Most Hawaii residents will end up paying more to install a solar photovoltaic system effective Jan. 1 as a result of the state’s move to tighten the rules for its renewable energy tax credit program.

The state Department of Taxation issued the temporary administrative rules last month in response to concerns that lost revenue from the tax credit was costing the state too much as PV installations soared.

High electricity prices charged by Hawaii’s two electric utilities combined with generous state and federal tax renewable energy incentives have fueled a PV frenzy across the state in recent years. On Oahu alone, residents and businesses so far this year have submitted applications with the Hono­lulu Department of Planning and Permitting for about 15,000 PV systems, more than 150 percent of the cumulative total of the previous 10 years, according to Marco Mangelsdorf, a Hawaii island PV installer who compiles data on the industry.

Those who oppose the new rules say the changes will reduce the size of the average tax credit by 50 percent and deal a major blow to the Hawai‘i Clean Energy Initiative. The HCEI aims to have the state generate 40 percent of its electricity from renewable resources by 2040. The Sierra Club and Earthjustice filed a lawsuit Dec. 11 in an attempt to prevent the state from enforcing new restrictions on solar tax credits.

The new rules base the state’s 35 percent solar income tax credit — which is capped at $5,000 per PV system for homeowners and $500,000 per system for businesses — on the total kilowatt output capacity of a system. Under the old rules, many homeowners and businesses, working with solar companies, exceeded the caps by configuring multiple systems on their properties.

The new Tax Department rules define a single residential PV system as having up to 5 kilowatts of generating capacity. Commercial projects are defined as having up to 1 megawatt of generating capacity. Tax credits are limited to one per system.

Under the old tax rules, a homeowner with 5 kilowatts’ worth of PV panels could divide the panels into two or more systems by having each "system" run through a separate inverter with an independent connection to the home’s electrical system.

Homeowners claiming the 35 percent tax credit hit the $5,000 cap once the cost of the PV installation reaches $14,285. However, many residential installations cost double, triple or more that amount. By structuring their PV projects as multiple systems, homeowners were able to claim multiple tax credits and recover a larger share of their investment.

Many players in the local PV industry criticized the Department of Taxation’s move, particularly its timing. The rules were published Nov. 9.

Some residential and commercial customers of Kailua-based Sunetric who based their decision to install PV systems on expectations under the 2012 tax rules found out that their net cost would actually be as much as 50 percent higher because the their systems wouldn’t be completed until 2013, company officials said.

"Looking at the calendar, the tax ruling came at the worst part of the year," said Gabriel Chong, special-projects manager for Sunetric. "This largely targets the average homeowner and the average business owner."

Sunetric was able to tap into some federal funding to cover the amount in lost tax credits for owners of residential PV systems. The company promotes the program on its website under a heading that reads, "Missed out on the 2012 solar tax credits? We’ve got you covered."

However, the offer does not apply to commercial systems. Chong estimated that the tax ruling resulted in the cancellation of projects totaling 500 kilowatts, which translates into "a couple of million" dollars in lost revenue to the company.

One of the unintended consequences of the tax ruling is that many PV installers are switching to low-cost PV panels and other equipment from Asia to keep projects affordable for customers, Chong said.

"The Tax Department and the governor basically made a decision that is wasting everyone’s money. The new rules promote lower-quality Chinese equipment rather than high-quality American-made equipment. The governor has actually done the opposite of what he intended in trying to save the state money," he said.

Veterans of the local PV industry also have concerns that some customers who rushed to get systems installed after the Nov. 9 announcement will end up with work of questionable workmanship.

"Because a lot of the reputable installers are booked right now, there is probably a lot more work being driven by guys who don’t typically do these kind of jobs. It’s kind of in a frenzy mode," said Mark Duda, a principal at RevoluSun.

He said the one impact of the tax ruling might not be seen until next year when the Hono­lulu Department of Planning and Permitting works through its backlog of PV system inspections and begins looking at systems completed hastily in November and December.

"This whole issue should have been handled in a more orderly manner. It’s just going to be messy," Duda said.

The city announced last week that residents who have a PV system installed by year’s end can have their request for an electrical inspection time-stamped "2012" so they will be eligible for a 2012 tax credit.

Their contractor should bring two copies of the inspection request to the building permit office in the Fasi Municipal Building by the close of business Monday.

One point that has been discussed but not resolved in the latest public debate over renewable energy tax credits is what the legislators intended when they drafted the legislative language in 2003.

The Hawaii Solar Energy Association maintains that if lawmakers had intended to limit the credit to one per household, then they would have written the law to reflect that.

However, Lowell Kalapa, head of the Tax Foundation of Hawaii, said the Legislature left that up to the Department of Taxation to clarify through rulemaking.

"Now, the department has come forward with revised rules that define a system based on the amount of power that can be produced," Kalapa wrote in a recent commentary on the organization’s website. "Given that ‘system’ was never defined in the state law and that the interpretation of the term ‘system’ was guidance given by the department in its original analysis of the term, rewriting the interpretation seems entirely within the department’s jurisdiction.

"While advocates of the credit wish to remain at the status quo arguing that it is up to the Legislature to change the definition of the system, they must remember that it was the Legislature that left vague the term of ‘system’ as part of the law and provided no further guidance. Thus, while advocates may believe that it is up to the Legislature to make a change, until that time it is in the department’s hands to determine what a ‘system’ is."