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Economic Currents

Keep up to date with the latest UHERO news.

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.

 

Regulatory Challenges

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.

 

Revenue Decoupling

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.

 

Continuing Dialogue

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.

---Michael Roberts

 

UHERO blog posts are intended to stimulate discussion and critical comment. They views expressed are those of the individual authors. 


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.

Ongoing/Current Issues

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.

 

-- Sherilyn Wee and Makena Coffman

 

 

1  The bill text and status can be found here: http://www.capitol.hawaii.gov/measure_indiv.aspx?billtype=SB&billnumber=2196&year=2014


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 

 


Source: HECO

 

-- 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.


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.

---Makena Coffman


An Insight on the Cost of Paradise

Whether visitors or residents in Hawai‘i, we are all aware of the high cost of living in paradise. One major contributing factor is the cost of energy. Households in Hawai‘i pay 4 times more than the average US household and nearly 7 times the households in Utah, where the residential energy cost is the cheapest in the nation.* While the US average for April 2013 hovered at 12 cents/kwh, Hawai‘i paid 37 cents/kwh for electricity in the residential sector.**

Breaking down residential energy consumption by source provides more insight into the high cost of living in Hawai‘i. While households in Hawai‘i supply their energy needs mainly by electricity (90%) at $110/mmbtu (equivalent to 37 cents/kwh), the two major sources in the US—natural gas and electricity—each comprise 42% of energy consumption, at roughly $5/mmbtu (equivalent to 1.7 cents/kwh) and $35/mmbtu (equivalent to 12 cents/kwh), respectively (see Figure 1). Hence, Hawai‘i is not only consuming a larger share of electricity, but also at skyrocketing prices. In contrast, the US is consuming a smaller portion from electricity at significantly discounted prices compared to Hawai‘i. This, combined with a large share of cheap natural gas in the US household consumption portfolio explains the large disparity in the cost of energy—particularly in the residential sector—in Hawai‘i and the US. Note however that switching to natural gas in Hawai‘i is not straightforward because of the logistics and infrastructure costs (liquefaction, shipping, regasification) of bringing natural gas to Hawai‘i.

 

-- Sherilyn Wee

 

 

*http://www.eia.gov/state/seds/data.cfm?incfile=/state/seds/sep_sum/html/sum_pr_res.html&sid=US **http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_6_a


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