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. Engage in rigorous analysis that contributes to a global community of scholars.
- 2. Develop and maintain data and models on Hawai‘i’s energy, economy, and resulting greenhouse gas emissions.
- 3. Develop solution-oriented analyses for decision-makers and energy-related stakeholders.
- 4. Design interactive education and outreach programs for a variety of audiences.
- 5. Showcase Hawai‘i-based energy policy solutions that may benefit other jurisdictions, including other States, the U.S., and island areas.
- 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
- March 6, 2014 Is Monopoly a Barrier to Hawai’i’s Ascent?
In 2012 Joseph Stiglitz, a Nobel Prize winning economist and Columbia University Business School Professor visited Hawaii to give the Stephen and Marylyn Pauley Seminar in Sustainability. Stiglitz discussed sustainability within the context of our depressed national economy and ongoing struggles with debt and unemployment. For our economy to fully recover, we need more investment, and Stiglitz argued that investments ought to be in education, technology, and green infrastructure, with solar, wind and an improved electricity grid being obvious choices.
Stiglitz then discussed Hawai'i’s local economy (around the 50 minute mark in the linked video). He saw monopolies in inter-island transfer, electricity, and shipping as key obstacles to Hawai’i’s sustainable growth. Of the three, he pointed to the second, Hawaiian Electric Industries electricity monopoly (HECO, MECO and HELCO) as the most important.
To be fair, Stiglitz has no unique insight into Hawai’i’s circumstances. Our unique geography makes it difficult to tell how much unavoidable costs or market control factor into our unusually high prices for electricity and other goods and services. What’s clear is that, at least in the case of electricity, the old regulatory model is being challenged by the rapid growth of renewable energy.
Historically, for electricity and many other utilities, there can be economies of scale, meaning it can be less costly for one company to produce than many companies. Think of large power plants and the impracticality of having many different electric lines running to each house. Similar situations arise for water, cable TV and phone services. The obvious problem with monopolies is that, left to their own devices, they'll maximize profits by charging prices that far exceed costs. As a result, local governments typically regulate utility prices, as they do here in Hawaii.
Regulation is tricky, however. Monopolies have no incentive to be forthcoming about their actual costs. And they have little incentive to innovate or find creative cost-cutting measures, if lower costs simply cause the public utility commission to commensurately lower regulated prices. Some argue that regulators, starved of resources or the right incentives, might serve the monopoly's interest instead of the public's.
Green Energy Challenges the Status Quo
Today, rapidly improving technology and a push toward green energy are challenging our electric utility monopoly. Economies of scale in generation no longer exist. Even without state and federal subsidies, rooftop solar and wind are becoming competitive with traditional carbon-based fuels, even on the mainland where electricity prices are less than one third those in Hawai'i. And Hawai’i’s geography suits renewables better than most places on the mainland.
A key technical challenge for renewables is their intermittency, which makes it more difficult to match demand with naturally varying supply. Another is our existing grid, which is designed for centralized generation, not a distributed network with tens or hundreds of thousands of rooftop power sources.
Engineers are working hard on the technical challenges, and so far have managed to accommodate more solar and wind power than many had thought possible on our antiquated grid. Experiments with variable time-of-day pricing might help match intermittent supply and demand. Others are dreaming up new ways to store energy or distribute it further, like the costly and controversial inter-island cable.
The political and regulatory challenge is facilitating access by these competing energy sources to a monopoly-controlled grid. Competition is good for consumers and economic efficiency. But, as Stiglitz noted, competition kills profits, so Hawaiian Electric has no incentive to facilitate grid access.
Thus far, the political solution to the grid-access problem is revenue decoupling. The idea, implemented in Hawaii over four years ago, is to allow the regulated monopoly to raise prices to compensate for sales lost to competing generation like solar. Revenue decoupling is the key reason electricity prices have continued to rise in Hawai’i over the last four years, even as generation costs have stabilized. Those higher prices have compensated Hawaiian Electric for roughly 200 megawatts of PV solar that have been installed on Oahu since decoupling in 2010.
Decoupling aligns the financial interests of Hawaiian Electric and competing solar interests, allowing both to profit from expansion of solar, wind and improved efficiency. The losers are commercial, industrial and residential consumers of generated electricity, who, for one reason or another, haven't installed solar. For a number of reasons we will discuss in subsequent posts, decoupling may not be a sustainable model over the long run.
On April 15, 2014 Vice President Al Gore will deliver another Stephen and Marylyn Pauley Seminar in Sustainability. Surrounding the Seminar will be a larger event with many local and national experts that will consider various sustainability issues in Hawai'i, including one session dedicated to our ongoing challenges and opportunities with electricity.
In anticipation of this event, UHERO will develop a number of posts that dig into some of the economic issues surrounding Hawai'i's push toward renewable energy, and over-arching challenges with managing the grid and regulating prices.
If you're confused by a lot of the jargon and complex details, you're not alone. Our hope is to add some clarity to the debate, aided with lots of nifty graphs and charts of available data. On issues that still confuse us, we'll use this blog to highlight key questions and ambiguities. We'll do our best to answer your questions, too.
UHERO blog posts are intended to stimulate discussion and critical comment. They views expressed are those of the individual authors.
- February 12, 2014 Hawai‘i’s Environmental Response, Energy, and Food Security Tax (aka Barrel Tax)
The one-dollar increase in Hawai‘i’s environmental tax from five-cents since its inception in 1993 to $1.05 effective July 1, 2010 was a stepping stone in Hawai‘i’s clean energy progress. While in theory it serves to discourage fossil fuels (internalizing the negative externality), its major impact has been as a funding source for energy and food security initiatives. Act 73 temporarily created three new funds—the Energy Security Special Fund, the Energy Systems Development Special Fund, and the Agricultural Development & Food Security Fund. Providing support for the Hawai‘i Clean Energy Initiative (HCEI) and the Greenhouse Gas Emissions Reduction Task Force (GHGRTF) as well as instrumental research conducted by the Hawai‘i Natural Energy Institute (HNEI) are just several examples of how the barrel tax has contributed to advancing the State’s energy goals.
What does the barrel tax apply to and how much has been collected?
As of the end of fiscal year 2013, the $1.05 per barrel tax on petroleum products—excluding jet fuel (aviation fuel) and any fuel sold to a refiner—totaled $80 million dollars statewide; on an annual basis this translates to approximately $27 million dollars. The petroleum products taxed represents roughly 2/3 of the barrels of oil imported each year.
Originally, of the $1.05 tax, forty-five cents was allocated to supporting environmental response, energy, and food security, while the remaining sixty-cents was apportioned to the general fund. During the 2013 Legislative session, though unsuccessful, it was proposed that the tax be distributed according to its intended purpose, rather than given to the general fund. As such, increasing the amount allocated to environmental response, energy and food security funds, along with re-establishing the energy systems development special fund, and extending the barrel tax to 2030 have been proposed under SB2196 in the current Legislative Session.1 The barrel tax is set to sunset in 2015, and Hawai‘i’s energy industry hopes to extend the repeal of the barrel tax to 2030, the same year as Hawai‘i’s ultimate renewable portfolio standards (RPS) target.
Table 1 below shows the original breakdown under Act 73, SLH 2010, and the allocation as of July 1, 2013.
1 The bill text and status can be found here: http://www.capitol.hawaii.gov/measure_indiv.aspx?billtype=SB&billnumber=2196&year=2014
- November 27, 2013 UHERO 101.10: The Confusing World of PV
This UHERO 101 intends to clarify some of the rate and policy aspects of PV in Hawai‘i, and explores the two opposite driving forces of PV adoption.
PV is an attractive investment in Hawai‘i where electricity rates are almost four times the national average. Rising electricity prices and falling system costs have largely driven the installation trend, with installations roughly doubling annually since 2007. Moreover, residential PV is quite cost-effective because it’s installation costs are up to 65% subsidized. In addition, there is ongoing support of PV in the form of Net Energy Metering (NEM). NEM gives households retail rate for their unused PV generation, rather than the wholesale rates paid for other sources of energy. As such, what many do not realize is that distributed PV can actually raise electricity rates rather than lower them. While PV customers benefit from providing their own energy and selling excess electricity back to the grid, non-PV customers are consequently likely to pay relatively more. Also, although PV certainly reduces the use of fossil fuels, it is not necessarily proportionately. Since PV is an intermittent source of energy, the utility also has to run spinning reserves to ensure reliable electricity at any given time.
To add to the confusing world of PV, Hawaiian Electric Industries recently modified its policy— both the primary metric used to determine circuit saturation and the process of connecting to the utility’s power grid. Prior to September 2013, distributed PV generation was limited to 15% of peak load on each circuit that, if exceeded, required the NEM applicant to pay for an interconnection requirements study (IRS). However this limit was not enforced for smaller systems under 10 kW (i.e. residential systems). However, now the metric of daytime minimum load (DML) is used to determine circuit saturation. The policy does not distinguish between small and large systems, and requires that written consent be obtained from the utility prior to installation.1 The details are summarized as follows:
1. Circuits below 75% of DML are not subject to an IRS or circuit upgrades. These projects should receive notice to proceed within 35 business days.
2. Circuits that fall between 75-99% of DML are not subject to an IRS but may require circuit upgrades. Depending on whether a supplemental review is required in addition to the initial technical review, these projects may receive a response anywhere from 35 to 85 business days.
3. Circuits beyond 100% of DML may require an IRS and circuit upgrades. Completing an IRS study may take up to an additional 165 calendar days on top of the initial and supplemental review.
As a result, on one hand, the policy change has slowed down solar installations, due to circuit upgrades. For projects above 75% of DML, customers have to first wait to hear whether a circuit upgrade is necessary and then, if deemed necessary, another several months for conducting the circuit upgrade. In addition to the long waiting period, potential customers face extra costs for circuit upgrades, which are allocated on a prorated basis and divided according to the size of the systems to be installed.
At the same time, the policy change provides further motivation for those customers who have been considering a PV system and whose homes are on circuits below 75% of DML, to join the race to install PV.2
* If you are thinking of installing PV, as an initial circuit availability check, enter your address here: http://www.heco.com/portal/site/heco/lvmsearch
- Sherilyn Wee and Makena Coffman
1In the past, submitting the NEM agreement was often the last paperwork step of the installation process. Applying for the City and County building permit was usually the first step, and now is applied for only after receiving approval to interconnect. Building permit approval takes about 20 business days.
2Previous state legislative discussions on reducing or phasing out the renewable energy investment tax credits have already commenced the “race” to install PV.
- September 20, 2013 Hawaii's Energy Future
Last week's Asia Pacific Clean Energy Conference has focused the spotlight on Hawaii's energy future. Governor Abercrombie opened the conference with a strong commitment to installing an undersea cable between Oahu and Maui. The Blue Planet foundation unveiled their "Energy Report Card" during a keynote address by Henk Rogers. Meanwhile, recent coverage by NPR discussed switching to natural gas as an alternative to Hawaii's oil dependence.
The Hawaii Clean Energy Initiative set the vision for the state to move toward renewable and cleaner sources of energy. There are numerous pathways and decision on the best pathway is fraught with debate.
The Governor's comments juxtaposed to strong resistance to the undersea cable suggests that there needs to be on-going discussion of what energy portfolios will likely emerge in separated versus linked islands scenarios - including environmental and economic impacts.
Moreover, there is also concern over the high cost of energy. As many renewable sources are still relatively costly (or difficult to locate) there is also consideration of switching to natural gas as a "bridge fuel." The future price of liquefied natural gas is uncertain and, while it is cleaner burning than oil, there is concern that its full environmental impact is not necessarily an improvement over the status quo.
In addition, environmental groups such as Blue Planet in their "energy report card" bring up concerns about the lack of guiding policy for the transportation sector. Policies that complement transportation as well as electricity have a place in the discussion as well.
UHERO's ongoing research is looking at ways to cost-effectively achieve GHG reduction and meet the state's clean energy goals.