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Energy & Greenhouse Gas Solutions

Mission: To provide rigorous and timely information to decision-makers and the public regarding energy and greenhouse gas related policy in Hawaii and beyond.

 

 

 

 

 

 

 

 

The Energy and Greenhouse Gas Solutions research program (EGGS) was launched in 2007 by the University of Hawai‘i Economic Research Organization (UHERO).  It serves as a resource for those interested in issues of energy and greenhouse gas emissions reduction in Hawaii and beyond.  EGGS takes a transdisciplinary approach to research by bringing together economists, planners, engineers and system modeling experts to address urgent issues of energy and climate change mitigation.   

EGGS Core Goals

  1. 1. Engage in rigorous analysis that contributes to a global community of scholars.
  2. 2. Develop and maintain data and models on Hawai‘i’s energy, economy, and resulting greenhouse gas emissions.
  3. 3. Develop solution-oriented analyses for decision-makers and energy-related stakeholders.
  4. 4. Design interactive education and outreach programs for a variety of audiences.
  5. 5. Showcase Hawai‘i-based energy policy solutions that may benefit other jurisdictions, including other States, the U.S., and island areas.

 

 

 

 

News

October 13, 2014 PV Growth in Hawai'i?

Public comments regarding Hawaiian Electric’s PSIP and DGIP were due last week. Here’s a recap of what Hawaiian Electric has proposed for rooftop solar PV.

Hawai'i is characterized with small island electricity grids and some of the highest rates of solar PV penetration in the world. With over 10% of O'ahu households having PV, exceeding that of any mainland utility, the Hawaiian Electric Company and its subsidiaries have recently stalled the interconnection of new systems. The Hawai'i Public Utilities Commission ordered that further study be completed that might facilitate the adoption of more solar PV in Hawai'i. Along with circuit and power system upgrades, Hawaiian Electric's Distributed Generation Improvement Plan (DGIP) devises an alternative rate design that increases the interconnection fee and makes it more favorable to the utility to allow more households to install solar PV. Hawaiian Electric projects that DG customers could triple to upwards of 900 MW, while reducing the cost shift to non-DG customers, which they estimate to the tune of $38 million in 2013, or $31 for each non-DG customer.

In Hawaiian Electric's proposed tariff structure, referred to as "Gross Export Purchase program," all residential customer groups—current Net Energy Metering (NEM) customers, “DG 2.0” customers, and “Full Service” customers (non-DG)—incur a fixed monthly charge of $55 and pay retail rate for any energy consumed from the grid. The idea of the Gross Export Purchase Program is to account for some combination of interconnection and grid service charges. The first major proposal is to switch the NEM program to one where customers are compensated at wholesale rates rather than retail rates (similar to KIUC and many other utilities). This is to account for, as Hawaiian Electric puts it, “the value of DG to the grid.” Following the duck-shaped load curve, the bulk of electricity generation from DG occurs during the day, while peak consumption occurs in the late afternoon/early evening. Under the current rate structure, DG providers are providing “cheap” electricity while consuming “expensive” electricity. Current NEM customers will be grandfathered according to their original agreement (i.e. the utility pays retail rate in credits which expire at the end of the calendar year). Future NEM customers, called DG 2.0, will pay an additional monthly fixed charge of $16 and any excess electricity generated would be compensated at the lower rate of 16¢/kWh, reflecting that of wholesale rates.


Source: Hawaiian Electric Companies, 2014. Hawaiian Electric Power Supply Improvement Plan (PSIP).

The second proposal is to quicken interconnection for what is termed the “non-export option.” It allows customers to offset their electricity use so long as they do not send excess generation to the grid. The non-export option includes several variations. There are those that operate in parallel with the distribution system (grid-interactive) and with or without customer-side energy storage; and those that are independent from the grid (non-parallel operation) and with energy storage. A type of parallel non-export system without energy storage is an over-installed system under Hawaiian Electric’s Standard Interconnect Agreement—where there is a possibility for energy to “leak” back to the grid, though the customer receives no compensation. On the other hand, systems configured for non-parallel operation serve only an isolated load, thereby negating any possibility for reverse power flow into the distribution network. As filed in Docket 2014-0130, non-parallel systems are therefore eligible to bypass the full screening process under Rule 14H. Systems that have the potential to operate in parallel may also be granted expedited approval if reverse power protection measures, such as stand-alone inverters, is installed.

Will it Increase PV Installations?

The underlying question remains—will PV installations increase under Hawaiian Electric’s proposal? Certainly the change away from retail to wholesale rates for NEM customers, along with technical upgrades, increases utility revenue and its incentive to allow for more PV system connections. It also decreases potential customers incentive to install solar PV – though arguably the return on investment has been remarkably high and customers are still likely to install even if incentives decline slightly. Moreover, there is an element of increased fairness to non-DG customers through the revised NEM rates (assuming savings are passed through accordingly). So the answer is, it depends. On the continued decline of PV system costs, tax credits, the cost of battery technology and electricity rates. Whereas a decline in battery technology costs might lead to increased solar PV yet fewer connections to the grid, declining electricity rates would have the opposite effect. Within Hawaiian Electric’s proposal, they also project substantial cost savings primarily due to the introduction of LNG. This, however, is a more long-term endeavor than the granting of near-term solar PV permits.

- Sherilyn Wee and Makena Coffman


May 21, 2014 Liquefied Natural Gas: A cleaner fossil fuel that's cheaper than oil and pairs well with renewable energy

Spurred by low natural gas prices and a maturing market for liquefied natural gas (LNG), Hawai‘i Gas received their first shipment of LNG in containers in early April. In phase one of the gas utility’s plan, LNG serves as a backup fuel for locally produced synthetic natural gas (SNG). Even with high transportation costs, it is currently cheaper for Hawai’i Gas to import LNG than to process naphtha into SNG.  While Hawai‘i Gas is the first entity to land LNG in Hawai‘i, Hawaiian Electric also plans to integrate LNG in the electric power sector. With the highest electricity rates in the nation and ambitious renewable energy goals, LNG could offer Hawai‘i lower costs. According to a 2012 report commissioned by the Hawai‘i Natural Energy Institute, bulk LNG yields fuel savings of 40-50% compared to oil on Oahu, and 22-44% on the neighbor islands. LNG also has a lower carbon footprint on a smokestack basis, with roughly half as much CO2 emissions as coal and 25% that of oil.
 

While oil prices remain high, natural gas prices in the United States have fallen due to the shale gas revolution, reaching an all-time low and dipping below $3/mmbtu ($17.4 per barrel of oil equivalent) in April 2012. Since then natural gas prices have roughly stabilized between $3-5/mmbtu. For Hawai‘i, the real question is whether gas-linked pricing from the US West Coast or US Gulf Coast can be secured over oil-linked pricing for almost all other LNG supplies elsewhere. If prices are tied to Henry Hub, the delivered cost of bulk LNG to Hawai‘i between 2020 - 2030 ranges from 13 - 19 $2012/mmbtu, whereas oil-linked pricing from Canada yields a higher delivered cost of 19 - 24 $2012/mmbtu (Facts Global Energy, 2012 and Galway Energy Advisors, 2012).

 


Source: Energy Information Administration
 

Besides potentially delivering substantial cost savings to the State, LNG is clean and flexible. It complements the growing share of intermittent renewable energy since gas turbines can be quickly ramped up and down. In addition, gas turbines are also more efficient, compared to the utilities’ old steam units operating at 30% efficiency. Hawai‘i has a wealth of renewable energy resources, particularly excellent wind and solar regimes.  But the intermittent nature of renewables creates challenges in integrating large amounts into the grid, a difficulty that we are facing today. Reliability concerns dictate a need for some amount of firm power that can adjust with demand and renewable output in any given moment.

The State has already exceeded its 2015 renewable portfolio standards (RPS) goal of 15%, but to reach 40% by 2030—and levels beyond—is more challenging. LNG can help to achieve this goal.  Unlike oil, LNG involves long-term contracts, mainly due to large capital investments for infrastructure (regasification plant, storage, pipelines) and requires the State to commit to a minimum demand for natural gas during the contract period. The 20-year time frame of contracting LNG is in line with the expected transition period from 75% oil to renewable energy as the dominant source, thereby allowing LNG to temporarily facilitate renewable energy adoption.

An alternative to LNG would be to remain on oil, deactivating antiquated oil-burning units and continuing to reduce the share of oil in power generation. Upcoming environmental regulations however, further motivate the use of LNG. Under the Clean Air Act, HECO’s oil-fired power plants (as well as the AES coal plant) are subject to the Mercury and Air Toxic Standards (MATS) while all of Hawaiian Electric Companies’ oil-fired plants must comply with the National Ambient Air Quality Standards (NAAQS). The compliance deadline for MATS is 2016-2017, and NAAQS, in 2022. Switching to LNG, as presented in the Hawaiian Electric Companies Fuel Master Plan, is the preferred approach due to its cost-effectiveness over more expensive ultra low sulfur diesel. Therefore, in order to expedite the introduction of LNG into their system to lower customers’ electric bills and comply with more stringent environmental regulations, HECO released an RFP in March for 800,000 tons of containerized LNG per year over 15 years, beginning in 2016 or 2017.

Although quicker to implement, importing containerized LNG is a limited measure and the economics of large-scale containers is not well studied to date. Considerable fuel savings can be realized with bulk LNG. Towards this end, Hawai‘i Gas and Hawaiian Electric Industries signed an MOU in December 2013 outlining their working relationship and guiding principles for bringing bulk LNG to Hawai‘i. Backed by the State, they intend to bring it to the market as soon as possible and in a way such that all islands and sectors benefit. This is an important framework moving forward as Hawai‘i’s path to clean energy lies not only in transforming Oahu’s electric sector, but also the neighbor islands’ and the State’s marine and ground transportation sectors.

-- Sherilyn Wee and Michael Roberts 


April 21, 2014 Managing a Grid with Green Energy

The calculator in the last post shows that installing solar is an incredibly valuable investment for households and businesses with the physical and financial ability to do it.  The gains are so large that some wonder why the state is nearly breaking its budget to subsidize what would still, even without the state tax credit, be a windfall gain for the typically wealthy households able to take advantage of the situation.

Things can look different at the system level.  Even if there is enough rooftop space available, we can't all install solar, because of a mismatch between electricity generation and electricity use.  It works well when only a fraction of households have solar, because those with solar panels effectively sell their electricity to their neighbors when they can't use all of it, then buy it back later when the sun isn't shining.  Put another way, the existing electric grid effectively serves as the solar household's battery. Under current net metering agreements the household's price for that battery is just $17 per month, plus any surplus generation not used over the course of a year (which might actually be considerable).

The situation is similar for wind.  Few if any of us will have windmills on top of our houses.  But nature's variable supply of electricity from the wind, like the sun, doesn't perfectly match our varying collective desire to consume electricity.

Our Grid Manager

Hawaiian Electric, our grid manager  (unless you're on Kauai) adjusts power from dispatchable sources (fossil fuel power plants) to compensate for variability from renewables.  If the share of renewable energy is modest, this is a fairly easy thing to do.  In fact, a modest amount of solar makes this job easier, because it knocks down peak loads on hot days.  Small, oil-burning generators satisfy peak loads, but these cost about two-and-half times the average cost of generation.

To get a sense of how the whole system works, the graph below shows load activity over the coarse of seven warm days in October, with a high peak load and light, variable wind.  The load curve varies throughout each day, with more electricity consumed in mid-day and early evening, and then falling off at night. Weekend loads (the last two humps) are a bit lower than weekday loads. In the warmer months, midday spikes more, mainly due to air conditioning and industrial uses.  In winter midday loads are a bit lower. 

 


Source:  Hawaii Solar Integration Study by GE Energy Consulting, April 1, 2013.


Different sources of electricity fill up the load curve. The load is typically satisfied with least-flexible, and typically least-expensive sources first.  Oahu's coal power plant generates electricity at just 5 cents/kWh, but its loads are difficult to ramp up and ramp down as demand or renewable supply changes.  This power plant helps to keep Oahu's prices lower than the other islands, but we're probably too small to have another base load powerplant like this one.  Cycling generators are more flexible, but also cost more per kWh.  Peaking generators, in red, are the most flexible, but very expensive and are only turned on when they have to be.  

The load shares beneath the curve were derived from a model developed by GE Energy Consulting.  Validation exercises show this model fits the actual situation extremely well, so it has been the basis of studies considering how different levels of renewable energy can fit onto the grid.

In the graph, we can see that solar provides energy when cycling and peaking generators are also being used.  That means the electricity is worth a lot more than average. However, in this graph solar is just 1.2% of total generation and wind is 3.6%.  In winter, midday load is less and solar would mainly displace cycling generators.

Solar energy can be especially valuable

If solar increases to 7.5% percent of the average load holding all else the same (for perspective, we're currently around 5%), the energy provided remains fairly valuable, displacing peak and cycling generators.  But more reserves are needed to stabilize unexpected variability from renewables.

By knocking down peak loads, Hawaiian Electric's cost savings from solar installations may be substantially greater than suggested in our last post.  The report by GE Energy Consulting shows that, averaging over the whole year, increasing solar by 6.3 percent (from 1.2 to 7.5) reduces HECO's oil generation costs by 9.2%, which suggests that HECO's savings from solar is about 46% higher than their average cost of generation.  This would put HECO's per kWh savings roughly on par with their revenue loss.  And that's not counting surplus generation under net metering agreements or the revenue-decoupling rule.

Bigger challenges at higher penetration levels

At current penetration levels, solar remains valuable.  But Hawaii is striving for 40% renewable energy, possibly much more.  When penetration levels increase, it becomes more difficult to adjust directed sources in response to varying renewables.  The graph below looks at an especially cool but sunny week in March assuming 14.8% solar penetration, or nearly three times our current level.  Under the current system, a lot of the solar energy would have to be “curtailed” (discarded), since base loads could not be economically reduced to accommodate it.  Here, solar becomes a lot less valuable at high penetration levels.  This level of green energy will require more creative grid management, more flexible and expensive generators, batteries, and/or shifting of load from the evening to when the wind is blowing or midday when the sun is shining brightest. These investments could be costly.  Without these major investments, pushing PV solar from 7.5% to 14.8% reduces costs from dispatchable sources by only 6%.  Where the first 7.5% of PV solar is worth considerably more than average, the next 7.3% of solar is worth about 18% less than average.


Source:  Hawaii Solar Integration Study by GE Energy Consulting, April 1, 2013.


Circuit-level challenges

Part of the difficulty is that our electric grid wasn't designed for renewables.  It was made for directing electricity out from power plants to homes and businesses.  But residential solar is distributed, which means electricity may need to flow in different directions than our grid was designed to handle.  To manage the backflow, new transformers need to be installed to allow energy to flow more easily to and from neighborhood circuits.  These potential challenges have recently stalled solar installations in circuits that are approaching risk of backflow. Although, one may wonder why Hawaiian Electric's rapidly increasing net revenue cannot cover the cost of such upgrades.

New solar inverters and transformer upgrades might improve circuit-level problems.  However, it would probably be more cost effective to install solar in circuits with less penetration, or develop more utility-scale solar and wind power plants.  

The plummeting cost of renewables

Where the cost of residential solar now runs about $4/Watt (which pencils out around 20 cents/kWh using our calculator, unsubsidized), utility-scale costs now average under $2/Watt, or 11 cents/kWh unsubsidized, or about half Hawaiian Electric's costs from fossil fuel sources. Wind is even more cost effective than PV solar.  Plus, Federal subsidies alone currently cover 30-40% of the cost of utility-scale renewables.

Thus, despite new grid challenges with renewables, Hawai'i ought to be charting a path toward much greener and much cheaper electricity.  We're starting to see a lot more renewable energy, but prices have been going up, not down.  Current proposed purchasing power agreements at around 15.7 cents per kWh, while lower than existing agreements, still seem too high.

In subsequent posts we'll write more about current policy, rapidly changing technology, and alternative paths going forward.

- Michael Roberts


April 7, 2014 The Costs and Benefits of Installing Solar PV

Renewable energy presents many new challenges at the system level. Before we get to that, it helps to first look at things from a homeowner’s perspective.

The Homeowner’s Solar PV Decision

If you’re a homeowner, and you haven’t already installed PV solar, you may want to look into doing it very soon.  To see why, and how much you could benefit, we’ve developed a calculator to help you sort out the costs and benefits of your particular situation.  Our wonky calculator includes a few extra features to take into account uncertainties that can factor into your bottom line, or battery backup if you’re inclined to consider it.  This calculator should help you to decide how large of a system to install and maybe help you comparison shop across solar providers.

 

Homeowner Solar PV Calculator

Value to Homeowner
 
Internal Rate of Return
 
Annual Energy Use
 
Annual Energy Production
 
Up Front Costs
 
Up Front Battery Costs
 
 
 

To get started, you need to estimate your electricity use per day, averaged over the whole year.  You can find this number on your electric bill.  Make sure you average over all twelve months of the year.  Adjust that number up or down depending on you future plans: Do you expect to install more air conditioning? Thinking about buying an electric car? If so, you might want to bump the number up.  Do you plan to install solar hot water, more energy-efficient appliances, air conditioning or LED lights?  If so, you might want to start with a lower number.

Your guess may be a little high or low.  Also, generation from your solar panels and your electricity use may vary depending on the weather or other factors.  To account for uncertainty, you can enter a number for how far off you expect your estimate to be.  A conservative number might be 20% of your estimate (say, 4kWh / day if your best guess for average use is 20kWh/day). 

You also need to account for how much sunlight your panels will be exposed to.  This can vary a lot across each island.  Online resources are available to help you approximate this.  Here is an example for Oahu.  Enter the equivalent hours of peak sun for your location. On Oahu this can vary from around 4 to 6 hours.

Uncertainty about electricity generation and use can make a big difference to your bottom line under the standard net-metering agreement.  That agreement allows you to obtain credit for excess generation from your panels in one month, which you may use in a later month when your use exceeds the energy generated by your panels.  But there’s a limit to the amount of credit you can build up.  Each year, any surplus generation is zeroed out.  So far, homes typically install far more solar than they need.  And as you will see, there’s a fairly strong incentive to over-install, especially if you’re highly uncertain about your electricity use.

The default values in the calculator are those for my house.  I don’t have solar yet.  I’m still waiting for my net metering agreement.  My recent quote for installed cost of my panels, $4.04/Watt, is from a large reputable company.  You can find quotes for less if you shop around.  And keep in mind that prices have been falling fast, and may continue to do so.  You can find this number by dividing the size of the system you plan to install (mine is 3.51 kW) by the total cost BEFORE tax credits, and including taxes and everything else.  Once you have the other numbers pinned down, you’ll want to adjust the size of the system to make the net present value as big as possible (do not maximize the internal rate of return).

The Federal tax credit is currently 30 percent, and the Hawai’i tax credit is 35% up to a maximum of $5000 per 5kW installed.  In my case, the Hawai’i tax credit is just under the cap, $4,963.14. 

Finally, you need to include an interest rate.  If you’re borrowing to finance your solar installation, include the rate on the borrowed funds.  If you’re using savings, you might enter the rate of return you expect on a safe investment vehicle, like a savings bond, certificate of deposit, etc.  This number goes in the first line of the calculator.  I’m using 5 percent.

You can adjust the other assumptions in the list, or just take the default values we’ve entered.  You might ask your solar provider about decay rate, life expectancy of the panels, maintenance, etc. and adjust accordingly.  The price of electricity is assumed to stay constant over the lifetime of the panels.  This may be conservative: most projections we’ve seen anticipate rising prices.  But you can adjust the price level up or down to account for your own expectations.

We’re not considering battery backup now, but some rough numbers are in there in case you want to consider it.  In the not-too-distant future it’s possible our grid may not be able to handle any more solar, which may require you to unplug and use a substantial battery backup if you want to install PV solar.  Note that battery costs vary a lot, depending on the kind of battery, how much you want to store.  Batteries remain expensive, but costs are falling

What’s the bottom line?  Installing this system on our house should net us a present value of approximately $19,949*, with an internal rate of return of 54.4% on our out-of pocket expense of just $5,167, after tax credits. My “pay back” period is about 2.5 years.  Needless to say, you would be very hard pressed to beat this kind of return for any other investment.  Note that I expect to use less electricity than I generate, but installing fewer panels would reduce my net present value. 

Note that I would still net almost $15,000 without the state tax credit and over $10,000 without state or federal tax credits.  Also note that without tax credits, it pays less to over-install.

Hawaiian Electric’s Bottom Line

Although HECO loses sales of 5.5mWh each year when I install solar, amounting to a revenue loss of about $2026, they also save about 7mWh in generation.  At a levelized generation cost of 22 cents/kWh, HECO saves about $1550.  Factoring in a monthly connection fee of $17, HECO nominally loses a net of about $272 per year from my solar installation.

This loss, however, doesn’t account for revenue decoupling, which allows HECO to raise prices on everyone else to make up the full $2026 revenue loss, ultimately providing a net gain of  $1,754.  We expect HECO’s grid management costs have gone up due to high penetration of solar and wind, and these costs would have to be subtracted from this net gain.  Nevertheless, it’s easy to see how HECO can benefit from the revenue decoupling rule and current net metering agreements.

The data do show Hawaiian Electric’s net generation has fallen by a lot more than sales have, a clear indication of widespread over-installations.  In 2009, EIA reports that Hawaiian Electric generated an average of 917.5 million kWh each month, falling to 817.8 in 2013.  Sales, in contrast, fell from 844 to 791.7 million kWh, or just over half the decline in net generation.

Incentives for Energy Efficiency

One side effect from current net metering agreements is that households over-installing solar typically will have little incentive to conserve electricity.  Once it becomes clear that a household will not use all of its solar generation for the year, there is zero cost for leaving lights on and zero benefit from upgrading to LED light bulbs, buying more energy efficient appliances, and so on.  This disincentive is tragic, because most efficient way of reducing greenhouse gas emissions, dependence of foreign oil and generally saving money, is through energy efficiency, even without distorted incentives.

In subsequent posts we’ll discuss alternative regulatory and policy structures that might be more efficient.

- Michael Roberts

 

* Numbers in the text may be slightly different than the calculator due to a random “Monte Carlo” evaluation of uncertainty.  If you refresh the page, the numbers change very slightly each time.


April 2, 2014 Why are Hawai’i’s Electricity Prices So High?

Excluding rooftop solar, Hawai’i residential consumers pay an average of about 37 cents for a kilowatt-hour of electricity. Taking refrigerators, water heaters, stoves, air conditioning and other uses into account, the average Hawai’i household uses about 18.5 kWh each day, for a monthly bill of about $205.

That’s a lot, between three and four times the average price on the mainland, and by far the highest price of any state. Thankfully, high electricity prices hurt a little less here than on the mainland, because our mild climate means we don’t have heating bills and we can usually get by without air conditioning.

But keep in mind that well over two thirds of the state’s generated electricity is used by commercial businesses and industry, which factor into the prices we pay for everything else. Businesses tend to pay less for electricity than households do, but the price is still high, so it’s easy to see how high prices are a burden on Hawai’i’s economy.

Electricity prices can be roughly boiled down to the price of oil, which is used to generate most of our electricity, plus price we pay for fixed costs like power plants, the grid and its management. These costs are fixed in the sense that they don’t vary with the amount of electricity generated and consumed. We have record high electricity prices because oil prices remain high, and because the fixed price of our infrastructure, averaged over the amount of electricity we use, is very high and rapidly growing.

Besides oil, there is one coal power plant on Oahu, which produces electricity much less expensively. Hawaiian Electric also buys electricity through a series purchasing power agreements (PPAs). Prices paid on PPAs vary across contracts and timing (peak or off-peak). These comprise a small share of total generation and the prices, on average, are roughly similar to the cost Hawaiian Electric’s reported cost for oil-generated electricity. Some new lower-cost PPAs should be coming online soon, and some older higher-cost PPAs expire relatively soon.

The Public Utilities Commission (PUC) allows Hawaiian Electric to adjust prices as oil prices change, but there is a bit of a lag between change in oil prices and changes in electricity prices. Every three years the PUC performs a rate case to evaluate costs more thoroughly. The three utilities, HECO, MECO and HELCO have rate cases performed on a rotating schedule. Some of the details remain confidential, and what is available can be difficult to discern from publicly available documents.

Historically, a good predictor of electricity prices in the current month is the average Brent crude oil price over the previous four months (figure 2). In our analysis we found Brent crude oil prices predicted Hawai’i’s average electricity price even better than prices reportedly paid by HECO.

Recently, however, we’ve seen prices drift up from the historical relationship. Statistically, a clear break occurred around November 2008, during the height of the financial crisis and the deepening recession. In the graph, we show months since this break in blue, and the historical relationship in black.

From the pre-November, 2008 relationship between electricity prices and crude oil prices, we can approximate the fixed-cost component of price at about 10.7 cents per kWh, which roughly equals the number reported by Hawaiian Electric. This margin covers cost maintaining the grid, infrastructure, billing and Hawaiian Electric’s profits. This fixed cost roughly equals the average retail price of electricity on the mainland. High fixed costs are partly a testament to the smaller scale and geographical constraints of an island economy. It’s hard to know whether or how much competition could reduce these costs.

We can calculate the portion of electricity price left over after we have accounted for estimated variable (fuel) costs by adding 10.7 to the difference between each month’s price and the fitted line in figure 2. We’ll call this the “estimated price per kWh towards fixed costs” shown in figure 3. Since the break in November 2008, prices have drifted upward from the historical relationship, which suggests the fixed cost share of price has risen to around 15 cents per kWh, or about $83 dollars per household per month.

Fixed costs have drifted up due to a number of factors. A 2009 rate case granted Hawaiian Electric permission to raise Oahu prices 5.7 percent to finance new infrastructure and meet rate-of-return requirements. A $1/barrel tax was also implemented in 2010 to fund renewable energy and food security initiatives. But this tax amounts to only 0.2 cents per kWh. The spread between Hawaiian Electric’s oil costs and world Brent crude oil prices has also increased slightly since 2011 (figure 4).

 

 

Finally, there’s the revenue decoupling rule, which allows HECO to increase prices each year between rate cases to compensate for revenues lost due to energy efficiency and distributed generation (i.e., new solar installations). The intent of decoupling is to align HECO’s interests with those of competing solar providers, as described in my last post. With revenues stable, and generation costs falling, HECO can profit from this policy between rate cases. So far, revenue decoupling adds 1.3 cents per kWh, and a leaked document from the Public Utilities Commission suggests this will soon rise to 2.2 cents per kWh.

Looking forward, we might hope for electricity prices to come down. The cost of generating electricity from wind and solar is less than oil, and falling rapidly. Natural gas, a cheaper, cleaner and less expensive fuel, might be brought in to substitute for oil. But the intermittent nature of renewables and our antiquated grid will limit renewables, and rapidly growing fixed costs may limit how much residents and businesses will ultimately gain from lower generation costs.

An over arching concern is that fixed costs of the grid are approaching levels that could make battery backup to “unplugged” distributed systems a viable substitute for the grid. With PV solar and battery costs falling, and fixed costs rising, we may be setting up an unavoidable “death spiral” that makes the whole grid obsolete. We will navigate this issue in more detail in later post.

In the next post of the series we’ll review the costs and benefits of solar, net metering, the rapid growth of solar installations, and how this growth can stress the current grid infrastructure.

--- Michael Roberts