2013 6-6 ps opp to ds motion to dismiss-1

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2013 6-6 ps opp to ds motion to dismiss-1

  1. 1. LINDA LINGLEGOVERNORJAMES R. AIONA, JR.LT. GOVERNORSTATE OF HAWAIIDEPARTMENT OF TAXATIONP.O. BOX 259HONOLULU, HAWAII 96809KURT KAWAFUCHIDIRECTOR OF TAXATIONSANDRA L. YAHIRODEPUTY DIRECTORPHONE NO: (808) 587-1510FAX NO: (808) 587-1560September 17, 2007TAX INFORMATION RELEASE NO. 2007-02RE: Relating to the Renewable Energy Technologies Income Tax CreditThis tax information release will clarify some of the issues surrounding the renewableenergy technologies income tax credits provided by § 235-12.5, Hawaii Revised Statutes (HRS).A. WHO MAY CLAIM THE CREDITOnly the economic owner of the renewable energy technology system may claim thecredit. The economic owner of the system need not be the owner of the property being served bythe system.The determination of who is the economic owner of a system is made at the time thesystem is installed and placed in service. The economic owner of a system is determined withreference to the facts and circumstances of the particular transaction. Although no single testwill resolve the question of who the economic owner of the system is in every situation, thefollowing general rules will be applied by the department when analyzing a transaction:In the situation of leasing the system or a sale-leaseback of the system, the determinationof the taxpayer who is entitled to the credit requires an analysis of whether the transactionis, in fact, a lease or sale-leaseback for federal income tax purposes. The characterizationof a transaction involving a system as a sale, lease, or sale-leaseback for federal incometax purposes determines who is the economic owner of the property and thereby entitledto the tax benefits associated with the system.If a transaction is a lease for federal income tax purposes, the lessor is the economicowner of the system. On the other hand, if the parties characterize a transaction as alease, but it is in reality a sale for federal income tax purposes, the lessee is the economicowner of the system.If a transaction is a sale-leaseback for federal income tax purposes, the buyer/lessorentering into a sale-leaseback arrangement with respect to the system is the economicowner of the system.If a transaction is a sale for federal income tax purposes, the buyer is the economic ownerof the system, even if title to the system passes to the buyer after the system is technicallyinstalled and placed in service by the seller, but only if the system is installed and placedin service at the direction of the buyer.EXHIBIT 1
  2. 2. Tax Information Release No. 2007-02September 17, 2007Page 2 of 12Example 1:A developer on a speculative basis (meaning that the developer is notcontracted to build the home for any specific person) plans to build andsell 50 homes, which are intended to be used as single-family residences.The developer plans to install and place in service a photovoltaic systemon each of the residences during the construction of the homes. Thedeveloper is eligible to claim the credit, all other requirements for thecredit being satisfied, if the developer purchases the system and installsand places it in service. The initial homeowner who then buys one of theresidences from the developer will not be eligible to claim the credit, asthat homeowner was not the economic owner of the system at the time thesystem was installed and placed in service.Example 2:A homeowner contracts for the purchase and installation of a photovoltaicsystem on her single-family residence. Because the installation andplacing in service is contemporaneous with the purchase of the systembeing installed, the contractor would not be eligible to claim the crediteven if the contractor originally purchased the system and then installed itand placed it in service prior to the passing of the title to the system fromthe contractor to the homeowner. The homeowner, being the economicowner of the system, would be the proper taxpayer to claim the credit.(For discussion regarding application of the appropriate credit cap, seesections D. and E., below.)Example 3:The owner of a hotel purchases a photovoltaic energy system forinstallation and use in the hotel. Immediately upon installation of thesystem in the hotel, taxpayer acquires the system pursuant to a sale-leaseback agreement with the hotel owner. Then the taxpayer leases thesystem back to the hotel as required for recognition of the transaction as avalid sale-leaseback transaction for federal income tax purpose. Thetaxpayer, not the hotel owner, will be considered the economic owner ofthe system when the system was installed and placed in service; andtherefore is eligible to claim the credit.B. WHEN THE CREDIT MAY BE CLAIMEDThe owner of the system may only take this tax credit for a system that has been installedand placed in service during a taxable year. A renewable energy technology system is placed inservice in the taxable year in which the system is placed in a condition or state of readiness andavailable for a specifically assigned function by the taxpayer. Both the installation andplacement in service requirements must be satisfied during a particular tax year in order to claimthe credit for that taxable year. However, not all installation activities must occur within thesame taxable year that the system is ultimately placed in service. As long as any portion of theinstallation occurs in the same year that the system is placed in service, all installation costsincurred by the owner of the system in previous tax years that are related to the system in
  3. 3. Tax Information Release No. 2007-02September 17, 2007Page 3 of 12question but not yet used in a claim of this credit due to the "placed in service" requirement, maybe included in the actual cost during the taxable year that both requirements are finally met.C. WHAT IS A SYSTEM?The question of what constitutes a system for purposes of this credit continues to causeuncertainty among taxpayers desiring to take advantage of the tax credit provided at § 235-12.5,HRS. This question is important because a credit may be claimed for every eligible renewableenergy technology system that is installed and placed in service by a taxpayer during the taxableyear. The credit allowable for each system, however, is subject to a cap; and, therefore, thequestion of whether the installation of renewable energy technology constitutes the installation ofone or more systems will directly affect the amount of credit available to a taxpayer."Renewable energy technology system" is defined by the statute as "a system thatcaptures and converts a renewable source of energy, such as wind, heat (solar thermal), or light(photovoltaic) from the sun into:(1) A usable source of thermal or mechanical energy;(2) Electricity; or(3) Fuel."§ 235-12.5(b), HRS.The statute also defines "Solar or wind energy system" as "an identifiable facility,equipment, apparatus, or the like that converts insolation or wind energy to useful thermal orelectrical energy for heating, cooling, or reducing the use of other types of energy that aredependent upon fossil fuel for their generation." § 235-12.5(b), HRS. The undefined terms usedin § 235-12.5(a)(1), (2), and (3) (respectively "solar thermal energy systems", "wind-poweredenergy systems", and "photovoltaic energy systems") will be defined with reference to thedefinition given for "solar or wind energy system." For purposes of this credit, the departmentwill interpret the terms "solar thermal energy systems", "wind-powered energy systems", and"photovoltaic energy systems" as follows:"Solar thermal energy system" means an identifiable facility, equipment,apparatus, or the like that converts heat (solar thermal) energy to useful thermal orelectrical energy for heating, cooling, or reducing the use of other types of energythat are dependent upon fossil fuel for their generation."Wind-powered energy system" means an identifiable facility, equipment,apparatus, or the like that converts wind energy to useful thermal or electricalenergy for heating, cooling, or reducing the use of other types of energy that aredependent upon fossil fuel for their generation."Photovoltaic energy system" means an identifiable facility, equipment,apparatus, or the like that converts light (photovoltaic) energy to useful thermal orelectrical energy for heating, cooling, or reducing the use of other types of energythat are dependent upon fossil fuel for their generation.
  4. 4. Tax Information Release No. 2007-02September 17, 2007Page 4 of 12Therefore, as defined above, "solar thermal energy systems", "wind-powered energysystems", and "photovoltaic energy systems" are all "renewable energy technology systems" asthat term is defined in § 235-12.5, HRS, because each captures and converts a renewable sourceof energy, such as wind, heat (solar thermal), or light (photovoltaic) from the sun into a usablesource of thermal or mechanical energy, electricity, or fuel. As renewable energy technologysystems, a taxpayer who installs and places in service a "solar thermal energy system", a "wind-powered energy system", or a "photovoltaic energy system" may claim the tax credit.The key to answering the question of whether any installation of renewable energytechnology constitutes the installation of one or more systems, therefore, depends uponidentifying the facility, equipment, apparatus or the like that is converting insolation or windenergy into useful thermal or electrical energy for heating, cooling, or reducing the use of othertypes of energy that are dependent upon fossil fuel for their generation. A system will only existwhen all the components necessary for the conversion of insolation or wind energy into usefulthermal or electrical energy are present.Example 4:Taxpayer installs and places into service three photovoltaic panels/arrays,one inverter, and associated attachment and connection equipmentsufficient to make one connection to the project sites electrical system.The taxpayer has installed one system, not three.Example 5:Taxpayer installs and places into service three photovoltaic panels/arrays,three inverters, and associated attachment and connection equipmentsufficient to make three separate, independent connections to the projectsites electrical system. If the taxpayer installs each array to a separateinverter, which is connected to the project sites electrical systemseparately and independently of the other inverter-array combinations, thetaxpayer has installed three systems.The department interprets the statutes allowance of a credit for a system that is installedand placed in service by a taxpayer during the taxable year as allowing additions to existingsystems to qualify for the credit in tax years following the year a system is initially placed inservice. However, to be considered an addition, the installation and placing in service ofequipment must be substantial and not constitute mere maintenance or repair of the existingsystem. All additions made to one existing system during a single taxable year will be treated asone installation with the aggregate cost subject to the cap as if a single system were installed andplaced in service during that taxable year. While any number of additions may be made during asingle taxable year, at least one of the additions made during the tax year in question mustconstitute or include an identifiable facility, equipment, apparatus, or the like that converts heat(solar thermal) energy, wind energy, or light (photovoltaic) energy to useful thermal or electricalenergy for heating, cooling, or reducing the use of other types of energy that are dependent uponfossils fuel for their generation; otherwise none of the additions will generate a credit because thedefinition of system will not have been met.
  5. 5. Tax Information Release No. 2007-02September 17, 2007Page 5 of 12Example 6:Taxpayer has an existing photovoltaic system and decides to add anadditional solar panel array in January and then again in November. Sinceeach solar panel constitutes an identifiable facility, equipment, apparatus,or the like that converts light (photovoltaic) energy to useful thermal orelectrical energy for heating, cooling, or reducing the use of other types ofenergy that are dependent upon fossil fuel for their generation, eachinstallation will be considered an addition. The two additions will betreated as a single project and subject to a single cap.Example 7:Taxpayer has an existing photovoltaic system and needs to replace one ofthe solar panel arrays. In January, taxpayer replaces one array and adds anadditional array. Since the replacement array constitutes maintenance orrepair of the existing system, it does not qualify. However, the costreasonably allocated to the installation of the additional array wouldqualify for the credit.Example 8:Taxpayer has an existing photovoltaic system and needs to replace theinverter. Since replacing the inverter constitutes maintenance or repair ofthe existing system, it does not qualify. Even if the replacement did notconstitute maintenance or repair, it would still not qualify because it is notan identifiable facility, equipment, apparatus, or the like that converts heat(solar thermal) energy, wind energy, or light (photovoltaic) energy touseful thermal or electrical energy for heating, cooling, or reducing the useof other types of energy that are dependent upon fossils fuel for theirgeneration. The inverter does not convert light, heat, or wind into usefulthermal or electrical energy, the solar panels do.Example 9:Taxpayer has an existing photovoltaic system and decides to add moresolar panel arrays. As a result of adding the solar panel arrays, he needs toupgrade the inverter and the associated attachment and connectionequipment for a reason other than maintenance or repair. Since theinstallation includes solar panels which constitute an identifiable facility,equipment, apparatus, or the like that converts light (photovoltaic) energyto useful thermal or electrical energy for heating, cooling, or reducing theuse of other types of energy that are dependent upon fossil fuels for theirgeneration, the entire cost of installation qualifies.Example 10:Taxpayer has an existing photovoltaic system and decides to add moresolar panel arrays in January and December. In September, taxpayerdecides to upgrade the inverter and/or associated attachment andconnection equipment for a reason other than maintenance or repair (for
  6. 6. Tax Information Release No. 2007-02September 17, 2007Page 6 of 12example, upgrading to more efficient equipment). The installations madein January, September, and December will be treated as a singleinstallation subject to a single cap. Even though the installation inSeptember does not include an identifiable facility, equipment, apparatus,or the like that converts heat (solar thermal) energy, wind energy, or light(photovoltaic) energy to useful thermal or electrical energy for heating,cooling, or reducing the use of other types of energy that are dependentupon fossil fuels for their generation, the September installation may beincluded in the aggregate actual cost because the January and/or Decemberadditions made during the same tax year do include the installation of anidentifiable facility, equipment, apparatus, or the like that converts light(photovoltaic) energy to useful thermal or electrical energy for heating,cooling, or reducing the use of other types of energy that are dependentupon fossil fuels for their generation.If the taxpayer in this example did not make either the January orDecember addition, then the September addition, by itself, would notqualify for the credit. To include the cost of installing associatedequipment that does not itself convert heat, wind or light, one of theadditions made during a taxable year must include the installation andplacing in service of an identifiable facility, equipment, apparatus, or thelike that does convert heat (solar thermal) energy, wind energy, or light(photovoltaic) energy, such as a solar panel.Example 11:Calendar year taxpayer has an existing photovoltaic system. InSeptember, taxpayer decides to upgrade the inverter and/or associatedattachment and connection equipment for a reason other than maintenanceor repair (for example, upgrading to more efficient equipment). Asexplained in example 10, taxpayer cannot claim this tax credit for theinstallation and placement in service of any equipment that does notconvert heat, wind or light. Taxpayer decides to install an additional solarpanel array in December. As explained in example 10, if taxpayer installsand places in service equipment that does convert heat, wind or light, thenall additions to the system during the same taxable year will be treated asone addition, subject to one cap. In this case, the actual cost of theinverter in the September addition and the solar panel array in theDecember addition would be added together and treated as one qualifyingaddition during the taxable year, subject to the appropriate cap.However, if, for purposes of this example 11, the solar panel arrayinstallation begins on December 30 and ends on January 2 of the nextyear, then the new solar array panel would be placed in service in thefollowing tax year. Because the solar panel array was not placed inservice until the next year, it cannot be included as an addition in the sameyear as the September inverter addition. Since no equipment that converts
  7. 7. Tax Information Release No. 2007-02September 17, 2007Page 7 of 12heat, wind or light was added in the year the inverter was added, theSeptember inverter addition does not qualify for the credit.D. Types of Property Served by the SystemThe question of what constitutes a single-family residential property, multi-familyresidential property, and commercial property for purposes of this credit is also causinguncertainty among taxpayers desiring to take advantage of this tax credit. The maximum creditallowed for the installation of a renewable energy technology system depends not only upon thetype of system being installed, but also upon the type of property being served by the system.The statute identifies, but does not define, three categories of property: single-family residentialproperty, multi-family residential property, and commercial property.The department begins its interpretation with the term property; the department interpretsproperty to mean a single, definable portion of the real property located in this State as describedin a title recorded with the Bureau of Conveyances and/or Land Court of the State of Hawaii andthat the applicable law allows to be sold in fee simple separately from any other real propertylocated in this State.Once the physical boundaries of the property are determined, a characterization must beassigned. The department interprets this statute to mean that, for purposes of this tax credit, allsuch titled property in the State is to be characterized as commercial or residential, or a mix ofthe two. The department further interprets the statute to mean that any property being served bythe renewable energy technology system that cannot be properly characterized as residential ormixed property will, by default, be characterized as commercial property. Property will beconsidered residential or mixed if any portion of the property is being used as a residence. If atthe time of installation and placing in service of the system the property is not occupied, thenproperty will be considered residential or mixed if any portion of the property is intended for useas a residence. If property is used to regularly furnish lodging to transients for consideration, inwhich the rooms, apartments, suites, or the like are occupied by a transient for less than onehundred eighty consecutive days for each letting, then the property will be consideredcommercial property to the extent of that use.Example 12:Same facts as Example 1. Since the unoccupied homes being built by thedeveloper are intended for use as single-family residences, a claim for thecredit based upon the installation and placing of service of a photovoltaicsystem on one of the homes will be subject to the single-family residentialproperty cap.Example 13:Taxpayer leases property to tenants for residential use. Even though thetaxpayer is engaged in the commercial activity of renting property, thecharacter of the property is determined by its use as a residence. A systeminstalled and placed in service by the taxpayer for this rental property willbe subject to the single-family or multi-family residential propertylimitations.
  8. 8. Tax Information Release No. 2007-02September 17, 2007Page 8 of 12Example 14:A hotel, or any other place in which lodgings are regularly furnished totransients for consideration, in which all of the rooms, apartments, suites,or the like are occupied by a transient for less than one hundred eightyconsecutive days for each letting will be considered commercial property.The number of separate residences located on a single property will determine whetherthe property is considered single-family residential property or multi-family residential property.A single property consisting of more than one residence will be considered multi-familyresidential property. The determination that property is multi-family residential property is factspecific; but, in general and in the absence of other relevant facts to the contrary, multi-familyresidential property will be real property that is described in a recorded title and that has morethan one mailing address or separate entrances to separate living areas. However, twoexceptions will be made:The Ohana House Exception: If a single property has two separate residences,each occupied by members of a family as defined in the Internal Revenue Code,§ 267(b)(1), then each residence will be considered a separate single-familyresidential property if the system services both residences. Internal RevenueCode, § 267(b)(1) states that "members of a family" are as defined in subsection(c)(4). Subsection (c)(4) states that "[t]he family of an individual shall includeonly his brothers and sisters (whether by the whole or half blood), spouse,ancestors, and lineal descendents."The Directed Use Exception: If a system only services one residence on a multi-family residential property, then the system will be treated as servicing a single-family residential property.Example 15:A taxpayer installs and places in service a renewable energy technologysystem that services a building containing 50 condominium units usedcommercially and 50 condominium units used as single-family residences.Each unit is titled separately, therefore, each unit would be considered aseparate property. If the system serviced only one condo unit, theappropriate property limit would apply, which under the facts of thisexample would be either the single-family residential property limit or thecommercial property limit. This is not an example of the Directed UseException.On the other hand, if the building did not consist of separately titledcondominium units, but instead was an apartment complex with 50apartment units used commercially and 50 apartment units used as single-family residences, then a system installed to service just one apartmentunit used as a residence would be subject to the single-family residentialproperty limit notwithstanding the fact that the apartment unit is part of amulti-family residential property. This is an example of the Directed Use
  9. 9. Tax Information Release No. 2007-02September 17, 2007Page 9 of 12Exception. If the system in this hypothetical involving the apartmentcomplex serviced two apartment units used as residences instead of one,then the multi-family residential property limit would apply using only thenumber of serviced units, not the total number of units in the entireapartment complex.E. Mixed-Use Property versus Multiple PropertiesA renewable energy technology system can be installed and placed in service for morethan one property or where a single property is used as a residence and for commercial purposes.It is important to keep in mind that the treatment of mixed-use property is different than that for asystem servicing multiple properties. In both situations, though, the department requires that thetaxpayer consistently apply a reasonable allocation method, such as square footage or a measureof use.In situations where one property has more than one use, the actual cost of the system isallocated between the residential use (which may be single-family use or multiple-family use)and the commercial use. Assuming the system in question is a photovoltaic energy system,thirty-five percent of the cost allocated to residential use is compared against either the single-family residential cap or the multiple-family residential cap; and thirty-five percent of the costallocated to commercial use is compared against the commercial property cap.Example 16:Taxpayer has designated one room of her residence for use as a homeoffice, which is recognized as such by the IRS for federal tax purposes.For purposes of this tax credit, the property will be considered a mix ofresidential and commercial property. If an allocation by square footage isused and the home office constitutes 5% of the total square footage, then a$20,000 photovoltaic energy system would result in the following credit:Single-family residential: The allocated cost is 95% of $20,000, or$19,000. 35% of the allocated cost ($19,000) is $6,650. Then compare tothe cap for single-family residential property, which is $5,000. The creditassociated with the residential portion of the property is $5,000.Commercial: The allocated cost is 5% of $20,000, or $1,000. 35% of theallocated cost ($1,000) is $350. Then compare to the cap for commercialproperty, which is $500,000. The credit associated with the commercialportion of the property is $350.The total credit for the $20,000 system is the residential portion ($5,000)plus the commercial portion ($350) for a total credit of $5,350.Example 17:Taxpayer is a farmer and has a dwelling and barn on one of her lots.Following the definition of property set forth in this TIR, the particular lotcontaining both the dwelling and the barn would be considered a mixed-use property. If taxpayer installs and places in service a renewable energy
  10. 10. Tax Information Release No. 2007-02September 17, 2007Page 10 of 12technology system that only services the barn, then an allocation by usewould result in the system subject only to the commercial propertylimitations. (Note: This is not an example of the directed use exceptiondiscussed above; an allocation would still be made, but it would be a 0%residential/100% commercial allocation based upon use.) Likewise, if thesystem only serviced the single-family dwelling, then an allocation by usewould result in the system subject only to the single-family residentialproperty limitations. If the system serviced both the barn and thedwelling, then a portion of the systems actual cost would be subject to thecommercial property limitations and the rest would be subject to thesingle-family residential property limitations.Example 18:Taxpayer installs and places into service a renewable energy technologysystem for an apartment complex that contains both residential andcommercial units. Each unit is not separately titled, so each unit wouldnot be treated as separate property. Instead, the titled property is the entireapartment complex. Since the titled property is mixed-use, the taxpayerwill have to reasonably allocate the actual cost of the system between theresidential and commercial uses of the property. Assuming 50 residentialapartment units and 10 commercial units of equal size and use, and a$600,000 photovoltaic energy system, the credit would be calculated asfollows:Allocation of cost: The actual cost of $600,000 would be dividedbetween residential use of the property and the commercial use of theproperty, allocating $500,000 to the residential use and $100,000 to thecommercial use.Residential Use: Since the property contains more than one residence, theproper characterization of this use is multi-family residential. In this case,thirty-five percent of $500,000, or $175,000, would be compared againstthe $350 per unit multi-family residential property cap, or $17,500. Underthe facts of this example, the multi-family residential use of the propertywould generate a $17,500 credit (50 units times $350).Commercial Use: In this case, thirty-five percent of $100,000, or $35,000,would be compared against the $500,000 commercial property cap. Underthe facts of this example, the commercial use of the property wouldgenerate a $35,000 credit.The total credit for the $600,000 photovoltaic energy system is $52,500.A different calculation is required for a system that services more than one property. Aswith a mixed-use property, the actual cost of a single system servicing multiple properties isallocated among the properties. The difference lies with the application of the cap. With a
  11. 11. Tax Information Release No. 2007-02September 17, 2007Page 11 of 12mixed-use property, the cap is applied once to each use since it is a single property. Withmultiple properties, the appropriate cap is applied for each separate property.Example 19:Taxpayer installs and places into service a wind farm that services onecommunity of 50 single-family homes and 10 separate commercialproperties. Assuming that each property is equal in size and use, theallocation of the actual cost would be made equally to each property. If a$600,000 wind-powered system were installed and placed in service forthese properties, the credit would be calculated as follows:Allocation of cost: The actual cost of $600,000 would be divided equallyamong the properties, allocating $10,000 to each property.Single-family residential: Each single-family residential property wouldbe treated independently. In each case, twenty percent of $10,000, or$2,000, would be compared against the $1,500 single-family residentialproperty cap. Under the facts of this example, each single-familyresidential property would generate a $1,500 credit, for a total of $75,000(50 properties times $1,500).Commercial: Each commercial property would be treated independently.In each case, twenty percent of $10,000, or $2,000, would be comparedagainst the $500,000 commercial property cap. Under the facts of thisexample, each commercial property would generate a $2,000 credit, for atotal of $20,000 (10 properties times $2,000).The total credit for the $600,000 wind-powered system is $1,500 for eachsingle-family residential property ($75,000) plus $2,000 for eachcommercial property ($20,000) for a total credit of $95,000.Example 20:Unlike Example 19, Taxpayer (for example, an independent energyprovider or the local electricity provider) installs and places into service awind farm that does not service any particular property, but is entirelydirected into the energy grid of the local electricity provider. Therenewable energy technology system will be considered to be servicingcommercial property only; no allocation is necessary.However, if an identifiable connection exists to any particular property inaddition to a connection to the energy grid of the local electricity provider,then the cost of the system must be allocated among and between theparticular property or properties being serviced and the connection to theenergy grid, which is treated as servicing a single commercial property.
  12. 12. Tax Information Release No. 2007-02September 17, 2007Page 12 of 12Example 21:Taxpayer installs and places into service a renewable energy technologysystem for a condominium that contains both residential and commercialunits. Each condominium unit has a separate title, so each unit would betreated as a separate property. The taxpayer will have to reasonablyallocate the actual cost of the system between the residential andcommercial properties. Assuming 50 single-family condominium unitsand 10 commercial units of equal size and use, and a $600,000photovoltaic energy system, the credit would be calculated as follows:Allocation of cost: The actual cost of $600,000 would be divided equallyamong the properties, allocating $10,000 to each property.Single-family residential: Each single-family residential condo unit wouldbe treated independently. In each case, thirty-five percent of $10,000, or$3,500, would be compared against the $5,000 single-family residentialproperty cap. Under the facts of this example, each single-familyresidential property would generate a $3,500 credit, for a total of $175,000(50 units times $3,500).Commercial: Each commercial condo unit would be treatedindependently. In each case, thirty-five percent of $10,000, or $3,500,would be compared against the $500,000 commercial property cap. Underthe facts of this example, each commercial property would generate a$3,500 credit, for a total of $35,000 (10 properties times $3,500).The total credit for the $600,000 photovoltaic energy system is $3,500 foreach single-family condo unit ($175,000) plus $3,500 for each commercialcondo unit ($35,000) for a total credit of $210,000.For more information, please contact Jason P. Healey, Administrative Rules Specialist at(808) 587-1562 or the Rules Office at (808) 587-1577.Kurt KawafuchiDirector of TaxationHRS Sections Explained: HRS § 235-12.5.
  13. 13. LINDA LINGLE KURT KAWAFUCHIGOVERNOR DIRECTOR OF TAXATIONJAMES R. AIONA, JR. STANLEY SHIRAKILT. GOVERNOR DEPUTY DIRECTORSTATE OF HAWAIIDEPARTMENT OF TAXATIONP.O. BOX 259HONOLULU, HAWAII 96809PHONE NO: (808) 587-1510FAX NO: (808) 587-1560May 3, 2010TAX INFORMATION RELEASE NO. 2010-02Re: Further guidance regarding the term "system" for purposes of the Renewable EnergyTechnologies Income Tax Credit, HRS § 235-12.5.The purpose of this Tax Information Release (TIR) is to provide additional guidance on theDepartment of Taxations (Department) interpretation of the term "system" for purposes of theRenewable Energy Technologies Income Tax Credit set forth at Section 235-12.5, Hawaii RevisedStatutes (HRS) (hereinafter "credit"). Due to technological advances in photovoltaic renewableenergy system technology, it is necessary for the Department to restate its position and provideadditional interpretation.TIR 2007-02 AND DETERMING THE NUMBER OF SYSTEMSIn TIR 2007-02, the Department analyzed how to determine the number of systems forpurposes of calculating the credit amount:The key to answer the question of whether any installation of renewable energytechnology constitutes the installation of one or more systems...depends uponidentifying the facility, equipment, apparatus or the like that is convertinginsolation...into useful thermal or electrical energy for heating, cooling, or reducingthe use of other types of energy that are dependent upon fossil fuel for theirgeneration. A system will only exist when all the components necessary for theconversion of insolation...into useful thermal or electrical energy are present.Discerning a "system" for purposes of the credit is important because the credits cap applies persystem. Therefore, if a taxpayer installs more than one system on a property, more than one creditcap may be applicable depending upon the facts and circumstances of a particular case.TIR 2007-02 went on to provide two examples of photovoltaic systems, distinguishingwhether more than one system was installed for purposes of the credit:EXHIBIT 2
  14. 14. Tax Information Release No. 2010-02May 3, 2010Page 2 of 6Example 4:Taxpayer installs and places into service three photovoltaic panels/arrays,one inverter, and associated attachment and connection equipment sufficientto make one connection to the project sites electrical system. The taxpayerhas installed one system, not three.Example 5:Taxpayer installs and places into service three photovoltaic panels/arrays,three inverters, and associated attachment and connection equipmentsufficient to make three separate, independent connections to the projectsites electrical system. If the taxpayer installs each array to a separateinverter, which is connected to the project sites electrical system separatelyand independently of the other inverter-array combinations, the taxpayer hasinstalled three systems.(emphasis added).THE INVERTER ALONE DOES NOT DICTATE THE NUMBER OF SYSTEMSThe Department has learned that the photovoltaic industry, taxpayers, and tax practitionershave interpreted the foregoing discussion contained in TIR 2007-02 to mean that a "system," forpurposes of determining the credit cap, is based upon the number of inverters installed on a project.The number of inverters alone does not dictate the number of systems eligible forindependent credit caps. TIR 2007-02 defines a system based upon the number of independentfunctioning connections to the electrical system——not the number of inverters.The Department is clarifying TIR 2007-02 to curb perceived abuse in the credits applicationper system as the credit applies to photovoltaic technology systems that use micro-inverters. TheDepartment understands that the use of micro-inverters in single-family residential homeapplications has become more common. Because of the volume of single-family residential taxcredit claims, it is important that the Department advise industry participants, taxpayers, and taxpractitioners to avoid unnecessary controversy or dispute.A. Micro-inverters vs. Central or String Inverters——DistinctionA micro-inverter is a device that converts the direct current (DC) produced from a singlesolar panel module to alternating current (AC). A central or string inverter, on the other hand,aggregates all DC current from an entire photovoltaic system and converts that DC power from theentire array into AC power. The main distinction between the micro-inverter and the central orstring inverter is that there is typically a single micro-inverter for each solar panel in a systemutilizing micro-inverters, thus eliminating the need for a central inverter. A system utilizing thecentral or string inverter contains one inverter per solar panel array,1converting the entire arrays DCpower into AC power at one common point. From an electrical engineering standpoint, a central orstring inverter system is connected in series. A micro-inverter system is connected in parallel.1An array is a grouping of solar panels.
  15. 15. Tax Information Release No. 2010-02May 3, 2010Page 3 of 6B. Micro-inverters vs. Central or String Inverters——Relevance in Application of theCreditAs stated above, the Department has learned that many persons involved in photovoltaicsystems have attempted to claim the credit based upon the number of inverters. Assuming thenumber of inverters is the test to determine the number of systems, a photovoltaic system on anordinary single-family residential house using micro-inverters could potentially have 20 systems,assuming there are 20 panels and 20 micro-inverters. However, the same sized system on the samehouse using a single central or string inverter would only constitute one system.If the number of inverters is the proper test for determining a system for purpose of the creditcap, a comparable system of equal size as demonstrated above would result in radically differentcredit claims——a claim with 20 caps for the system containing micro-inverters and a claim with onecap for the system with a central inverter. Because of the radically differing results, for which thereis no basis for differentiation as a matter of tax law, the Department reminds taxpayers, taxpractitioners, and industry participants that the number of inverters does not dictate the number ofsystems.The Department will be pursuing and challenging any claims made by micro-inverter systemowners who have claimed that the credits cap is based upon the number of micro-inverters.THE NUMBER OF CONNECTIONS TO THE ELECTRICAL SYSTEM IS THE PROPERTESTFor purposes of determining the number of systems associated with any property, the propertest under TIR 2007-02 is the number of independent connections to the project sites electricalsystem. The number of independent electrical connections may be equal to the number of inverters,or it may not. Ordinarily, on a system involving central or string inverters, the number of invertersinvolved will be equal to the number of systems because each central inverter will have its ownindependent function as it relates to the connection into the electrical system. However, on a systemutilizing micro-inverters, ordinarily the number of systems will not equal the number of invertersbecause a micro-inverter system wired in parallel ordinarily only has one independent connection tothe projects electrical system.In order to determine the number of connections to the project sites electrical system, theDepartment will look to the number of independent connections into a final utility metering deviceor circuit breaker. It is possible for a single project site to have more than one point of connectioninto a final utility metering device or circuit breaker.Example 1:Taxpayer installs and places into service three photovoltaic panels, with a micro-inverterattached to each panel for a total of three inverters, and associated attachment andconnection equipment sufficient to make a single connection into the single family homescircuit breaker. The taxpayer has installed one system, not three.
  16. 16. Tax Information Release No. 2010-02May 3, 2010Page 4 of 6Example 2:Same facts as Example 1, except the system includes one central inverter and no micro-inverters. The taxpayer has installed one system.Example 3:Taxpayer installs and places into service ten photovoltaic panels, with a micro-inverter attached to each panel for a total of ten inverters, and associated attachmentand connection equipment sufficient to make two independent connections into thesingle family homes two independent circuit breaker panels. One circuit breakerpanel is for the homes main electric system. The other panel is located in the garageand is used to control the power for the homes swimming pool and sprinkler system.The taxpayer has installed two systems because there are two independentconnections to the project sites electrical system.Example 4:Same facts as Example 3, except the system includes two central inverters foraggregation of DC power to each separate panel and no micro-inverters. Thetaxpayer has installed two systems.TAX MOTIVATED INSTALLATIONS WILL BE DISREGARDEDThe only connections to a project sites electric connection that will qualify as independentseparate systems are those electrical connections that have a legitimate purpose and are not taxmotivated.For example, if a taxpayer foregoes a junction box or other device used to reduce multipleconnections into a single connection for purposes of connecting to the circuit breaker so that thetaxpayer can create multiple connections to increase the number of credit caps, such installation willbe considered tax motivated, a sham, and will be challenged by the Department. Where multiplesystems are claimed and are subsequently found to be a sham by the Department, only one systemwill be allowed.The Department reserves the right to inspect any installation resulting in more than onesystem per project site to ensure that the number of systems is legitimate and not abusive.Example 5:Taxpayer installs and places into service 20 photovoltaic panels, with a micro-inverter attached to each panel for a total of 20 inverters, and associated attachmentand connection equipment. Assume further that a similar system ordinarily includesa junction box to reduce the 20 connections from the individual panels into a singleconnection for easy installation into the circuit breaker. In order to increase the
  17. 17. Tax Information Release No. 2010-02May 3, 2010Page 5 of 6number of credit caps, the taxpayer requested that the installation include 20 separateconnections to the circuit breaker, bypassing the junction box. Assume further thatthere is no independent nontax reason for 20 separate connections to the circuitbreaker. This installation would be considered abusive by the Department and theDepartment would disallow any claim involving more than one system. One systemwould be allowed.The same analysis in Example 5 would apply to multiple use of central or string inverters withmultiple connections to the electrical system that lack a legitimate nontax purpose.Examples of legitimate nontax reasons for multiple connections to an electrical systeminclude:Separate independent circuit breakers located at the same project site;Separate independent utility metering devices located at the same project site;System capacity or load capacity of equipment;Utilizing multiple connections to independently power separate devices or for separate uses(i.e., one system to power air conditioning and another system for net metering);Any other legitimate nontax reason certified by an electrical engineer in writing and signedunder penalties of perjury containing the following affirmation——““I declare, under the penalties set forth in section 231-36, HRS, that this statement (including anydiagrams or supporting documentation) has been examined by me and, to the best of my knowledgeand belief, is a true, correct, and complete statement of the facts as they relate to this certification,made in good faith, pursuant to Hawaii Income Tax Law, Chapter 235, HRS.””Ultimately, whether or not a connection is abusive or outside the Departments interpretationof a separate independent system is made on a case-by-case basis.TEMPORARY AMNESTY/PENALTY WAIVER FOR THOSE CLAIMING ABUSIVECREDITSThe Department will be pursuing all taxpayers who have claimed more than one system todetermine whether such claims are in accord with this TIR. It is the Departments position that thepositions taken in TIR 2007-02 are clear and that the proper test to determine a system isindependent connections——not the number of inverters. The Department understands that industryparticipants who sell or install photovoltaic systems have advised customers and clients to thecontrary and that the number of inverters is the proper approach. The Department believes thatindustry participants who have advocated these positions have potentially participated in thepromotion of an abusive tax shelter within the meaning of HRS § 231-36.7. A person who is foundto have promoted an abusive tax shelter within the meaning of HRS § 231-36.7 may be subject to apenalty of $1,000 per shelter or could be prohibited from further promoting the underlyingtransaction, in this case the promotion of Hawaii tax incentives.The Department will be vigorously pursuing those who have abused the renewable energycredit, including market participants who have violated Hawaii tax shelter or other laws. In
  18. 18. Tax Information Release No. 2010-02May 3, 2010Page 6 of 6furtherance of the Departments tax compliance efforts, the Department will be approaching industryparticipants to obtain customer lists and other information about those who have had multiplesystems installed on their premises.Notwithstanding the foregoing, the Department strongly encourages voluntary compliancewith the tax laws. Beginning immediately, taxpayers will be allowed to submit amended returnsadjusting credit claims to conform to the positions in this TIR and TIR 2007-02. If a taxpayersubmits amended tax returns by June 30, 2010 correcting any erroneous refund claims, all penaltiesassociated with abusive claims will be waived. Amended tax returns reflecting adjustments torenewable energy credits should include the marking "ENERGY CREDIT AMNESTY" on the topof the return. The Department reminds taxpayers that penalties are assessable for substantialunderstatements, erroneous refund claims, as well as negligence in tax positions that are contrary toexpress guidance. The Department will be assessing the 20% erroneous refund claim on all abusiveclaims starting July 1, 2010.Moreover, the Department will waive the tax shelter promoter penalty for those industryparticipants that fully cooperate with the Departments investigation into customer lists and otherinformation regarding the renewable energy system plans offered for sale.IMPACT ON ADDITIONS TO EXISTING SYSTEMSThis TIR is not intended to impact the Departments interpretation or analysis of allowing aseparate credit claim for additions to an existing system, as discussed in TIR 2007-02. In order foradditions to existing systems to qualify for the credit, the installation and placing in service ofequipment must be substantial and not constitute mere maintenance or repair of the existing system.EFFECTIVE DATEThis TIR is effective immediately and applies to any system placed in service prior to itseffective date where the statute of limitations for assessment or refund remains open.For additional information regarding this TIR, please call (808) 587-1577.KURT KAWAFUCHIDirector of TaxationHRS Sections Explained: HRS § 235-12.5
  19. 19. LINDA LINGLE KURT KAWAFUCHIGOVERNOR DIRECTOR OF TAXATIONJAMES R. AIONA, JR. STANLEY SHIRAKILT. GOVERNOR DEPUTY DIRECTORSTATE OF HAWAIIDEPARTMENT OF TAXATIONP.O. BOX 259HONOLULU, HAWAII 96809PHONE NO: (808) 587-1510FAX NO: (808) 587-1560TAX INFORMATION RELEASE NO. 2010-03May 21, 2010Re: Further technical clarification regarding the term "system" for purposes of theRenewable Energy Technologies Income Tax Credit, HRS § 235-12.5The purpose of this Tax Information Release (TIR) is to provide additional guidance on theDepartment of Taxations (Department) interpretation of the term "system" for the purposes of theRenewable Energy Technologies Income Tax Credit set forth at Section 235-12.5, Hawaii RevisedStatutes (HRS).In prior TIRs on this subject, the Department clarified that qualified renewable energytechnology systems:(a) must be fully integrated (i.e. must incorporate all components necessary to convert arenewable energy source into useful thermal or electrical energy) (see TIR2007-02atpage 4);(b) must have an independent connection into a project sites electrical system (i.e. afinal utility metering device, circuit breaker or other overcurrent protection device1(see TIR 2010-02 at page 3).Beyond providing further guidance regarding the term "system," the Department sought inTIR 2010-02 to address its concerns that in some instances, persons involved in the installation ofphotovoltaic systems were not adhering to one or both of the above principles. Instead, somepersons improperly relied upon changes in system component technology (in particular, theavailability of "micro-inverters") to overstate the number of systems for which credits may beclaimed. TIR 2010-02 at page three discusses how a single micro-inverter, attached to a single solarpanel, could be inappropriately characterized as a separate system. In an effort to prevent themanipulation of system design solely for tax purposes, the Department set forth five hypotheticalexamples to provide guidance on the design of legitimate systems.1Per National Electric Code 2008 240.2 (treatment of overcurrent protection devices).EXHIBIT 3
  20. 20. Tax Information Release No. 2010-03May 21, 2010Page 2 of 4Upon further consideration and review, the Department believes additional guidance isnecessary regarding what constitutes a legitimate, fully integrated and independent system toprovide greater clarity and certainty for industry participants, taxpayers and tax practitioners. In thiscase, and in the case of all such guidance, the Department’s intent is to provide standards that can berelied upon by tax practitioners.As noted above and in the earlier TIR’s, the number of inverters alone cannot be used todetermine the number of systems for the purpose of computing the cap. The number of independentconnections into the building’s electrical system is the determining factor, as illustrated by thefollowing examples:Example 1:Taxpayer installs and places into service ten photovoltaic panels, with a micro-inverterattached to each panel for a total of ten inverters, and associated attachment and connectionequipment sufficient to make a single connection into a circuit breaker in the maindistribution panel or a subordinate PV system output panel or other code compliantconnection method used in the electrical system of a single-family home. The taxpayer hasinstalled one system, not ten.Example 2:Taxpayer installs and places into service twenty photovoltaic panels, with a micro-inverterattached to each panel for a total of twenty inverters, and associated attachment andconnection equipment sufficient to make two connections into two circuit breakers in themain distribution panel or a subordinate PV system output panel or other code compliantconnection method used in the electrical system of a single-family home. The taxpayer hasinstalled two systems, not twenty.Example 3:Taxpayer installs and places into service ten photovoltaic panels, with a micro-inverterattached to each panel for a total of ten inverters, and associated attachment and connectionequipment sufficient to make ten independent connections into ten circuit breakers in themain distribution panel of a single-family home. Assume further that there is no independentnontax reason for the ten separate connections to the ten independent circuit breakers. Thetaxpayer has installed one system, not ten.Example 4:Taxpayer installs and places into service twenty photovoltaic panels, with a micro-inverterattached to each panel for a total of twenty inverters, and associated attachment andconnection equipment sufficient to make a connection into a circuit breaker in each of twocircuit breaker panels in a home with two such panels (for example, a main distribution paneland a subordinate panel used to control a swimming pool). The taxpayer has installed twosystems, not twenty.
  21. 21. Tax Information Release No. 2010-03May 21, 2010Page 3 of 4Note that in Example 2, the PV Installation is classified by the Department as having beenappropriately divided into two systems for legitimate nontax reasons by virtue of the fact thatmicroinverter manufacturers explicitly specify a maximum number of modules that can be wired inparallel in a single circuit (i.e., into a single overcurrent protection device) for each microinvertermodel to reduce the risk of fire, electrocution, and to prevent damage to the equipment. Therefore,the design specifications of the system determine the need for multiple connections to the electricalsystem, and the number of connections has not been determined by tax concerns.The Department’s guidance has been clear and consistent across the three TIR’s.From TIR 2007-02, Example 5 (page 4) reads:Taxpayer installs and places into service three photovoltaic panels/arrays, three inverters,and associated attachment and connection equipment sufficient to make three separate,independent connections to the project site’s electrical system. If the taxpayer installs eacharray to a separate inverter, which is connected to the project site’s electrical systemseparately and independently of the other inverter-array combinations, the taxpayer hasinstalled three systems.This guidance was reaffirmed in the Department’s Letter Ruling 2010-05 (dated March 25,2010) in footnote two on page two, where it states:The proper test for determining the number of systems under TIR 2007-02 is the number ofindependent connections to the project site’s electrical system – not the number of central orstring inverters. The number of independent electrical connections may be equal to thenumber of central or string inverters, or it may not. Ordinarily, on a system involving centralor string inverters, the number of inverters involved will be equal to the number of systemsbecause each central or string inverter will have its own independent connection to theelectrical system.”This language is also repeated verbatim in the Department’s guidance in TIR 2010-02 (seepage 3). TIR 2010-02 goes on to articulate a partial list of legitimate non-tax purposes for multipleconnections to electrical systems on page 5.The following examples further clarify the appropriate use of central or string inverters fornontax reasons:Example 5:Taxpayer installs and places into service twelve photovoltaic panels, attached to a single6,000 watt central or string inverter, along with associated attachment and connectionequipment. The output from the inverter is then connected to a single circuit breaker in themain distribution panel or a subordinate PV system output panel or other code compliantconnection method used in the electrical system. The taxpayer has installed one system.
  22. 22. Tax Information Release No. 2010-03May 21, 2010Page 4 of 4Example 6:Taxpayer installs and places into service twelve photovoltaic panels, attached to two 3,000watt central or string inverters, along with associated attachment and connection equipment.The output from each inverter is then connected to a unique circuit breaker in the maindistribution panel or a subordinate PV system output panel or other code compliantconnection method used in the electrical system. The taxpayer has installed two systems.Example 7:A single taxpayer installs and places into service a PV project on a single rooftop of afacility with two utility meters, one for the main load and another to handle a refrigerationload. Half of the project is wired into the electrical system attached to one utility meter andhalf of the project is wired into the electrical system associated with the other utility meter.The taxpayer has installed two systems not one.The design basis for different central or string inverter combinations can be driven by manyfactors including but not limited to Maximum Power Point Tracking, multiple roof planes, shading,future system expansion, increased inverter efficiency, utility interconnection requirements, andmaximizing production of renewable energy (for instance, the systems in Example 6 above will yieldmore renewable energy over time than the single system in Example 5). Legitimate designmotivations, including but not limited to those listed above will not be considered to be "taxmotivated."For additional information regarding this TIR, please call (808) 587-1577.KURT KAWAFUCHIDirector of TaxationHRS Sections Explained: HRS Section 235-12.5
  23. 23. EXHIBIT 4
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  30. 30. EXHIBIT 11
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  36. 36. EXHIBIT 17
  37. 37. EVOLVING HAWAI`I’S SOLAR TAX CREDIT:Preserving Long-Term Prosperity while Avoiding Short-Term Disaster!"#$%&(#)*%++,-.)The Hawai`i PV industry has grown over a few short years from a small niche industry to become one of thebright spots of economic growth in the State. From a handful of companies with a dozen or two employeeseach, the industry has grown to employ an estimated 5,000 people in the State. Solar projects now comprise23% of all construction activity in Hawai`i. And, PV enjoys immense popularity among the people ofHawai`i, who see it as both a symbol of the State’s commitment to ward renewable energy and away from itsoil dependency, and as a way for cash-strapped households to help manage their ever-growing electricity bills.The growth of the industry has not come without a cost to the State budget, and that cost has been increasingas the industry grows (though not as rapidly as the industry is growing because the installed cost of PVprojects has been in steady decline since 2008). Meanwhile, some have charged that the State tax credit isbeing abused as some installers and system owners allegedly claiming credits worth more than they areentitled to under the law. While solid economic analysis has repeatedly demonstrated that the state tax creditis a resoundingly good financial deal for the State treasury—returning over $2.60 in direct additional taxrevenue for every credit dollar spent, and providing the State with a strong financial return of 10.8% per yearover the 30 year life of the systems—the rapid growth in immediate costs to the State budget and theallegations of abuse have raised questions about the wisdom of continuing the credit in its present form.Changing the State tax credit offers both great opportunity and great danger: If done wisely, the credit can beevolved in a way to mitigate and manage the impact on the State budget while at the same time creating apath for the booming industry to evolve beyond the need for credits while solidifying its place as a critical,long-term component of the State’s economy. If done poorly and precipitously, however, changing the creditcould lead to the almost immediate layoff of thousands of workers, many Hawaii-owned businesses goingbankrupt, and the State and its residents experiencing a major setback in their efforts to move toward energyindependence.This White Paper addresses the current role of the PV industry in the State’s economy; the significance of theState tax credit in creating and maintaining that role; the impacts of potential changes to the credit; andproposes means by which the credit can be evolved without highly disruptive and potentially disastrous sideeffects on the State’s employment picture. Finally, the paper offers suggestions for managing fraud and abuseof the tax credit.Alternative Futures: Employment Levels in Hawai`i’s PV IndustryEXHIBIT 18
  38. 38. !"#$%&()*)+(+&!! ! !+&/0#)123#)24)&0#)56)789%:&-.)8);,<,=>:)!$282+.)Industry data indicates that the total size of the solar PV industry in Hawai`iin 2012 is about $450 million in revenue,1 and accounts for about 5,000 jobs,including about 23% of all construction jobs.2 The Hawai`i PV industry canbe broken down into several market “segments,” each of which is affectedsomewhat differently by the solar tax credit. Industry data suggests that thecurrent Hawai`i PV market volumes and jobs breakdown looks somethinglike this:"1] Job estimates are based on DBEDT input/output macroeconomic model multiplier of 11.1 jobs/$1 million of activity for theconstruction sector.!Between one-quarter and one-half of the cost of most PV installation is attributable to labor, all of whichmoney remains in Hawai`i to circulate in the local economy. The balance of the costs are for systemcomponents, essentially all of are produced outside of Hawai`i. A recent update by University of Hawai`ieconomist Dr. Thomas Loudat of his 2002 Energy Efficiency Policy Task Report to the Hawai`i Legislatureshowed the following benefits to the Hawai`i economy:Source: BluePlanetFoundation.org/SolarCreditPV industry impact goes well beyond the direct employment of contractors on rooftops installing PV. EachPV project requires sales staff, administrators, accountants, designers, electrical engineers, roofers, lawyers,&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&Figures supplied by the Department of Business, Economic Development and Tourism (DBEDT) to the Council onRevenues in August 2012 suggest that the total industry size is about $775 million. That analysis is based on severalflawed assumptions, as discussed further below.&+&Source: DBEDT analysis of data from closed building permits for solar PV as a proportion of all closed buildingpermits.#$%&!())$*+,-!.$!/01!$.!2$+-,*),3$+!(),343,5!3+!6&7&33!!"#$%&(%)*%+&,"+-.,&/*"&%-(/0%,12++3"4/0%-5"&*/-67897:%,/-%+&/"4;<**%#=/"4>7?8$@;<**%#=/"4A7?8$@B/%#7C%%-6/+B"#/DDE#<F%=&,G&/4/&HIB/%#JC%%-6/+B"#/DDE#<F%=&,B<&"4,!"##$%&"#()*&+),##,"-./0122&3 045&3 015&3 065&3 065&3 0772&3!,%*89&:&;-<,%*89&=">.&?@A1112 611 16B BCC BCC 7BB7
  39. 39. !"#$%&()*)+(+&!! ! !,&transportation workers, project managers in the private sector, plus building permit analysts and inspectors,utility engineers and staff, and other trades.In addition to jobs, the PV industry is a major source of new capital coming into the State. Of every dollarspent on PV projects in Hawai`i, over 708 of it comes from private investors outside of Hawai`i and from theFederal government.3 Outside investment into the State grows our economy and our Gross State Product.*?84$,8$#)24)&0#)*&,&#)/,")@-#9&)8)&0#);,<,=)!$282+.),89)56)789%:&-.)It is important to remember that the solar tax credit was created by the Legislature in 2002 to help the Statereduce its dependency on imported oil and grow a stronger local economy while enhancing and protectingour unique and important pristine environment. It was not created as a stimulus for any particular industry orbusiness segment and as such is not akin to Hawaii’s much-discussed High Technology Tax Credit.Accordingly, when analyzing the state tax credit, it is important to keep it in the larger context of Hawai`iexporting $4 billion to $6 billion per year on fossil fuels, with no control over costs or availability of thatresource, and commensurate vulnerability to both price spikes and supply disruptions. Hawai`i’sexpenditures on energy as a percentage of Gross Domestic Product are currently at an all-time high:The state solar tax credit has played an important part in Hawai`i growing its solar PV basis to rank third inthe nation for installed PV per capita, and for Hawai`i’s utilities to occupy four of the top five spots in aranking of installed solar systems per customer.4 Currently, approximately ___% of Hawai`i’s electricitycomes from solar PV, up from almost nothing over the past five years, and which undeniably could not haveoccurred without the state solar tax credit.The solar tax credit currently supplies about 23% of the cost of any given solar PV system installed in theState. The importance of the state credit varies according to two major factors: 1) industry segment and 2)&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&,&DBEDT estimates that the Hawai`i tax credit is actually claimed at a rate of only about 23% of total project costs. SeeDBEDT report to Council on Revenues, August 2012. This is because a significant portion of the claims for the 35% taxcredit are made via application for the cash refund, which is only 24.5% of project costs. In addition, a materialproportion of taxpayers entitled to the credit either fail to claim it, or claim it over several years, reducing the net presentcost to the State.&-&Sources: 2011 U.S. Solar Market Trends, August 2012; 2011 SEPA Utility Rankings, May 2012 (SEPA).
  40. 40. !"#$%&()*)+(+&!! ! !-&proportion of systems financed by third-party investors, as opposed to being paid for by the “host” who usethe energy produced by the PV system.Estimated Size and Segmentation of Hawaii’s PV MarketA,-B#&)*#?+#8&:),89)!:&+,&#9)*C#:)DE88%,3C#9F),&)+9GHIJH)1#:9#8&,3)@2++#-$,3)KHLIB<)@2++#-$,3)MHLIB<)/#-)H))N##9G8)/,-44)5-2O#$&:)P&3&.)Q)/#-)R)N##9G8)/,-44)5-2O#$&:)9$%%&!4$%*:;!<:3%%3$+-=!>/??!@! >AB!@! >/B!@! >CB!@! >CB!@!D$E$,3$+!,F3GHE&,5!.3+&+);G!!I?1! 0?1! J?1! K??1! K??1!Industry segmentation is significant to any discussion of efforts to adjust the solar credit because itdetermines the sensitivity of the project’s financial viability to changes in the incentive structure and alsodetermines the amount of time required to complete a project, from initial concept to final utilityinterconnection. For example, homeowners and commercial system owners installing a PV systems to reducetheir own electrical usage will be somewhat less sensitive to incentive adjustments than third party financiersof residential, commercial, feed-in tariff, and utility scale PV systems, who must meet the return requirementsof their investors. Similarly, whereas environmental motivations may influence investment decisions forhomeowners and business owners, for financiers solar projects are competing only with alternativeinvestment options, reducing these projects’ ability to absorb changes in the incentive environment.Understanding the extent to which a market segment is third-party financed is also important because theeconomic motivations that permit the systems to be purchased and paid for are driven entirely by investorslooking at economic risk/return, so the impact of a change in the solar credit on residential property will havedifferent implications to those third-party financing suppliers for residential solar (i.e., residential solar lessors)than they will to the homeowners who will be using the energy.Another important aspect of the solar tax credit for third party financing is the degree of stability andpredictability in availability of the incentive. Financing involving tax credits is highly complex and there are alimited number of suppliers of that financing. In addition, successful completion of a financed projectrequires long planning and development cycles, during which significant money and other resources are spentin anticipation of receiving a promised benefit from the incentive. Development cycles vary by marketsegment:Accordingly, abrupt changes that are implemented with less notice than the development cycle time andwhich do not provide some sort of ‘grandfathering’ for projects already committed can cause huge
  41. 41. !"#$%&()*)+(+&!! ! !.&disruptions in the marketplace, resulting in projects being cancelled, workers being laid off, and businessesfailing.7+S,$&:)T4)52&#8&,3)@0,8?#:)/2)/0#)*&,&#)*23,-)@-#9&)There are a range of potential changes to the state solar credit, as well as a range of ways those could beimplemented. This White Paper considers the two that seem to be principally under discussion:1) A change in rules implemented by the State Department of Taxation which would limit the tax creditto the statutory cap amount on a TMK basis, and which would be effective for systems placed intoservice on or after January 1, 2013 (the “DoTax Rule Change”).2) A change to the tax credit statute by the Legislature during the 2013 session that would roll the taxcredit back in steps from 35% to 25% to 20% and possibly continuing in steps until the credit iseliminated, and implemented for projects put in service in 2014 and after (the “Legislative Phase-Out”).7+S,$&:)24)&0#)U2/,")1%3#)@0,8?#)The following chart discusses likely impacts of the DoTax rule changes by market segment over time, and canbest be understood when read vertically column by column:A,-B#&)*#?+#8&:),89)!:&+,&#9)*C#:)DE88%,3C#9F),&)+9GHIJH) 1#:9#8&,3)@2++#-$,3)KHLIB<) @2++#-$,3)MHLIB<)/#-)H)N##9G8)/,-44)5-2O#$&:)P&3&.)Q)/#-)R)N##9G8)/,-44)5-2O#$&:)9$%%&!4$%*:;! • >/??!:3%%3$+! • >AB!:3%%3$+! • >/B!:3%%3$+! • >CB!:3%%3$+! • >CB!:3%%3$+!93;),!L!M+G3;),!N$O-!! • /P/??! • C//! • /CQ! • Q00! • Q00!7+S,$&)V.)/+#)N-,+#),89)A,-B#&!! ! ! ! !M::;G3&,;!R!,F$*SF!;+G!$.!5;&!<K/T0KTK/=!• @&G!-)&:O%;!,$!S;,!-5-,;:-!-$%G!&+G!-,&,;G!,$!:&U;!K/T0K!G;&G%3+;!V!3+);&-;!3+!/?K/!)%&3:-!• W3,F;!.;;X;!$.!,F3GHE&,5!.3+&+);G!-&%;-!G*;!,$!)$+);+!$4;!)$:E%;,3$+!G&,;!3-U!$!%&S;!&,;!3+);&-;!,$!)$4;!E$,;+,3&%!%$-,!-*O-3G5!• Q?HJ?1!.&%%H$..!3+!-&%;-!&),343,5!7F3%;!E;$E%;!7&3,!,$!-;;!3.!*%;!3-!&),*&%%5!&G$E,;G!• Y;*,&%!,$!-%3SF,!.&%%$..!G*;!,$!Z[9!.&),$!• ;E*,&,3$+!G&:&S;!,$!#,&,;!!• Y;&%5!)$:E%;,;!F&%,!,$!E;+G3+S!&+G!+;7!G;4;%$E:;+,!&),343,5]!$+%5!-5-,;:-!&%;&G5!3+,$!E;:3,,3+S!E$);--!73%%!)$+,3+*;!• Z;;X;!$.!+;7!,F3G!E&,5!.3+&+)3+S!&+G!3+4;-,$!&),343,5!• ;G*),3$+!3+!&4&3%&O%;!3+4;-,$!E$$%!&-!3+4;-,$-!;&%%$)&,;!&,,;+,3$+!;%-;7F;;!• ;E*,&,3$+!• Y;&%5!)$:E%;,;!F&%,!,$!E;+G3+S!&+G!+;7!G;4;%$E:;+,!&),343,5]!$+%5!-5-,;:-!&%;&G5!3+,$!E;:3,,3+S!E$);--!&+G!+$,!*-3+S!3+4;-,$!.3+&+)3+S!73%%!)$+,3+*;!• (),343,5!-*-E;+G;G!$+!.3+&+);G!-5-,;:-!&%;&G5!3+,$!E;:3,,3+S!E$);--!7F3%;!.3+&+)3+S!;+;S$,3&,;G!,$!G;&%!73,F!)$+,3+S;+)5!$.!/?K0!)$:E%;,3$+!• Z;;X;!$.!+;7!,F3G!• Y;&%5!)$:E%;,;!F&%,!,$!E;+G3+S!&+G!+;7!G;4;%$E:;+,!&),343,5!• (),343,5!-*-E;+G;G!$+!-5-,;:-!&%;&G5!3+,$!E;:3,,3+S!E$);--!7F3%;!.3+&+)3+S!;+;S$,3&,;G!,$!G;&%!73,F!)$+,3+S;+)5!$.!/?K0!)$:E%;,3$+!• Z;;X;!$.!+;7!,F3G!E&,5!.3+&+)3+S!&+G!3+4;-,$!&),343,5!• ;E*,&,3$+!G&:&S;!,$!#,&,;!
  42. 42. !"#$%&()*)+(+&!! ! !/&&+G!3.!^;S3-%&,*;!73%%!:&U;!)F&+S;-P!;-*%,3+S!3+!%&5$..-!3+!-&%;-!&+G!&G:3+!E$-3,3$+-!• #,$+S!;:E%$5:;+,!3+!)$+-,*),3$+!,$!S;,!)$+,&),;G!-5-,;:-!O*3%,!• ;E*,&,3$+!G&:&S;!,$!#,&,;!3+!.3+&+)3&%!:&U;,-!G*;!,$!E;);34;G!:$43+S!$.!S$&%!E$-,-!73,F$*,!7&+3+S!!G&:&S;!,$!#,&,;! E&,5!.3+&+)3+S!&+G!3+4;-,$!&),343,5!•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• 2$+,3+*;G!G;E;--;G!-&%;-!&),343,5!• @&--34;!%&5$..-!3+!)$+-,*),3$+!-;),$!G*;!,$!%&)U!$.!-&%;-!&),343,5!.$!/?K0!3+-,&%%&,3$+-!• (+S5!)$+-*:;-!3+!)&-;-!7F;;!-5-,;:-!G3G!+$,!:&U;!,F;!G;&G%3+;]!_W`!&+S5!3.!)&*-;!7&-!%&)U!$.!3+-E;),3$+!$.!)$:E%;,;G!-5-,;:!• #F*,G$7+-!&+G!• #&:;!HH!D$--3O%;!&GG3,3$+&%!-:&%%!.&%%$..!G*;!,$!)$+);+!&O$*,!7F&,!^;S3-%&,*;!:3SF,!G$!,$!/?K0!3+-,&%%;G!-5-,;:-!• Z;;X;!)$+,3+*;-!• @$;!3+4;-,$!E*%%H$*,!• Z;;X;!)$+,3+*;-!• @&+5!E$a;),-!73%%!O;!)&+);%%;G!7F;+!,;:-!)&++$,!O;!;+;S$,3&,;G!,$!E$43G;!)$:E;,3,34;!;,*+-!• ;G*),3$+!3+!&4&3%&O%;!3+4;-,$!E$$%!&-!3+4;-,$-!;&%%$)&,;!&,,;+,3$+!;%-;7F;;!• Z;;X;!)$+,3+*;-!• @&+5!E$a;),-!73%%!O;!)&+);%%;G!7F;+!,;:-!)&++$,!O;!;+;S$,3&,;G!,$!E$43G;!)$:E;,3,34;!;,*+-!• ;G*),3$+!3+!&4&3%&O%;!3+4;-,$!E$$%!&-!3+4;-,$-!;&%%$)&,;!&,,;+,3$+!;%-;7F;;!
  43. 43. !"#$%&()*)+(+&!! ! !0&O&+U*E,)3;-!$.!3+-,&%%;!.3:-!L/&"$"C0#&"%&"$%(=#/+=43M%D8?7-%"*./.0*%01#*&%2.34"5%%6F8+N8%0330./%:#33.::%0/%;#3";%<.34"%=.>%3.;;";5%?D88+?@88%0/%*./;&$4*&0./%134;%.;&%$"#0/0/B%H.>;%0/%;#3";A%"/B0/""$0/BA%1"$0&&0/BA%#C0/0;&$#&0./%2.34"5%%!"B30B0>3"%%=.>;5%!"B30B0>3"%2.34"5%%,$.1;%&.%/"#$+O"$.%3"<"3;%#;%1$.H"*&;%#$"%*#/*"33"C%.$%;&#33"C%#J#0&0/B%.4&*.";%%=.>%3.;;";5%?88+?@8A%0/%"/B0/""$0/BA%1"$0&&0/BA%*./;&$4*&0./A%#;%1$.H"*&;%&I#&%J.43C%.&I"$J0;"%>"%;&#$&0/B%$"#0/%./%I.3C%.$%*#/*"33"C%2.34"5%%,$.1;%&.%/"#$+O"$.%3"<"3;%#;%1$.H"*&;%#$"%*#/*"33"C%.$%;&#33"C%#J#0&0/B%.4&*.";%%=.>%3.;;";5%@88+E88A%0/%"/B0/""$0/BA%1"$0&&0/BA%*./;&$4*&0./A%#;%1$.H"*&;%&I#&%J.43C%.&I"$J0;"%>"%;&#$&0/B%$"#0/%./%I.3C%.$%*#/*"33"C%2.34"5%%,$.1;%&.%/"#$+O"$.%3"<"3;%#;%1$.H"*&;%#$"%*#/*"33"C%.$%;&#33"C%#J#0&0/B%.4&*.";%%=.>%3.;;";5%9@8+@@8A%0/%"/B0/""$0/BA%1"$0&&0/BA%*./;&$4*&0./A%#;%1$.H"*&;%&I#&%J.43C%.&I"$J0;"%>"%;&#$&0/B%$"#0/%./%I.3C%.$%*#/*"33"C%Long Term Economic Impact of the DoTax Rule ChangeA rule change such as described above will reduce the effective subsidy by imposing the current statutory caps on aper-TMK basis. Under current DoTax guidance, which describes a variety of conditions under which a single PVproject may be comprised of more than one “independent system” for tax purposes, the statutory caps have littleor no effect. Reduction of the effective subsidy to the statutory amount at the level of the individual PV Projectwill increase the effective (post-subsidy) cost to the system buyers, in amounts that vary by market. That increasein cost will result in reduction in demand and market activity, in ways that differ across market segments and alsovary based on the price elasticity of that demand.) 1#:9#8&,3) @2++#-$,3)KHLIB<) @2++#-$,3)MHLIB<)/#-)H)N##9G8)/,-44)5-2O#$&:) P&3&.);G*),3$+!3+!;..;),34;!);G3,!&:$*+,!I?HQ?1! Y$!)F&+S;! ?HC?1! ?HB?1! QBHJB1!M+);&-;!3+!;..;),34;!)$-,!0?HIB1! Y$!)F&+S;! //HI/1! ?HIB1! I/HB?1!D3);!R!9;:&+G!W%&-,3)3,5!• b7+;!-;%.H.3+&+);Gc!@;G3*:!• dF3G!E&,5!.3+&+);Gc!@;G3*:!• b7+;!-;%.H.3+&+);Gc!@;G3*:!• dF3G!E&,5!.3+&+);Gc!63SF!• b7+;!-;%.H.3+&+);Gc!@;G3*:!• dF3G!E&,5!.3+&+);Gc!_;5!F3SF!• b7+;!-;%.H.3+&+);Gc!@;G3*:!• dF3G!E&,5!.3+&+);Gc!63SF!• b7+;!-;%.H.3+&+);Gc!!Y$,!&EE%3)&O%;!• dF3G!E&,5!.3+&+);Gc!_;5!F3SF!W28?)/#-+)!$282+$)7+S,$&)B?1!G;)%3+;!3+!4$%*:;!K???H/???!E;:&+;+,!a$O!%$--;-!Y$!)F&+S;! CB1!G;)%3+;!3+!4$%*:;! JB1!G;)%3+;!3+!4$%*:;]!:$-,!E$a;),-!73%%!O;!;+G;;G!+$+H;)$+$:3)!G*;!,$!O;%$7H:&U;,!3-UH&Ga*-,;G!;,*+-!JB1!G;)%3+;!3+!4$%*:;]!:$-,!E$a;),-!73%%!O;!;+G;;G!+$+H;)$+$:3)!G*;!,$!O;%$7H:&U;,!3-UH&Ga*-,;G!;,*+-!7+S,$&:)24)W#?:3,&(#)50,:#GT%&)
  44. 44. !"#$%&()*)+(+&!! ! !1&This section estimates these same market-segment figures under an incentive reduced from 35 to 25 percentfor the baseline non-refundable credit (24.5 to 17.5 percent for the refundable credit), as proposed in lastSession’s HB2417 Proposed CD1 from the 2012 Legislature.Key findings are as follows:• Total solar market dollar volume for 2014 declines under reduced subsidy from $530 million to $374million.• General fund (“GF”) expenditures for 2014 decline from $142.9 million to $71.8 million – a savingsof $71.1 million or roughly half of the total.It is important to note that additional GF savings of about $__ million can be achieved by legislative action toreplace the current income tax credit for utility scale projects with a production tax credit (PTC).5Leaving aside the gains that could be accomplished by switching utility scale from an investment-based to aproduction-based tax credit, the primary drivers of the GF savings are (1) reductions in market activity ofvarying amounts and (2) shifts between the non-refundable to the refundable credits in each of the marketsegments. The remainder of this document examines each market segment and explains the dynamics thatresult in these changes.Estimated Market Volume and General Fund Obligation under Existing and Proposed Systems (allnumbers in millions)Residential RooftopCommercial<250 kWRooftopCommercial>250 kWFITGroundMount<500 kWUtilityScalePPAs andTier 3FITTotal2014: Current CreditEstimated Volume $200 $40 $40 $125 $125 $530Share Claiming RefundableCredit 50% 50% 90% 100% 100%Est. 2014 Credit Cost $59.5 $11.9 $10.2 $30.6 $30.6 $142.92014: Proposed CreditEstimated Volume $160 $34 $30 $88 $63 $374Refundable Share (24.5%) 60% 50% 90% 100% 100%Est. 2014 Credit Cost $32.8 $7.2 $5.5 $15.3 $10.9 $71.8Market volume impact of changein incentive(Percentage point change) -20% -15% -25% -30% -50%Savings under ProposedChanges $26.7 $4.7 $4.7 $15.3 $19.7 $71.1Residential Market Impacts: $26.7 million GF SavingsThe residential market will experience two primary effects from the changes to the credit: An estimated 20percent reduction in volume due to the reduced incentive, and a shift in the preferred financing mechanism.The reduction in demand would lower residential market volume by an estimated $40 million. The reducedincentive will also shift the market more toward a lease financing product because of lower out-of-pocket&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&5 This change was part of the compromise version of HB2417 (proposed CD1) that was supported by the House,Senate, DoTax and the solar industry that failed to meet the final deadline in the 2012 legislative session.
  45. 45. !"#$%&()*)+(+&!! ! !*&savings to homeowners from directly purchasing systems.6 This affects total expenditures because leases usethe refundable credit (17.5 percent under the proposed system) exclusively whereas purchases use the fullcredit (25% under the proposed change, 35% currently).Smaller Rooftop Commercial (<250 kW) Impacts: $4.7 million GF SavingsThe small commercial market is already declining statewide due to the high penetration levels of PV onutilities’ distribution circuits feeding commercial areas. These areas have been built out for some time and themajority of new commercial systems are idiosyncratic smaller churches and non-profits, or condominiumassociations, all of which have more complex PPA financing structures and approval processes than standardcommercial rooftop PV systems. This market only experiences a modest volume drop of 15 percent due tothe fact that it is falling anyway and is somewhat less price sensitive to changes in the incentive because thesystems are being used to directly offset user load costs at the full utility retail rate. Nonetheless, it isimportant it note that power purchase agreement pricing for the smaller non-profit type systems that willcontinue to be installed will increase substantially to the power user as a result of the proposed change.Larger Rooftop/Parking Commercial (>250 kW) Impacts: $4.7 million GF SavingsAt this point in the evolution of Hawaii’s solar market larger rooftop systems have primarily been built inareas where they can be easily interconnected and where clients have straightforward decision-makingprocedures, and that portion of the market has been largely saturated. The remaining demand for rooftopprojects in this size range is largely for public sector facilities such as schools, government buildings and thelike, all of which require third-party PPA financing to take advantage of the federal and state tax benefits.These projects have been slower to develop because they typically involve protracted PPA negotiations and inmany cases have multiple stages of award/audit and due diligence prior to being constructed. The otherremaining area of market demand for larger commercial projects is in covered parking projects, which havebeen slower to develop because they are more costly to build and/or are sited at townhouse or condoassociations. In virtually all cases, remaining projects in these size classes are employing some kind of thirdparty financing (PPA or tax leases), which are very sensitive to changes in pricing and incentive levels.Volume in the remaining portions of this market segment is projected to fall by 25 percent due to end userresistance to the higher energy prices which will be required by PPA/lease providers to offset loss of someincentive, and withdrawal from the market by some financiers due to the increased risk premium associatedwith the unanticipated changes in state tax policy. Savings in this group are modest despite the 25 percentdecline in volume because of the relatively small size of this market segment.Feed-in Tariff Projects under 500 kW (Tier 2 FIT Projects): $15.3 million GF SavingsFeed-in tariff (FIT) projects receive vastly lower benefit from energy revenues than projects that offset theuser’s electrical load because under the FIT contract all power is sold to the utility at a wholesale rate that isbetween 35 and 50 percent less than the retail rate. This makes the economics on these projects tighter thanthey would be on load offsetting projects and, as a result, they are more sensitive to changes in the incentivelevel than load offset projects. Put another way, load offset projects are driven by the owner’s ongoing needto meet its own electrical demand and concerns about future utility rate growth. No such concern affects FITproject developers: When the risk-adjusted economics of the project fall below their required market levels ofreturn on investment, they simply walk away. As a result, this market segment will suffer higher volumereduction from the proposed change in the incentive, falling by at least 30 percent and perhaps as much as 70percent. Since these projects use the lower refundable credit exclusively, there is no savings impact from ashift in the form of the credit accessed by developers. A 30 percent reduction in volume produces a $15.3million reduction in GF obligations, and this estimate is almost certainly conservative–market volume falloffcould be as high as 70 percent (i.e., $30.6 million savings).&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&/&&&The change is projected to shift the residential market from a projected 50/50 split between purchases and leases to60/40 leases, accelerating a trend that began in 2010 toward increasing use of lease financing. &
  46. 46. !"#$%&()*)+(+&!! ! !(&Utility Scale PPAs and Tier 3 FIT Projects: $10.9 million GF Savings (or more)Utility scale projects have all of the same financing characteristics and issues as Tier 2 FIT projects, exceptthey typically have lower energy sales rates and are more risky and costly to develop because they requiresubstations, line extensions, and various other interconnection infrastructure improvements that are notincludable in the tax basis of the project and are not required on smaller projects. These projects will haveeconomics and financiers that are the most sensitive to changes in the rules because they rely heavily on stablepolicy environments due to their long development timelines, typically 3 to 5 years in Hawaii. The estimates$10.9 million in savings is conservative because the estimated 50 percent reduction in in-service dollar volumemay very well shift to zero under the reduced credit amount, in which case savings will be nearly $22 million.Utility Scale Production Tax Credit (PTC)In addition, it is important to note that a broad consensus exists for the conversion of utility scale solar andwind from an investment-based to a production-based tax incentive structure. For relatively high-costsystems that appear periodically but are not a part of the ‘normal flow of business’ government agenciestypically favor spreading the payment obligation over time. Developers and investors are also comfortablewith production credits because the timing of the incentive payment stream matches up with project debtservice obligations. A production-based credit would take the cost of an existing credit and pay it out over tenyears, rather than one year.The table below shows that a PTC level can be chosen that keeps the industry viable while reducing theamount paid out in any year. Additionally, PTC at $0.08 (as proposed in HB2417 CD1) can keep the overallGF obligation more or less static, even without allowing for any discounting of the payments over time. Thatis, the present value of the GF obligation is actually much lower under an $0.08/kWh PTC than it is underthe current system. Overall, the impact if introducing a PTC would be to lower the GF payout in 2014without reducing the projected level of development (which does occur when the credit is left as aninvestment based credit but scaled back).Incentive Value for 1 MW System under Various Incentive SystemsYearCurrentSystemPTC per kWh$0.06 $0.07 $0.08 $0.09 $0.101 $1,225,000 $96,767 $112,895 $129,023 $145,151 $161,2792 $96,284 $112,331 $128,378 $144,425 $160,4733 $95,802 $111,769 $127,736 $143,703 $159,6704 $95,323 $111,210 $127,098 $142,985 $158,8725 $94,847 $110,654 $126,462 $142,270 $158,0786 $94,372 $110,101 $125,830 $141,558 $157,2877 $93,900 $109,551 $125,201 $140,851 $156,5018 $93,431 $109,003 $124,575 $140,146 $155,7189 $92,964 $108,458 $123,952 $139,446 $154,94010 $92,499 $107,915 $123,332 $138,748 $154,165Total $1,225,000 $946,190 $1,103,888 $1,261,586 $1,419,284 $1,576,983
  47. 47. !"#$%&()*)+(+&!! ! !&!(23(8?)&0#)*&,&#)/,")@-#9&X))W#,98?)&0#)789%:&-.)&2),8)P8:%V:9C#9)N%&%-#)Y&02%&)@-SS38?);,<,=>:)1#8#<,V3#)!8#-?.)!442-&:)8)&0#)5-2$#::)Because of the complex nature of financing involving tax credits, the market is very susceptible to extremechanges based on even short-term threats of changes to incentives. A very good proof of that point exists inthe history of the U.S. wind energy market. The wind industry has relied heavily on Federal production taxcredits (“PTCs”), and since 1999, Congress has allowed those credits to lapse for short periods of time, or inone case, simply waited until the last minute to extend them. The results were a drastic boom-bust cycle:On the other extreme, the nation of Brazil has demonstrated how a well-managed incentive program cangenerate a large, strong domestic industry that can be competitive without subsidies. Brazil started with alarge subsidy for wind energy, but structured the subsidy, and changes in the subsidy, to attract the strongestcompetitors to the marketplace, induce them to make long-term investments, and the weed out the inefficientplayers by gradually reducing the subsidies. The result is that Brazil now has one of the most competitivewind industries in the world: In an open energy auction in mid-2011, unsubsidized wind energy producerswere able to bid power into the Brazilian electrical grid at 6.38/kWh – even more cheaply than natural gasproducers.The Legislature is already on a path to gradually phase down and possibly phase out the solar tax credit inHawai`i. If that process is managed carefully, and adequate precautions are taken to protect via a‘grandfathering’ mechanism the vested interest of projects which have invested months or even years inreliance on the current credit structure, then Hawaii can offer the United States a similar leadership example,and emerge with an industry that will continue to supply both jobs and clean, locally produced energy toHawai`i into the indefinite future.
  48. 48. !"#$%&()*)+(+&!! ! !+&&Appendix – Market Segments and Financing StructuresMarket SegmentsResidential Market• Typical size 4-8 kW• Typical cost $5-6/watt, $20,000 to $50,000• Development cycle: 4-8 months from decision to completion• Construction time: 1-2 days• Estimated 2012 dollar volume: $200 million• Total jobs supported (direct & indirect, using DBEDT model of 11.1 jobs/$1 million): 2,200• Total direct jobs: 1,500• Proportion third-party financed (2012): 40%• Homeowner motivation: Offset energy load purchased from utility, resulting in direct savings of fullutility retail price for amount of energy offsetSmall Commercial Market (<250kW)• Typical size 100-200kw, rooftop mounted• Typical cost $4-5/watt, $400,000 to $1 million• Typical users: Businesses, non-profits, condominium associations, some public sector• Development cycle: 6-18 months• Construction time: 1-3 weeks• Estimated 2012 dollar volume: $65 million• Total jobs: 715• Direct jobs: 500• Proportion third party financed (2012): 30%• Owner motivation: Load offsetLarge Commercial (>250 kW)• Typical size 400-800kw, rooftop mounted• Typical cost $3.50-5/watt, $1.5 – 5 million• Typical users: Primarily public sector, with some larger businesses and occasional non-profits andcondominium associations• Development cycle: 1-3 years, principally due to long procurement and negotiation cycles• Construction time: 1-2 months• Estimated 2012 dollar volume: $25 million• Total jobs: 275• Direct jobs: Included in 500 estimate for small commercial• Proportion third party financed (2012): 90%• Owner motivation: Load offsetThese larger commercial projects are distinguished from the smaller segment primarily due to the lengthof development cycle and heavy reliance on third party financing.Small Feed-in Tariff (Tier 2, >500kW Oahu >250 kW Neighbor Island)• Typical size 400-500kw, rooftop mounted• Typical cost $3.50-4.50/watt, $1.5 – 2.5 million• Energy buyer: Utility, under pre-approved PUC contract and fixed pricing

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