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Economic Currents

Keep up to date with the latest UHERO news.

UHERO Study Finds That PV Systems Have a Positive Rate of Return of 14% For Households, But Could Cost the State Up To $1.4B in Residential Tax Credits

Posted February 11, 2013 | Categories: Hawaii's Economy, Blog

Solar photovoltaic (PV) tax credits are at the center of a public debate in Hawai'i. In their policy brief “Tax Credit Incentives for Residential Solar Photovoltaic in Hawai'i” UHERO’s Makena Coffman, Carl Bonham, Sherilyn Wee and Germaine Salim find that the typical residential solar PV investment has an internal rate of return of 9% even without state tax credits.  With the current state tax credit rules, the internal rate of return is as high as 14%.  If most of Hawai'i’s households choose to take advantage of these high rates of return, state tax credit expenditures could reach $1.4 billion for residential units alone.

Background:
HRS 235-12.5 allows taxpayers to claim a 35% non-refundable tax credit against Hawai'i state individual or corporate net income tax, for eligible renewable energy technology, including PV.  The policy has a $5000 cap on the tax credit per system, and excess credit amounts can be carried forward into future years until they are exhausted. 

Is PV A Sound Household Investment?
In purely economic terms, and assuming that the net-metering agreement remains unchanged, the rational decision is to make the PV investment, regardless of tax credit policy. Because systems are warrantied for 25 years or more, a payback period of 10 years or less makes the PV installation a very lucrative investment. The statewide average “payback period” is 8 years with no State tax credit and 6 years under the current set of rules. Of course other factors play a role in the household decision—there are questions of expected house tenure and whether the solar investment adds value to the sale of a home.

How Many PV Installations Can We Expect in the Future?
While it is difficult to understand why households do or do not choose to make what is currently an economically rational decision, we estimate the potential for solar PV installations on owner-occupied single family homes by household income, as provided in the most recent Census Data.

 

 

 

 

 

 

 

 

 

 

 

 

Making the heroic assumption that all owner-occupied single-family residences install solar PV such that they are net-zero users of electricity, we estimate a potential of up to 1,100 MW of capacity. This is a tremendous amount of PV and, without upgrading grid capabilities, would result in some neighborhoods exceeding the 15% circuit limit.

How Will This Affect State Expenditures?
If the total 1,110 MW of PV are installed, we estimate that under the current rules that defines PV systems by their output capacity, households could claim as much as $1.4 billion in state tax credits. This is solely for residential installations.

An Alternative
We suggest that an improved role for policy is to facilitate PV deployment rather than making direct payments. We encourage the State’s inquiry into on-bill financing for PV. This “pay-as-you-save” mechanism is a way to potentially deploy solar PV to a wider population, as well as limit the state's expenditures.

Read the Report


Breaking Down The Tesoro Refinery Closure - Part 3

Earlier this month, after a year-long unsuccessful effort to sell the facility, Tesoro announced they were shutting down their refinery while continuing to offer it for sale. The question on everyone’s mind—what does this mean for Hawai‘i?

This 3-part series by UHERO Graduate Assistants Iman Nasseri and Sherilyn Wee attempts to answer those questions.

 

Part 1: Hawaii’s Oil Market 
Part 2: Why did Tesoro close and not Chevron?
Part 3: How will this affect gasoline and other prices?

 

Part 3: How will this affect gasoline and other prices?

Many people instinctively assume that Tesoro’s closing will affect gas prices. In contrast, we think the refinery closure will have very little impact on prices.

Each and every refined product consumed in Hawai‘i is available in the US and global oil markets. However, not all of the products in the global market (most importantly gasoline, diesel and fuel oil) would necessarily meet the standards set by US Environmental Protection Agency. Fuel oil, for example, at the quality standards that HECO would require to meet EPA requirements, is traded in a thin market without a well-established price marker, and are only found in the Asian markets. Gasoline and diesel markets, on the other hand, are relatively over-supplied in both the US mainland and Asian markets. (You may be surprised to learn that the United States is the largest exporter of petroleum products in the world!)

Hawaii’s two refineries have together been supplying almost all of the state’s gasoline and diesel requirements in the past two decades. These two products were imported in the past but not much since the late 1990s, although this option has always been available. In addition to the refineries, there are four other entities that have the capability to import their own petroleum products—Hawaii Fueling Facilities Corporation (HFFC), Hawaii Gas, Aloha Petroleum, and Mid-Pac Petroleum. HFFC imports some jet fuel on a regular basis to supply airlines at the Honolulu International Airport and Aloha and Mid-Pac have also always had the option to import any fuel to sell in the local market. However, because the refineries have always faced a natural price floor through import-parity pricing (at least for some products), Aloha and Mid-Pac have found local supply competitive to imported fuel, and hence purchased locally.

If refineries did not consider the import option in their pricing mechanism, Aloha and Mid-Pac would have imported cheaper fuels and increased their markup to match what other retailers were charging.

Moreover, Hawai‘i ’s refineries have a higher crude oil cost compared with the refineries on the US mainland due to the unique demand pattern in Hawai‘i as well as technical limitations to meet high EPA standards while having little desulfurization and cracking capacity. To price their gasoline and diesel competitive to the imported fuel option, Chevron and Tesoro had to manage their profit margin using the pricing mechanism in their long term contracts for fuel oil and diesel sales to HECO. Faced with restrictions from long-term HECO contracts and import price competition, changing local fuel demand and global oil market conditions at times left both refineries with negative margins.

Consequently, we don’t expect to see much of a change as Hawai
i begins importing some or all of its fuels. The price impact, if any, is expected to be minimal, with some fuels becoming a little more expensive, and others a little cheaper. 

Discuss on FacebookRead Part 1Read Part 2


 

Disclaimer: Blog posts are intended to stimulate discussion and critical comment. The views expressed in this article are those of the author.


Breaking Down The Tesoro Refinery Closure - Part 2

Earlier this month, after a year-long unsuccessful effort to sell the facility, Tesoro announced they were shutting down their refinery while continuing to offer it for sale. The question on everyone’s mind—what does this mean for Hawai‘i?

This 3-part series by UHERO Graduate Assistants Iman Nasseri and Sherilyn Wee attempts to answer those questions.

Part 1: Hawaii’s Oil Market
Part 2: Why did Tesoro close instead of Chevron?
Part 3: How will this affect gasoline and other prices?

 

Part 2: Why did Tesoro Close Instead of Chevron?

Tesoro Hawaii faces worse conditions than both Chevron Hawaii and Tesoro’s mainland refineries. How? Despite being the larger of the two local refineries, Tesoro’s facility is less sophisticated than Chevron’s. Tesoro’s refining operation yields a larger share of fuel oil (35%) than Chevron (20%). Due to renewable energy developments and energy efficiency enhancements, fuel oil demand is shrinking as the demand for fossil fuel-based power generation declines. To cut it’s fuel output, Tesoro was forced to continuously lower its refinery’s utilization rate. In 2010, Chevron operated at around 85% utilization rate, while Tesoro’s stood at around 75%. 


This is already a very low utilization rate. Forthcoming EPA regulations will make matters even worse. In 2017, EPA requirements will ban utilities from burning anything with ash content. 
While these rules are primarily targeting coal fired power plants, Hawai‘i power plants would also be affected (and will probably be the only non-coal plants in the entire country to be affected). The end result is the destruction of a major portion of fuel oil demand for Hawaii’s refineries and even lower utilization rates. At lower utilization rates, Tesoro would have struggled to earn a profit without major investments to upgrade the facility. 

So the decision was made to convert the facility to an import, storage, and distribution terminal. As we mentioned in part 1, Chevron may eventually find itself in a similar situation and arrive at a similar decision.

But would RTT conversion (Refinery To Terminal—that is to import fuels rather than crude oil) enhance or diminish our economy’s fuel supply risk in terms of exposure to greater price fluctuations or supply disruptions? It depends! 


Under normal conditions, importing fuels from a fairly well supplied market would not lead to any increased price variability when compared to the alternative of importing crude and refining at home. But due to the pricing mechanisms described in part 1, caused by Hawai
i’s specific oil market conditions, some products are currently priced at a higher markup compared to imported fuels, hence there is a good chance that RTT would provide us with cheaper options for some fuels if not all.  


However, during periods of heightened volatility, crude oil and refined products may both be in short supply. It may be more difficult to deliver refined products to Hawai
i than to obtain unrefined crude. But we are talking about a period of global oil crisis, something that has not occurred in more than thirty years. 

 

Discuss on FacebookRead Part 1Read Part 3

 

Disclaimer: Blog posts are intended to stimulate discussion and critical comment. The views expressed in this article are those of the author.


Breaking Down The Tesoro Refinery Closure - Part 1

Earlier this month, after a year-long unsuccessful effort to sell the facility, Tesoro announced they were shutting down their refinery while continuing to offer it for sale. The question on everyone’s mind—what does this mean for Hawai‘i?

This 3-part series by UHERO Graduate Assistants Iman Nasseri and Sherilyn Wee attempts to answer those questions.

Part 1: Hawaii’s Oil Market
Part 2: Why did Tesoro close instead of Chevron?
Part 3: How will this affect gasoline and other prices?

 

Part 1: Hawai'i's Oil Market: A tale of two refineries
Hawaii is an extremely small part of global oil markets (almost 90 million barrels per day). Hawaii consumes 100-145 thousand barrels per day (kb/d) of petroleum products with fluctuations since the early 1980s. Currently the state has two small refineries: Chevron and Tesoro. Chevron’s Hawai‘i refinery was built in 1962 to supply the growing fuel market in Hawai‘i. Its crude distillation capacity was initially 33 kb/d, but has since been expanded to 54 kb/d. The Tesoro refinery was built as a 30 kb/d facility in 1970 by a company called Pacific Resources International (PRI). That facility changed hands twice—in 1989 to BHP, an Australian mining and oil company, and again in 1998 to Tesoro. After being upgraded and expanded several times, the refinery’s capacity is now nearly 94 kb/d, 75% larger than the Chevron facility.

The total refining capacity of both facilities, nearly 150 kb/d, has exceeded Hawaii’s demand for refined products for quite some time, and Hawaii’s demand for oil is actually expected to shrink further due to a variety of factors. One factor affecting the prospects for Hawaii’s petroleum market is the Hawai‘i Clean Energy Initiative (HCEI), whose express purpose is to gradually wean Hawai‘i’s economy off oil. Other factors include, but are not limited to, the possible introduction of Liquefied Natural Gas (LNG) into Hawai‘i’s energy mix, existing and future environmental regulations that may limit the use of petroleum products (such as burning fuel oil to produce electricity and/or marine transportation), increased EV penetration and improved fuel economy in the ground transportation sector, and flat to moderate economic and population growths in short- to medium-term future.

In addition, in today’s worldwide refining industry, the most profitable facilities have the following characteristics:
- large[1]  enough to achieve economies of scale
- small enough relative to the local market to sell all of its production in the local market regardless of its operating strategy
- in a market where imports of all products are required (to have a natural price floor through import-parity pricing). 

 

Hawai‘i’s refineries do not enjoy any of these conditions!

Taken as a whole, it is clear that the closure of at least one of Hawaii’s refineries was expected, and baring some significant improvement in the local refining industry, Chevron may very well follow Tesoro’s conversion to an import facility.

[1] Current average-sized refinery worldwide is about 400 kb/d

 

Disclaimer: Blog posts are intended to stimulate discussion and critical comment. The views expressed in this article are those of the author.
 


Details of the Fiscal Cliff Deal

Posted January 3, 2013 | Categories: Hawaii's Economy, Blog

On New Year’s Day, almost 24 hours after the deadline had passed, members of Congress approved the American Taxpayer Relief Act that shielded the majority of Americans from the effects of the “fiscal cliff”, which threatened to send the economy back into recession.

The key elements of the fiscal cliff deal are the following:

  • Up to an annual income of $400,000 for singles and $450,000 for couples, the deal maintains the 2012 tax rates, while above those levels income tax rates go up from 35% to 39.6%, and dividend and capital gains tax rates go up from 15% to 20%.  The deal is a significant concession from President Obama's proposal during his re-election campaign, which would have had the top tax rate kick in at lower income thresholds, $200,000 for singles and $250,000 for couples, and would have raised more than twice as much revenue as the current deal does.  According to the IRS, in 2010 there were over 11,000 tax filers in Hawaii with adjusted income between $200,000 and $500,000, but only about 2,000 tax filers with adjusted gross income above $500,000. 
  • Personal exemptions and deductions are phased out for incomes over $250,000 for singles and $300,000 for couples.
  • The alternative minimum tax, which affected over 11,000 Hawaii tax filers in 2010 and would have affected significantly more middle class families without a fix, is now indexed for inflation.
  • Estate tax rates are raised to 40 percent from 35 percent on the value of estates over $5 million.
  • Tax credits introduced in the 2009 stimulus law, affecting over 100,000 tax filers in Hawaii, are extended for five years.  These include a child tax credit, an expanded earned income credit, and a refundable credit for college tuition.  Some business tax credits are also extended for one year. 
  • The emergency unemployment compensation and extended benefits unemployment insurance programs are extended through January 1, 2014.  According to an estimate of the US Department of Labor, about 5,500 unemployed people in Hawaii would have been affected by the discontinuation of these programs. 
  • The "doc fix" prevents a 27% reduction in payments to Medicare providers for one year.
  • The deal also extends some portions of the current farm bill for nine months, but eliminates conservation programs and financing for fruit and vegetable growers and Hawaii's organic farmers.
  • The automatic spending cuts worth $110 billion that were part of the fiscal cliff were delayed for two months, which means that we will almost certainly witness another fiscal cliffhanger very soon.  The negotiations will remain contentious in the coming months because they will also involve raising the government's borrowing limit which we reached on New Year's Eve.  The president has indicated that he does not plan to negotiate over the debt ceiling, but Speaker Boehner has already pledged to require spending cuts matching any increase in the debt ceiling. 
  • The deal is being characterized as one aimed at “stopping taxes from going up on middle class families,” but in fact the expiration of the 2% social security payroll tax holiday means that employees will see 6.2% instead of 4.2% witheld from their paychecks on their first $113,700 of income.  Based on 2010 IRS data, the increase in payroll tax will affect over 500,000 tax filers in Hawaii.

The deal as it stands does almost nothing to solve the long term fiscal problems the country is facing.  The threat of the fiscal cliff was supposed force lawmakers to a grand bargain that effectively deals with the long term national debt.  Earlier proposals by President Obama and Speaker Boehner included hundreds of billions more in deficit reduction, with Mr. Obama favoring increased taxes on the wealthy and Mr. Boehner favoring spending cuts.

 

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The impact of the deal on federal revenues depends on what it is compared to.  If it is compared to going over the fiscal cliff, the Congressional Budget Office estimates that the deal reduces government revenues by almost $4 trillion over 10 years. If it is compared to an extension of the 2012 tax policies, then the deal raises $620 billion in new revenues over a decade. But that amount does little to eliminate our annual trillion dollar deficits.

 

-- Peter Fuleky

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