In 1976, Hawaii’s first tax credit legislation was signed into law to promote the purchase of solar energy systems and reduce the importation of fossil fuels. George Ariyoshi was serving the first of his three terms as governor. Gerald Ford was president. Hawaii’s population was 900,000; today it’s about 1.4 million. And most of today’s workers in Hawaii’s solar businesses were not even born, or they were kids running around the schoolyard, when this legislation was signed into law.
For close to four decades there has been some form of direct state financial support for those purchasing solar energy systems, support that directly benefits those who have been able to take advantage of the tax credit. When the support was small, the majority of taxpayers could take solace from the energy diversification and small business benefits enjoyed by the island as a result of the subsidy.
The 1976 tax credit legislation was originally designed to be a “limited-time-only” incentive for homeowners and businesses to go solar, yet it has become a 37-year-old-and-counting, seemingly endless subsidy for the solar industry. We have reached the point that the industry and its customers have a powerful addiction to these subsidies even as the hit to the state’s general fund ballooned to well over $200 million in fiscal year 2013.
Such is the power of, and dependence upon, government largesse. Once dependency starts, irrational behavior begins. A constituency that perceives its very existence as reliant on that financial support flowing from the state or federal coffers can end up being irrational. Why? As conditions improve and goals are met, the goalposts are moved for phasing out this financial support.
Unwavering backing from successive governors and legislatures has made Hawaii a national model of support by a state in promoting the adoption of solar power. According to the Solar Energy Industries Association, this strategy has resulted in dramatic cost reductions and over 100 percent compounded annual growth in the installation of photovoltaic systems in the past several years; in 2012 alone there was more solar electric capacity installed in the state than in the preceding twenty years combined. Mainland analysts like Greentech Media are now predicting that Hawaii might make up the second-largest solar market in the country in 2013.
With the costs low, the time is right to phase out overly generous and no-longer-needed solar subsidies in the mature solar market of Hawaii.
With retail electricity prices in Hawaii over 30 cents per kilowatt-hour, our analysis shows that high-quality solar is now cost-effective without state subsidies. (Regardless of what the state does with its tax credit statute, the 30 percent federal tax credit will continue through at least 2016.) Making the transition to a subsidy-free deployment strategy may not be easy, but phasing out these subsidies will lead to greater long-term public support for renewable energy and a more stable marketplace for the solar industry.
Our conclusion is derived from the living laboratories of India, Germany and the United Kingdom. While we were initially skeptical that the elimination of high subsidies would help lower the consumer price, our skepticism was abated through a clear review of the data. As all three markets dramatically reduced incentives, most analysts predicted shrinking markets. In fact, the opposite occurred. Solar installations went up in each of these markets because the local solar industry figured out how to be more efficient in order to keep investors interested.
Many argue that since fossil fuels are still significantly subsidized, solar subsidies should not be phased out now. Shouldn’t we wait until there’s a level playing field in the energy market? No, we should not wait. Instead, Hawaii can be a model once again, but this time for phasing out subsidies as we promised we would do. In reality, a truly level playing field in all energy resources is unlikely in the foreseeable future, if ever. The welfare subsidy payments to the oil industry will end at some point, but we should create a model for the solar industry that is not based on unending government support.
In order to get us where we need to go, we propose the following:
- Reduce the state solar tax credit to 15 percent starting this July 1 with a fixed cap dollar amount on that credit, similar to Governor Abercrombie’s current proposal
- Further reduce the credit to 10 percent starting January 1, 2015 and 5 percent starting January 1, 2016, and eliminate it entirely by January 1, 2017
- Eliminate the potential gaming of the system by removing multiple tax credits per PV facility site and limiting the tax credit to one per tax map key plot
Everything is possible, but we need to create a roadmap to greater growth and face up to the realities of our industry. Eliminating confusing subsidies will expand one of the largest wealth creation opportunities on the planet: solar energy. The Hawaii solar industry can phase out the state tax credit and lead the way to a sustainable and fiscally prudent Hawaii.
Marco Mangelsdorf has been working in the solar energy field for 35 years, is president of ProVision Solar in Hilo and teaches energy politics at UH- Hilo. Jigar Shah is the author of the upcoming book: Creating Climate Wealth: Unlocking the Impact Economy and the founder of SunEdison, the world’s leading solar services company.