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Economic Currents

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Research Driven Energy Policy

Hawaii is in the midst of transforming its electricity system into one with a lot more renewable energy. It’s an exciting time, but also a challenging one that is forcing the State to make tough decisions amid many uncertainties. There appears to be confusion about who bears responsibility for making these decisions. Take, for example, public discussion surrounding the potential merger of HECO and NextEra, which has focused at times on whether NextEra can be trusted to keep their commitments to meeting Hawaii’s clean energy goals. At face value, that discussion seems odd given the utility is regulated and obtains approval from the state Public Utilities Commission (PUC) for important policy changes. Meeting clean energy goals is a statutory mandate or regulatory requirement, not HECO’s or NextEra’s “choice”.*

It is possible that these concerns arise from the fact that the State’s goals have escape clauses. The Renewable Portfolio Standard (RPS), for example, includes a long list of reasons why the utility can be allowed to fall short of prescribed targets, including the cost of achieving the goals. Clearly, there are many ways the State might achieve its renewable energy goals, and the path we choose will have many consequences—for the cost of electricity, how the burden of those costs are allocated, how much energy we use, and the environmental impacts. Regardless of how the PUC decides the merger case, it is their job to ensure that the State’s goals are met in a cost effective manner.

Regardless of who owns the electric utility, given the pace and scale of changes to our electric system, there has to be a better way to fully utilize our local academic resources as we take on this formidable energy transformation. We need a mechanism for the utility, the PUC and other entities to engage in collaborative processes that results in an effective strategy befitting of the state’s multifaceted goals. These should include rigorous and transparent analysis of a wide range of policy alternatives from neutral parties.

We believe UHERO, as an objective data and research driven entity, can play a role in achieving the State’s clean energy goals and the need to lower and stabilize the cost of electricity. Several UHERO faculty and fellows have recently joined forces to form the Energy Policy and Planning Group. You may have seen some of the many blog posts or working papers we have released over the past year. A few things stand out from this line of research. First, is the merely obvious, reducing the cost of electricity in Hawaii can have significant impacts on our economy. Makena Coffman’s research showed that a 25% reduction in the price of electricity could raise Hawaii GDP by close to 1.5%. Moreover, focusing on making the business of contracting and pricing more efficient to get the incentives right is likely to create economic development opportunities through innovation in the production, delivery and use of energy.

Demand shifting is another active area of work that was discussed in some detail in "Efficient Design of Net Metering Agreements in Hawaii and Beyond" by Makena Coffman, Michael Roberts, Mathias Fripp, and Nori Tarui. This paper lays out several policy goals that are achievable in the near term, and some longer term goals. For example, Coffman et. al recommend an optional tariff, available for all customer classes, with hourly prices that reflect the continuous variation in supply and demand of electricity. In that way, customers will have incentives to reduce their use during times of high marginal cost (high loads with low renewable power production) and increase their demand during times of low marginal cost (low loads and/or high renewable power production). Customers who are able to shift demand will reduce their own costs and the system’s costs. And, variable pricing will open the door even wider to storage and related innovations. Such variable pricing will require smart meters, and HECO has already filed with the PUC to install smart meters.

There are thoughtful ways of incrementally modernizing the grid in a way that also facilitates customer choice. At first, smart meters need only be installed for households most willing to juggle variable pricing. Well-designed experimental pilots can be used to measure efficacy and guide future policies. To implement these policies it is imperative that the PUC possess the capacity to analyze the technical and economic merits of proposals or issues to be deliberated. UHERO faculty and fellows have been working on building such capabilities for several years. For example Matthias Fripp’s open source SWITCH model allows optimization of investment and electric system operation decisions to study alternative pathways to extremely high penetration renewables. And the UHERO electric sector model is tied to our General Equilibrium Model to translate energy systems decisions into economic outcomes.

We recommend using UHERO’s Energy Policy & Planning Group as a neutral, research-driven evaluator to model and analyze Hawaii’s energy policy. This role could be modeled after the role of the UH Hawaii Natural Energy Institute as a neutral evaluator of energy technology, or it could be less formal.

- Carl Bonham, Makena Coffman, and Michael Roberts

*See also  "Who’s In Control Here" by Mina Morita.

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