UPDATED 12/13/12 6:30 p.m.

CORRECTION: The state tax department says that exemptions, or “letter rulings,” were sent out November 29, not on Wednesday, as a previous version of this article stated.

The Hawaii Department of Taxation has exempted some solar projects from new rules that effectively limit the number of state tax credits that can be claimed on solar systems.

Mallory Fujitani, a spokeswoman for the tax department confirmed the exemptions, or “letter rulings,” but said she could not disclose which projects or how many have received a reprieve because of state privacy laws that protect taxpayer information.

UPDATED But Sen. Mike Gabbard, chair of the Energy and Environment Committee, who has pushed for exemptions for solar farms that are in development, said the exception covers 12 projects, information he said was provided to him by the department.1

“The letters grandfather those companies and allow them another year to get the old tax credit amounts,” he said.

Developers of large solar projects, such as those that feed energy into the islands’ electric grids, have complained openly about the new rules, saying that they could kill some of the state’s most important renewable energy projects that have been in the works for years.

The Hawaii Sierra Club and Earthjustice have picked up the cause, filing a lawsuit on Tuesday to try stop the rules from taking effect at the beginning of the year.

We’ve “heard of investors pulling out of several large-scale commercial projects because the reduced credit makes the projects unviable,” said Robert Harris, executive director of the Hawaii Sierra Club, in a prepared statement released Tuesday announcing the lawsuit. “This goes completely against what the Legislature tried to accomplish in enacting and expanding the solar tax credit.”

The current tax law allows for a 35 percent tax credit to be taken on a residential rooftop solar system, or $5,000 refund, whichever is less. For commercial systems, the 35 percent tax credit can be taken as a $500,000 refund. The credits have proven attractive to investors in Hawaii’s solar industry.

However, homeowners and companies have been claiming multiple credits on rooftop arrays. Gov. Neil Abercrombie has called it cheating, but many solar companies say they are just following earlier instructions from the tax department.

The new rules specify that homeowners can only claim one credit, and limit the number of credits that can be taken on commercial systems based on system output.

Hawaii’s renewable energy tax credits are expected to cost the state $174 million in 2012, up from $35 million in 2010, according to state data. The amount prompted the Council on Revenues to downgrade the state’s revenue forecast from 5.3 percent to 4.9 percent.

The tax department has said that it didn’t take into account the cost of the incentives to the state when issuing the new rules.

The state currently has about a dozen utility-scale solar projects in the works, according to information from the state energy office. It’s not clear if these projects are those that are primarily being exempted.

Three of the projects are for the Kauai Island Utility Cooperative and are expected to account for about 50 percent of the island’s daytime electricity use. Jim Kelly, a spokesman for KIUC, said that the utility hadn’t heard anything from the tax department about being exempted. He said that in the past, the utility had asked the tax department to grandfather in its projects, to no avail. He said that the fight could be picked up in the Legislature this session.

Two of the projects KIUC will own — a solar array in Anahola being constructed by REC Solar, and a solar system being developed by SolarCity. Each project is 12 megawatts.

Kelly said that the utility had expected to claim about $8 million in state tax credits for each of the $40 million systems. But the new rules cut that amount by about half. He said the Anahola project will cost the utility an extra $240,000 a year during the 25 years that it is paying off the system.

The changes in the tax credit rules aren’t expected to derail the projects or raise the price much for customers, said Kelly.

The target price of the energy prior to the new tax credit rules was 15 cents per kilowatt hour, a cost that’s considerably less than current electricity prices on Kauai, according to the utility. Kelly said that without the state tax credits, the price would go up by about 1 cents per kilowatt hour.

“It’s not going to make a difference up and down on people’s bills,” he said. “It just makes the project a little more expensive to do.”

Alexander & Baldwin is also developing a 6-megawatt project for KIUC. The company did not return a call for comment as to whether its project had been grandfathered in by the tax department.

Kelly said that Alexander & Baldwin had been scrambling to finish the solar farm by the end of the year to make the deadline for the rule change.

“Those guys are hustling, and I mean hustling, seven days a week to get this thing turned on by December 31,” he said.

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