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Economic Currents

Keep up to date with the latest UHERO news.

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


The Challenges of EV Efficiency In Hawaii

Earlier this month, U.S. Department of Energy launched a website that calculates “the cost of fueling a vehicle with electricity compared to a similar vehicle that runs on gasoline”.

The mission of this gadget is to encourage consumers to switch to electric cars by:

• bringing greater transparency to vehicle operating costs

• helping drivers determine how much they might save on fuel by choosing an electric vehicle (EV)

• showing the low and steady price of fueling with electricity.

Announcing the launch of the website, the new Secretary of Energy, Ernest Moniz, stated that EVs could not only save consumers on fuel, but also reduce the dependence of our nation on oil. Those goals may be harder to achieve in Hawai’i than in the rest of the nation.

First, according to the eGallon website, while it costs the average driver in the US less than a third to drive an EV than a conventional gasoline vehicle (saving them more than 68% on fuel cost*), Hawai‘i residents save only 5 cents per gallon on gasoline (less than 1.5%). That explains why the first goal (saving consumers on fuel costs) is harder to achieve in Hawai‘i.

Second, while less than 1% of US electricity is generated from oil, Hawai‘i currently generates 75% of its electricity from oil. This explains why the second goal (reducing dependency on oil) is harder to achieve through EVs in Hawai‘i.

Finally, an often-quoted goal of increased EV penetration is to lower greenhouse gas (GHG) emissions from the transportation sector—as the largest and fastest growing component of state GHG emissions. Achieving that goal is also currently easier in the rest of the nation where more than 40% of electricity comes from cleaner sources than oil and coal (i.e. renewables, nuclear, and natural gas).

Therefore, both of the objectives mentioned by the US Energy Secretary are harder to achieve in Hawai‘i, unless consumers charge their vehicles themselves, for example using their own rooftop PV systems. That way, they could save more on vehicle fuel costs and help the State reduce their reliance on oil.

 

---Iman Nasseri and Kimberly Burnett 

 

*It is worth mentioning that both this website and much of the media tend to examine “pump prices” for passenger cars. Although EVs show a lot of promise in much of the US in terms of fuel cost per miles compared with gasoline and other alternative-fueled vehicles, considering the higher capital cost of EVs than their similar class conventional gasoline vehicles (Please refer to section 2.8 of Transitions to Alternative Vehicles and Fuels), they may not look as promising in terms of overall cost per mile.


Investigating the Potential for Seawater Air Conditioning in Waikiki

Researchers at the University of Hawai‘i at Mānoa recently concluded a study into the potential for seawater air conditioning (SWAC) in Waikīkī. The study was led by the University of Hawai‘i Sea Grant College Program (UH Sea Grant) in partnership with the the Economic Research Organization at the University of Hawai‘i (UHERO) to investigate various aspects of seawater air conditioning and its applicability to Waikīkī. In examining the appropriateness of SWAC technology, researchers compared SWAC with ‘business as usual’ and various renewable energy and other energy efficiency options. Each option was analyzed in terms of: 1) generation capacity; 2) applicability to existing policy standards; 3) economic factors; 4) environmental and social factors; and, 5) energy and supply security.


 

According to the findings of the report, while SWAC may be more costly than other efficiency/conservation options, its ability to provide an uninterrupted supply of cool air gives it a solid advantage over the use of more intermittent renewable energy technologies (such as wind and solar power) for air conditioning purposes. For Waikīkī, where demand for air conditioning is constant, SWAC has the potential to decrease the cost of air conditioning and reduce the amount of harmful emissions that are released as a by-product of generating electricity from fossil fuels.

Traditional air conditioning systems require large amounts of energy to cool air to the desired temperature. In contrast, SWAC technology harnesses the cooling properties of cold seawater to achieve the same purpose, reducing the amount of electricity required. SWAC is particularly relevant to Hawai‘i, where the close proximity of deep, cold, ocean water to areas of high population make it an ideal location to implement the technology. In addition, the first seawater air conditioning unit was invented by a UH Sea Grant researcher in the early 1980’s.

When surveyed, 62 percent of O‘ahu residents indicated support for SWAC development in Waikīkī, compared to 8 percent opposed and 30 percent neither supporting nor opposing. Individuals more familiar with SWAC technology were more likely to support its development than those who were not aware of the technology (69 percent in favor compared to 54 percent). Slightly less than half of O‘ahu residents, 46 percent, also supported the use of public funds to help develop SWAC in Waikīkī, versus 26 percent opposed and the remaining 28 percent neither supporting nor opposing.

# # #

The University of Hawai’i Sea Grant College Program is part of the University of Hawai‘i at Mānoa’s prestigious School of Ocean and Earth Science and Technology. It supports an innovative program of research, education and extension services directed to the improved understanding and stewardship of coastal and marine resources of the state, region and nation. Science serving Hawai’i and the Pacific for over 40 years.

UHERO is a unit within the College of Social Sciences (CSS) at the University of Hawai‘i at Mānoa. Established in 1997, UHERO is dedicated to informing public- and private-sector decision making through rigorous, independent economic research on the people, environment and economies of Hawai‘i and the Asia-Pacific region.

The College of Social Sciences (CSS) at the University of Hawai‘i at Mānoa is engaged in a broad range of research endeavors that address fundamental questions about human behavior and the workings of local, national and international political, social, economic and cultural institutions. Its vibrant student-centered academic climate supports outstanding scholarship through internships, and active and service learning approaches to teaching that prepare students for the life-long pursuit of knowledge.

 

 

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The Hawaii Clean Energy Initiative (HCEI): Watt, Me Worry?

The connection between the emerging field of sustainability science and the economics of sustainable development has motivated a line on interdisciplinary research inspired by the notion of “positive sustainability.” This notion is founded on three principles or pillars: (1) adopting a complex systems approach to modeling and analysis, integrating natural resource systems, the environment, and the economy; (2) pursuing dynamic efficiency, that is, efficiency over both time and space in the management of the resource-environment-economy complex to maximize intertemporal well-being; and (3) enhancing stewardship for the future through intertemporal equity, which is increasingly represented as intergenerational neutrality or impartiality. I argue that the Hawaii Clean Energy Initiative (HCEI) fails to satisfy all three pillars of sustainability, and consequently fails to achieve the "sustainability criterion" put forward by Arrow, Dagupta, Daily et al: that total welfare of all future generations not be diminished. HCEI shrinks the economy, contributes negligibly to reduction of global carbon emissions, and sparks rent seeking activity (pursuit of special privilege and benefits) throughout the State of Hawaii.

The HCEI, introduced in 2008, is a partnership between the State of Hawaii and the U.S. Department of Energy intended to lead Hawaii toward energy independence. How well does the HCEI comport with the three pillars of sustainability mentioned above? Unfortunately for Hawaii residents and their long-term welfare, not very well, despite almost unshakeable political support state-wide. The problem is not clean energy, pursuit of which, in advanced technology forms, is a worthy policy objective. The problem, rather, is the current approach to the initiative itself, with its emphasis on mandates, subsidies, and picking winners. It just doesn’t add up, starting with the HCEI goal: “...achieve 70% clean energy by 2030 with 30% from efficiency measures and 40% coming from locally generated renewable sources.” (After accounting for 30% efficiency, 40% of remaining energy use is 28%, for a total of 58% clean energy, not 70%).

What about alleged benefits of HCEI? Here’s a brief reckoning:

  • Strengthen our economy: Very doubtful. Renewable energy mandates and subsidies, coupled with the continuing monopoly power of Hawaii’s electrical utility, especially under the present revenue decoupling scheme, will maintain energy prices high, reduce consumer and taxpayer welfare, and accordingly, shrink (weaken) the economy. This was a key message of Nobel Laureate, Joseph Stiglitz, in his special lecture on sustainability at the University of Hawaii at Manoa in February 2012.
  • Increase our energy security: Not likely. Abundance of shale oil and gas is changing the global energy market, including prices and geographic sources. The future should see lower oil and gas prices and less dependence on supply from the Middle East. Even with the current high price of low sulphur fuel oil, current-technology renewable energy is not competitive in Hawaii without subsidy. Is it really better for consumer welfare to have higher, but allegedly stabler prices? Concern about supply disruption seems wildly exaggerated. After all, the mission of the U.S Pacific Fleet, headquartered in Honolulu, is to provide maritime security throughout the Asia-Pacific region, including commercial shipping to the State of Hawaii. And a natural disaster, severe enough to impede fuel delivery, would, in all probability, cause major damage to local energy infrastructure. Less severe disasters might cripple the vulnerable renewable energy sector without preventing maritime delivery of fuel. Security is enhanced, not diminished, by the diversity of energy sources.
  • Reduce our carbon footprint: A large, costly shoe for such a small foot. Hawaii currently imports about 40 million barrels of oil per year or about 0.1 million barrels per day. World-wide fossil fuel consumption (oil, coal, natural gas) comes to about 250 million barrels of oil equivalent per day (see annual data from the International Energy Agency or the U.S. Energy Information Administration). Accounting for the carbon intensity of the different fossil fuels, Hawaii’s contribution to global carbon dioxide emissions is on the order of 0.01%. HCEI will not meaningfully prevent climate change nor save the planet.
  • Make Hawaii a world model for energy independence: And serve as a model of welfare erosion as well. A common justification for independence among HCEI proponents is “keeping the money at home,” which represents crude, modern day mercantilism (exports are good; imports are bad), an economic policy that was discredited over two centuries ago by Adam Smith (The Wealth of Nations) in favor of international specialization and voluntary exchange (Endress, 2012, Economic Currents, UHERO). Pursuing independence, foregoing the welfare gains from trade, shrinks the economy.
  • Create a cleaner, more sustainable environment: Does this alleged benefit measure up to the three sustainability pillars?
  • Systems Approach: HCEI is a single-agenda program that downplays its interaction with and impact on the Hawaii’s wider economic-ecological system. Renewables are land-use and water-use intensive. Wasteful over-investment in renewable energy (i.e., subsidies and tax credits) may come, for example, at the expense of optimal watershed protection against invasive species. Marine resources, vital to sustainable tourism in Hawaii, may similarly receive inadequate attention.
  • Dynamic Efficiency: Mandates and subsidies are notoriously inefficient, because they reduce consumer and taxpayer welfare. Take the solar tax credit for example. For the fiscal year ending June 2012, Hawaii tax revenue lost due to solar tax credits (i.e., subsidies) amounted to $170 million; the Council on Revenues has adopted forecasts based on the assumption credits will rise to $240 million in the current fiscal year. That’s very likely to be an under-estimate, given the solar-installation frenzy that the commission’s announcement has engendered in anticipation of a possible credit crack-down by the Hawaii State Legislature.

The revenue loss is a direct burden; but the overall loss is even worse. “Excess burden” is the additional welfare loss to Hawaii residents because subsidies distort prices and incentives in the economy, inefficiently drawing resources from other production sectors into the renewable energy sector. (The renewable sector gains at the expense of jobs and income in the rest of the economy.) On top of that is the added excess burden of tax friction: every dollar of tax revenue raised to finance subsidies costs the economy about another 25 cents. (Economists refer to this friction as the social cost of public funds.) And where do most of the solar panels now being installed in Hawaii come from? China, not the United States. Using welfare analysis made standard by economist Arnold Harberger, 1964, Professor Jim Roumasset and I estimate that the total amount of excess burden due to solar tax credits for this fiscal year will come to about $360 million. That’s $1million a day swirling down the state drain. The benefits and costs of other policy manifestations of HCEI should also be analyzed, including the interisland grid, feed-in tariffs and regulatory policies regarding consumer prices.

Intertemporal Equity: HCEI’s implicit rate of time preference is high; political imperatives are favoring the present over the future, despite public relations appeals to the contrary. Rather than allowing renewable technologies to advance with R&D and become commercially viable without subsidy, Hawaii is paying a high price and foregoing other productive investment to lock in current, suboptimal energy technology. When the overall economic-ecological system is considered, Hawaii is making inadequate additions to inclusive wealth and is thus in jeopardy of not meeting the sustainability criterion and stewardship for the future.

HCEI may serve State energy objectives, but it is not in the public interest (i.e., overall consumer/taxpayer welfare. HCEI does not enhance intertemporal well-being and can not help save the planet through meaningful contribution to global carbon reduction. And moral justifications for the HCEI fail to persuade: in what way is the undermining of sustainability in Hawaii, and hence, the intertemporal well-being of Hawaii’s citizens, a moral outcome?

So, what are the alternatives? The British energy economist, Dieter Helm (not a climate change denier), 2012, offers some constructive recommendations for rational energy policies in Europe and the United States: (1) Institute carbon taxes; (2) Increase investment in R&D for advanced renewable technologies; (3) Adopt natural gas as a transition fuel until advanced technology renewables are ready for prime time. The first two recommendations are best pursued at the national level, although Hawaii should have some comparative advantage in R&D for ocean and geothermal energy. As to the third recommendation, the natural gas option should be put on the table in Hawaii for serious study and debate. The current administration in the State of Hawaii seems open to that idea (Governor Abercrombie 2013 State of the State address).

--Lee H. Endress

References

Arrow, K., Dasgupta, P., Goulder, L., Daily, G., Ehrlich, P., Heal, G., Levin, S., Mäler, G-M., Schneider, S., Starrett, D., and Walker, B. 2004. “Are We Consuming Too Much?” The Journal of Economic Perspectives. 18(3): 147-172.

Endress, L. 2012. “Keeping the Money at Home!” Economic Currents. The Economic Research

Organization at the University of Hawaii (UHERO). Posted Jan. 23, 2012.

Harberger, A., 1964. ‘‘Taxation, Resource Allocation, and Welfare,’’ in J. Due (ed.), The Role of Direct and Indirect Taxes in the Federal Revenue System. Princeton University Press. Helm, D. 2012. The Carbon Crunch. Yale University Press.

Smith, A. 1776. The Wealth of Nations. 1994 Modern Library Edition.

WORKING PAPER

 

 


Breaking Down The Tesoro Refinery Closure - Part 3

Earlier this month, after a year-long unsuccessful effort to sell the facility, Tesoro announced they were shutting down their refinery while continuing to offer it for sale. The question on everyone’s mind—what does this mean for Hawai‘i?

This 3-part series by UHERO Graduate Assistants Iman Nasseri and Sherilyn Wee attempts to answer those questions.

 

Part 1: Hawaii’s Oil Market 
Part 2: Why did Tesoro close and not Chevron?
Part 3: How will this affect gasoline and other prices?

 

Part 3: How will this affect gasoline and other prices?

Many people instinctively assume that Tesoro’s closing will affect gas prices. In contrast, we think the refinery closure will have very little impact on prices.

Each and every refined product consumed in Hawai‘i is available in the US and global oil markets. However, not all of the products in the global market (most importantly gasoline, diesel and fuel oil) would necessarily meet the standards set by US Environmental Protection Agency. Fuel oil, for example, at the quality standards that HECO would require to meet EPA requirements, is traded in a thin market without a well-established price marker, and are only found in the Asian markets. Gasoline and diesel markets, on the other hand, are relatively over-supplied in both the US mainland and Asian markets. (You may be surprised to learn that the United States is the largest exporter of petroleum products in the world!)

Hawaii’s two refineries have together been supplying almost all of the state’s gasoline and diesel requirements in the past two decades. These two products were imported in the past but not much since the late 1990s, although this option has always been available. In addition to the refineries, there are four other entities that have the capability to import their own petroleum products—Hawaii Fueling Facilities Corporation (HFFC), Hawaii Gas, Aloha Petroleum, and Mid-Pac Petroleum. HFFC imports some jet fuel on a regular basis to supply airlines at the Honolulu International Airport and Aloha and Mid-Pac have also always had the option to import any fuel to sell in the local market. However, because the refineries have always faced a natural price floor through import-parity pricing (at least for some products), Aloha and Mid-Pac have found local supply competitive to imported fuel, and hence purchased locally.

If refineries did not consider the import option in their pricing mechanism, Aloha and Mid-Pac would have imported cheaper fuels and increased their markup to match what other retailers were charging.

Moreover, Hawai‘i ’s refineries have a higher crude oil cost compared with the refineries on the US mainland due to the unique demand pattern in Hawai‘i as well as technical limitations to meet high EPA standards while having little desulfurization and cracking capacity. To price their gasoline and diesel competitive to the imported fuel option, Chevron and Tesoro had to manage their profit margin using the pricing mechanism in their long term contracts for fuel oil and diesel sales to HECO. Faced with restrictions from long-term HECO contracts and import price competition, changing local fuel demand and global oil market conditions at times left both refineries with negative margins.

Consequently, we don’t expect to see much of a change as Hawai
i begins importing some or all of its fuels. The price impact, if any, is expected to be minimal, with some fuels becoming a little more expensive, and others a little cheaper. 

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Disclaimer: Blog posts are intended to stimulate discussion and critical comment. The views expressed in this article are those of the author.


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