Charging Ahead: Hawaii looks beyond oil

Better Place Announcement

On the sidewalk in front of the state Capitol, Gov. Linda Lingle climbs into the driver’s seat of a white and blue Nissan Rogue. But this is no ordinary Nissan. It’s an electric car, the demonstration vehicle for Better Place, a technology company with ambitious plans to persuade thousands of people that electric cars represent the future of Hawaii. A small crowd of press, politicians and energy buffs have come to see the Rogue and hear how it fits into the Hawaii Clean Energy Initiative (HCEI), the state’s bold new attempt to kick its oil habit. In the afternoon shade, they chat amongst themselves, slowly stepping aside as the governor executes an erratic loop around the statue of Father Damien. Because the car is completely noiseless, no doubt she hears her staff as they amiably disparage her driving. The governor smiles.

Somehow, the ordinariness of this gathering underscores the sense that we might be seeing history: that this normal-looking car — a basic crossover SUV, fit for a soccer mom (or a governor) — may be the missing link in the great quest to escape the tyranny of oil.

Of course, part of the vision for the HCEI has always been that it would be a magnet for companies like Better Place, making the state a kind of hot bed for energy high-tech. In fact, less than two weeks later, Phoenix Motorcars, a California-based electric car manufacturer, also showed up at the Capitol, touting another pilot project to test electric cars in the fleet operations of the Maui Electric Company. But, whether it is Better Place or Phoenix Motorcars or another company altogether, someone will eventually have to answer the question that haunts the noble but quixotic dreams of the HCEI: “What about fueling transportation?”

In short, for the HCEI to work, every business in the state will have to plan on a new model that looks at energy consumption as less of a simple cost and more of a bottom-line item that can contribute to, as well as take away, profits.

The problem that the HCEI seeks to address isn’t that hard to understand. As Jeff Mikulina likes to point out, “Hawaii is punch drunk on oil.” Mikulina is the executive director of the Blue Planet Foundation, an organization committed to weaning Hawaii from fossil fuels, so the sentiment might be expected. But the numbers bear him out. In fact, Hawaii depends upon fossil fuels — mostly oil —for more than 90 percent of its energy needs. The cost of this oil addiction is staggering. State energy administrator Ted Peck puts it in context, “Hawaii’s GDP is about $60 billion. We pay about 11 percent of that in energy costs.” That means Hawaii exports nearly $7 billion a year to buy oil. “That cost gets embedded in everything,” Peck says, which leaves the state disturbingly vulnerable to the rising cost of oil. “I’m not a fear-monger,” Peck says, “but I think that’s at least as compelling as global warming.”

The Hawaii Clean Energy Initiative, with its laundry list of commitments to renewable, local energy — including 40 percent renewables by 2030 — is supposed to change everything. The most important element of the initiative is an effort to force businesses and consumers to change the way they think about energy. 

Consider: the easiest way to reduce our reliance on fossil fuels is to promote greater efficiency. In the old business model, the utility was paid based on the number of kilowatt-hours sold, which tends to encourage profligacy. The HCEI agreement, though, proposes to “decouple” HECO’s rates from how much energy is sold. Instead, the utility will be rewarded for improving customers’ efficiency.

Decoupling helps control demand; to improve the supply of renewable energy sources, the electric company agrees to post “feed-in” tariffs — essentially, the rates they’ll pay to purchase different kinds of renewable energy. Knowing the feed-in tariff gives companies what they need to decide whether they want to invest in Hawaii’s renewable energy market. Together, decoupling and feed-in tariffs will transform how the electric company — and their customers — do business. 

Not everyone is sanguine about the initiative’s prospects. Even some of its strongest supporters acknowledge the failure of similar programs and initiatives in the past. Mikulina, who has enthusiastically endorsed the HECO agreement, points to the electric company’s Kahuku wind project in the 1970s as a kind of cautionary tale. “When they put those turbines in, that was cutting edge,” Mikulina says. “Those were the largest wind turbines in the world at the time, and they should get credit for it.”

Nevertheless, the project, which began in response to the oil crises of the 1970s, foundered when oil prices fell again in the 1980s. Mikulina says, “Recently, they’ve been right on target. But right now, it’s just on paper. And the devil’s in the details.”
Perhaps the most glaring detail missing has been a serious explanation of how we will pay for the major changes to our power infrastructure that the agreements promise. The No. 1 example is the undersea cable linking the proposed wind farms of Lanai and Molokai with the energy-strapped Oahu grid. Estimates for the cost of constructing such a cable range between $500 million and $1 billion.

Current plans suggest that the cable will be paid for and owned by the state, but operated by the utility. That is not, however, set in stone.

One thing is clear: the cable’s going to cost the consumer. Robbie Alm, HECO’s senior vice president for public affairs, says flatly, “I think we may be able to get some federal monies for it, but rate-payer and taxpayer money is going to pay for most of it.”

Perhaps the strongest critique of the state’s new initiatives has come from Fereidun Fesharaki, a well-regarded energy economist at the East-West Center. Fesharaki is not so sure that the rate-payers and taxpayers will welcome the high cost of investing in alternative energy. He acknowledges that the recent spike in oil prices to nearly $150 a barrel certainly made wind and solar seem more attractive, but he points out that the true price of oil is surprisingly elastic.

“The cost of production of oil today — conventional oil — is around $30 a barrel,” he says. “The rest is profit.” On the other hand, the cost of switching to alternatives is relatively high and inflexible, a fact highlighted by the need for tax credits and other subsidies to support them. Fesharaki notes, “It could be two or three times the price of oil. And while everybody becomes brave when oil prices are high, when the prices come down, people are going to ask, ‘Why am I paying all this extra?’”

The answer, of course, is straightforward: pay me now, or pay me later. Even Fesharaki acknowledges that the demand for oil will soon outstrip the supply. “I think, in two or three years, oil will probably be around $200 a barrel,” he says. So the question of whether to invest in renewables is really a political rather than a technical one, and most experts give the Lingle administration credit for its initiative in dealing with the problem now. Peck has a colorful way of putting it: “The question is very analogous to a tsunami; are we going to stay on the beaches, or are we going to go to high ground?” The price of oil may, indeed, fall in the short term, Peck says, “But that doesn’t mean the wave isn’t coming. It’s coming.”

Hawaii Clean Energy Initiative (HCEI)

A Sampling of Goals and Projects
• A HECO commitment to purchase as much as 1,100 megawatts of already identified renewable energy

• Construction of an undersea transmission cable connecting Molokai, Lanai and Maui with the Oahu grid

• 70 percent “clean” energy by 2030

• Doubling the current Renewable Portfolio Standard (RPS) to 40 percent by 2030

• Establishment of a “feed-in” tariff describing purchase power prices for renewables

• Deployment of Advanced Metering and time-of-use rates, allowing customers to better control their energy use

• “Decoupling” HECO’s compensation to encourage conservation and efficiency

• Retire older, dirty generation plants as Hawaii moves into a renewable future

• Convert existing generators to renewable biofuels

• Prohibit any new coal plants in Hawaii

One of the real problems with replacing fossil fuels with clean alternatives is simply, “How do we get there from here?” According to Fesharaki, it’s pretty clear that Hawaii will continue to depend upon fossil fuels for a large part of its energy needs well into the future. The reason is in your driveway.

Only about 30 percent of the fuel produced at Hawaii’s two refineries goes to power generation. The other 70 percent supplies the state’s seemingly insatiable transportation needs: jet fuel, bunker fuel, gasoline and diesel. If, indeed, through the use of renewables and higher efficiencies, HECO is able to reduce its consumption of fossil fuels for power by 70 percent, that still means the state will have to rely on oil for nearly 80 percent of its total needs.

Because of that, we will continue to depend upon the two local refineries to fuel our economy. Yet, Fesharaki notes, the state’s new energy policy may prove lethal to them. “It’s unlikely we can actually reach a 70 percent reduction,” he says, “but let’s assume, for the moment, that they’re actually able to reach a 30 percent reduction. Go ask the people at the Tesoro or the Chevron refinery if they can survive with a 30 percent decline in demand. I don’t think so. Maybe one of them would survive, but then you’d be relying on just one. What do you think they’re going to charge you?”

That’s why transportation remains the bugbear of the renewable energy landscape. It’s also why the successes of Better Place and the HCEI are so intertwined. Hawaii is the ideal venue for a company like Better Place to test its business model. The short driving distances and high fuel costs make electric cars practical, and Hawaii’s visibility as a major tourist destination makes it a powerful marketing tool. But Better Place is also the ideal test for the HCEI, an opportunity to see if this new energy paradigm is revolutionary enough to make real change possible.

Whatever doubts or skepticism the HCEI may provoke, in one respect, at least, it’s already achieved its goal. Its sheer ambition has clearly attracted the attention of companies like Better Place and others. For Alm, it’s all in the numbers. He points out that the 40 percent Renewable Portfolio Standard truly sets Hawaii apart. “Basically, we agree to be legally bound to that — 40 percent of the power we buy will be derived from renewables. That number is by far the highest in the United States.” Will this be enough to attract the investment and brainpower to make Hawaii a global model for energy high-tech? Alm certainly thinks so.

Fesharaki, always somewhat more circumspect, notes archly, “In the fullness of time, as the British say, everything is possible.”


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Filed under Business, Hawaii Business, Science

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