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Economic Currents

Keep up to date with the latest UHERO news.

Does PV Add Home Value?

Circuits with installed PV up to and greater than 250% of daytime minimum load. Source: HECO

Hawaii leads the nation with the highest per capita installation of solar photovoltaic (PV). High electricity rates—three times the national average, —a generous state tax credit, plummeting PV costs, and net energy metering (NEM) policy have all contributed to the proliferation of PV. Considering future cost savings, PV is an attractive investment, yielding an internal rate of return of 23% with the state tax credit, equivalent to a payback period of four years (Coffman et al., 2016). In a recent analysis I answer the question of how PV is capitalized into a home’s value.

Using econometric tools, I assess the impact of PV systems on home value for single-family resale homes on Oahu. Using home resale and PV building permit data from 2000-2013, I find that PV adds on average 5.4% to the value of a home. This translates to approximately $34,000 relative to the sales price of the median non-PV home of $630,000.  

This means that PV already installed on a home is worth about $4,000 more than the median value of a PV permit (approximately $30,000). While this may appear puzzling at first, issues of circuit saturation may well-explain this result. Calculating the stream of electricity savings* over 9 years (the average household tenure) and a typical 30-year mortgage respectively, reveals that a homebuyer is effectively paying $4,000 more for a PV home to receive between $14,000- 30,000 in electricity savings. This makes sense given many of the circuits in Hawaii have reached legal limits for PV installations and therefore new homebuyers have an expectation that future installations will be limited. Thus for many the choice isn’t purchasing a house without PV (and then installing it) but rather to gain access to PV (and future electricity savings).

An area of further inquiry in light of the recent PUC ruling is to extend the dataset to examine whether homes that are grandfathered under the NEM program are worth more.

- Sherilyn Wee

Coffman, M., Wee, S., Bonham, C., and Salim, G. (2016). “A Policy Analysis of Hawaii’s Solar Tax Credit Incentive.” Renewable Energy, 85, 1036-1043.


*The net present value calculation assumes a 5% discount rate, electricity price of 30 cents/kWh, a system cost of $4.50/watt (year 2013), 5.2 solar hours per day, 75% efficiency factor, and daily household consumption of 18 kWh.

Net Metering Agreements in Hawaii

In Hawaii, like most U.S. states, households installing rooftop solar photovoltaic (PV) systems receive special pricing under net-metering agreements. These agreements allow households with rooftop solar to buy and sell electricity at the retail rate, effectively using the larger grid to store surplus generation from their panels during sunny times and use it when 
the sun isn’t shining. If a household generates more electricity than it consumes over the course of a
 month, it obtains a credit that rolls over for use in future months. Net generation supplied to the grid in excess of that consumed over the course of a full year is forfeited to the utility. Net metering agreements often include 
a monthly fee to support billing, transmission and operation of the grid.

A growing concern is that the utility has many costs besides the fuel used in electricity generation, and most of these “fixed costs” are lumped in with per- kilowatt hour (kWh) charges. As a result, under current net metering agreements, when a solar customer provides their own power, they don’t pay the fixed- cost component for each kWh they produce. Under 
a revenue-decoupling rule, those costs are shifted to households and businesses without rooftop solar. As less power is sold in Hawaii, fixed costs per kWh are rising fast. Most of the decrease in power sales is due to gains in efficiency, but some of it is due to installations of solar PV. Residential customers now pay roughly $0.17/kWh for fixed costs. After the drop in oil prices earlier this year, well over half the utility’s revenue from residential customers goes toward fixed costs.


The graph shows the average residential electricity price from 2000 to the present, and breaks out the generation component from the total (Adjusted ECAF). The difference between price and the Adjusted ECAF (Gap) accounts for all non-fuel or fixed costs.

A longer-term concern, particularly in Hawaii with its high electricity rates, is that an inefficient pricing system could encourage many households and businesses to install stand-alone systems, unplug from the grid, and further raise costs for everyone else.

In a new report UHERO's Energy Policy & Planning Group summarizes the benefits and challenges with distributed solar and sketch out a set of long-term solutions based on marginal-cost pricing as the primary platform. Marginal cost is the incremental 
cost of power production—the cost of generating one more kWh. This cost can vary a lot depending on total demand and the amount of renewable power, among other things, so ideal prices would vary over the course of each day, week, season and year. This is likely to become especially pronounced as the variable supply from renewable sources becomes more prominent.

- Makena Coffman and Michael Roberts

UHERO brief


Up to $100 Million in Monthly Electricity Savings for Hawai’i After Oil Prices Plummet

As of January 12, the Brent Crude Price was just a shade under $47 per barrel. The last time prices were this low was nearly 5 years ago, in April, 2009. Since crude oil and its products feed into about 90% 70% of electricity generated in Hawai’i, it is almost axiomatic to expect electricity prices to decline with oil prices.

But it takes some time for oil prices to feed into electricity prices. The price Hawaiian Electric Industries pays for oil in any month is closely connected to the average Brent crude price in the three previous months (figure 1). So, if prices stay this low, it will take up to four months before electricity prices fully reflect the drop in oil prices.

The relationship between the lagged average oil price and electricity price implies that each dollar per barrel decline in oil price should lead to a 0.22 cents/kWh decline in electricity price (figure 2). We use this relationship to project electricity prices under two assumptions about the future price of oil: (i) oil prices remain constant at the January 12 level, or (ii) oil prices follow the path predicted by the January 12 futures prices for Brent crude. (Futures prices are prices that can be locked in today for delivery up to 5 years from now).

Figure 3 shows these projections. Assuming oil prices stay at current prices, electricity prices should decline to around 18 cents/kWh by the middle of the year, and stay there. As of January 12, futures prices are above spot prices, so the second scenario has electricity prices falling to 18 cents/kWh but then gradually increasing to 23 cents/kwh thereafter.

Note that this forecast is based on the historical link between oil prices and electricity. In recent years electricity prices have drifted above this relationship, so it’s possible that prices will not drop as much as we project even if oil prices stay low.

Either way, the savings will be substantial. For a household consuming 600kWh, the 10 to 15 cent/kWh decline translates into $60 to $90 off their monthly bill. Since Hawai`i is consuming 790GWh on average, the almost $60 decline in oil prices should save the State’s economy about $104 million every month, with about three quarters of that amount going to businesses and municipalities and a quarter of it going to households.

With Hawai’i being the most oil-dependent state in the country, plus that fact that we import all of our oil, our state may benefit more than any other from the precipitous decline in oil prices.

- Karl Jandoc and Michael Roberts

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

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 

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