must either find a way to absorb the additional tax hit, attempt to renegotiate their respective contracts or, at worst, terminate projects.

Kirsten Baumgart Turner, a deputy energy officer at the state Energy Office, pointed out that while the switch to the industrial rate is prompting bankruptcy worries, the demand for more renewable energy here will increase upon next year’s closure of the AES coal power plant, which now provides 16% of Oahu’s peak power needs.

“These projects that are in line to provide us the renewable energy capacity that we need to replace the coal plant, and to keep us moving towards our 100% mandated renewable energy goal” could be “derailed,” Baumgart Turner said.

The difference between being assessed at the city’s agricultural rate versus the industrial rate is vast. The industrial rate is $12.40 per $1,000 of the net taxable amount — more than double the ag rate of $5.70.

Further reducing the ag tax bill, if there’s a 10-year commitment to doing agricultural work on the land, the dedicated portion is assessed at 1% of its value. A five-year dedication is assessed at 3%.

For example, if a farm commits to working ag land for 10 years and its property valuation is $1,000, at 1% of its value, the valuation would be $10 and the amount of property tax owed would be 5.7 cents. If the industrial property valuation was $1,000, the property tax owed would be $12.40.

Wren Wescoatt, director of development at Longroad Energy, said he worries that under the industrial rate his company might not be able to afford its envisioned combination farming-solar energy project, Mahi Solar, which is scheduled to be fully constructed in 2023.

“It would have a huge economic impact on the project when we’re really going to great lengths to keep the land in agricultural use as well,” Wescoatt said.

Additionally, he said: “The use for solar is really temporary. The equipment that’s going in is going to be removed at the end of the project. It’s not like a building or a factory. It’s not like we’re installing something that’s going to be around for 100 years. This is just temporary equipment that eventually is going to be removed.”

In a recent letter addressed to Mayor Rick Blangiardi’s administration, City Council Chair Tommy Waters and Vice-Chair Esther Kiaaina called for temporarily returning renewable projects to the agricultural rate grouping.

The letter called for an administrative stopgap action of “immediate restoration of classification to avoid grave potential disruptions of the renewable energy progress made to date on our island.” It also called for a “working group of stakeholders and Council staff to craft a suitable long-term solution.”

But Kawano has countered that such administrative action is blocked by city law.

“We’re following current ordinance in terms of all the properties are assessed, and it’s based on highest and best use,” he said. Kawano maintains that the quickest way to address the quandary, “specific to these renewable energy projects that sell power to the utility,” is by way of a new ordinance.

In its current draft, Bill 39 is viewed as a short-term solution by most stakeholders. Among potential long-term solutions, Kawano said, is one through which the city would charge renewable energy companies a fee in lieu of taxes.

The state charges most non-renewable energy projects a fee, and those projects are exempt from city property taxes.

The state Energy Office has identified finding a viable fix to the renewable energy tax quandary as a top priority. “Our biggest concern is that we have fairness and consistency with existing projects and projects under development,” Baumgart Turner said.

The city tax rate “will impact everything. It will have a domino effect, and we need those projects to continue forward. … We can work together on finding a long-term solution,” she said, but noted that in the short-term the Energy Office favors resetting assessments to match ag rates.

Nicola Park, Origination Manager at Clearway Energy Group, told the Honolulu Star-Advertiser in an emailed statement: “Our goal has always been to deliver reliable, clean renewable power to Hawaii at below the costs of fossil fuels,” and the city’s “previous tax policy allowed us to do that.”

Park added that any significant change “needs to ensure that electricity customers continue to receive the low rates they were promised, as the state transitions from fossil fuels to 100% clean energy. … Oahu’s electricity customers need clarity and a fair deal.”