Hawaii Economists: Residential Solar Could Cost State $1.4 Billion
State tax credits for residents who install rooftop solar systems are no longer a good deal for the state and could end up costing Hawaii taxpayers $1.4 billion over the long term, according to a by University of Hawaii economists.
鈥淲e鈥檙e looking at a really tremendous burden on the state in terms of lost tax revenue,鈥 said Makena Coffman, a lead author of the study and an economics professor at UH鈥檚 Department of Urban and Regional Planning.
The report, issued on Monday by the University of Hawaii Economic Research Organization, emphasizes that rooftop solar panels are a lucrative investment even without current state tax credits.
The findings come as solar and environmental advocacy groups lobby state lawmakers to preserve generous tax incentives that allow homeowners to recoup 35 percent of a photovoltaic system’s cost, or $5,000, whichever is less.
The solar credit is expected to cost the state $174 million in lost tax revenue in 2012, according to the state energy office, compared with $35 million in 2010.
Solar and energy advocates immediately panned the report, saying it relied on faulty assumptions.
Still, the report makes a strong argument for repealing the solar tax credits, said Coffman.
To calculate the potential cost to the state, researchers focused on households likely to install solar panels: owner-occupied, single-family homes. The report acknowledges that it is unlikely that all the households will adopt solar and that limits on how much solar the islands鈥 electric grids can handle could hamper adoption. But the $1.4 billion figure illustrates the potential runaway costs for the state, said Coffman.
鈥淥ne of the problems with state tax credits is that they kind of run away from you,鈥 she said. 鈥淭he state didn鈥檛 intend for them to cost this much.鈥
The cost of the solar tax credits to the state is causing concern for Gov. Neil Abercrombie鈥檚 administration. In November, the Hawaii Department of Taxation amended its solar tax credit rules to in essence restrict the number of tax credits that can be claimed on solar arrays.
In response, the Sierra Club and Earthjustice sued the state to stop the new rules from taking effect. The groups warned that homeowners would no longer be able to afford solar panels and that thousands of jobs in the solar sector would be lost.
But the UHERO report says that solar panels are not only affordable without state tax credits, they鈥檙e a great investment.
鈥淔rom a private investor decision, it鈥檚 kind of a no brainer to install a PV system, with or without the state tax credits,鈥 said Carl Bonham, the executive director of UHERO.
The university researchers say that for a typical residential solar array, the annual internal rate of return is 9 percent without state tax credits. With the credits, that figure jumps to 14 percent.
Bonham said that the rates of return are exceptional.
鈥淚 have no place that I can earn a 9 percent return on an investment that I would consider safe,鈥 he said. 鈥淚t doesn鈥檛 exist.鈥
By comparison, he said that the annual yield on 10-year treasury bonds is about 2 percent and that the long-term average return in the stock market is about 7 percent.
UHERO’s calculations on the rates of return only apply to systems that homeowners buy. Residents can also enter into long-term leases in which they rent a system for 20 or more years, but the rate of return wouldn鈥檛 be as good, said Bonham.
Solar Lobby Fights Back
The report is likely to become a major point of contention in the debate over the future of the state鈥檚 tax credits.
Leslie Cole-Brooks, executive director of the Hawaii Solar Energy Association, which represents the majority of the state鈥檚 solar companies, questioned the report鈥檚 findings.
She said that the report doesn’t take into account the additional benefits to the state of having a booming solar industry, such as increased tax revenue from general excise and income taxes.
The HSEA wants the Legislature to amend the incentive for solar PV systems to include a 30 percent credit for the cost of a system, capped at $12,500, with no expiration date, she said.
David Henkin, an Earthjustice attorney, also criticized the report, saying it fails to look at whether homeowners would switch to solar at the same rate if the credits are reduced or taken away.
“They make an assumption that with the old rules and the new rules and no credit, you are going to have the same amount of PV installation,” he said. “And Economics 101, unless you have a completely inelastic demand 鈥 meaning people don’t care what the price is 鈥 that is simply not true.”
Bonham said that any time an industry is receiving free money, it’s going to fight to keep it.
“I don’t think that you need a $5,000 credit or a $35,000 credit to induce homeowners to make this investment,” he said. “I think education and information is needed and I think that we have seen a very rapid growth in the PV industry. It is not clear that they need anywhere near this level of state government money to continue their growth.”
In addition to the state tax credit, solar customers are eligible for a 30 percent federal credit to cover system costs.
Coffman said that one of the main takeaways from the report is that “solar pays,” and that it’s important to educate the public that solar is a smart investment.
Tax Credits for the Wealthy?
The state still has a valuable policy role to play when it comes to encouraging residents to adopt solar, but it shouldn鈥檛 be in the form of government incentives, according to the report.
Rather the state should make it easier for a much broader demographic to go solar by encouraging an on-bill financing system that allows residents to easily pay off solar systems through their electricity bills, according to UHERO.
鈥淕iven the magnitude of the estimated taxpayer burden, the relatively short payback periods for household investors, and the large potential for rooftop PV and its subsequent greenhouse gas emission reduction benefits, a more appropriate role for state policy is to facilitate PV deployment rather than make direct payments,鈥 the report says. 鈥淥ne approach to facilitating private decisions to install PV is on-bill financing. This ‘pay-as-you-save’ mechanism is a way to potentially deploy PV to a wider population, while limiting the state鈥檚 tax credit expenditures.鈥
The vast majority of rooftop solar will be installed by households earning $75,000 or more a year, according to the report. Proponents of on-bill financing say that the program, which is being reviewed by state regulators, could make it easy for lower-income residents and possibly renters to switch to solar.
Read the report here:
