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Economic Currents

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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. 

Discuss on FacebookRead Part 1Read Part 2


 

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


Breaking Down The Tesoro Refinery Closure - Part 2

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

 

Part 2: Why did Tesoro Close Instead of Chevron?

Tesoro Hawaii faces worse conditions than both Chevron Hawaii and Tesoro’s mainland refineries. How? Despite being the larger of the two local refineries, Tesoro’s facility is less sophisticated than Chevron’s. Tesoro’s refining operation yields a larger share of fuel oil (35%) than Chevron (20%). Due to renewable energy developments and energy efficiency enhancements, fuel oil demand is shrinking as the demand for fossil fuel-based power generation declines. To cut it’s fuel output, Tesoro was forced to continuously lower its refinery’s utilization rate. In 2010, Chevron operated at around 85% utilization rate, while Tesoro’s stood at around 75%. 


This is already a very low utilization rate. Forthcoming EPA regulations will make matters even worse. In 2017, EPA requirements will ban utilities from burning anything with ash content. 
While these rules are primarily targeting coal fired power plants, Hawai‘i power plants would also be affected (and will probably be the only non-coal plants in the entire country to be affected). The end result is the destruction of a major portion of fuel oil demand for Hawaii’s refineries and even lower utilization rates. At lower utilization rates, Tesoro would have struggled to earn a profit without major investments to upgrade the facility. 

So the decision was made to convert the facility to an import, storage, and distribution terminal. As we mentioned in part 1, Chevron may eventually find itself in a similar situation and arrive at a similar decision.

But would RTT conversion (Refinery To Terminal—that is to import fuels rather than crude oil) enhance or diminish our economy’s fuel supply risk in terms of exposure to greater price fluctuations or supply disruptions? It depends! 


Under normal conditions, importing fuels from a fairly well supplied market would not lead to any increased price variability when compared to the alternative of importing crude and refining at home. But due to the pricing mechanisms described in part 1, caused by Hawai
i’s specific oil market conditions, some products are currently priced at a higher markup compared to imported fuels, hence there is a good chance that RTT would provide us with cheaper options for some fuels if not all.  


However, during periods of heightened volatility, crude oil and refined products may both be in short supply. It may be more difficult to deliver refined products to Hawai
i than to obtain unrefined crude. But we are talking about a period of global oil crisis, something that has not occurred in more than thirty years. 

 

Discuss on FacebookRead Part 1Read Part 3

 

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


Breaking Down The Tesoro Refinery Closure - Part 1

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

 

Part 1: Hawai'i's Oil Market: A tale of two refineries
Hawaii is an extremely small part of global oil markets (almost 90 million barrels per day). Hawaii consumes 100-145 thousand barrels per day (kb/d) of petroleum products with fluctuations since the early 1980s. Currently the state has two small refineries: Chevron and Tesoro. Chevron’s Hawai‘i refinery was built in 1962 to supply the growing fuel market in Hawai‘i. Its crude distillation capacity was initially 33 kb/d, but has since been expanded to 54 kb/d. The Tesoro refinery was built as a 30 kb/d facility in 1970 by a company called Pacific Resources International (PRI). That facility changed hands twice—in 1989 to BHP, an Australian mining and oil company, and again in 1998 to Tesoro. After being upgraded and expanded several times, the refinery’s capacity is now nearly 94 kb/d, 75% larger than the Chevron facility.

The total refining capacity of both facilities, nearly 150 kb/d, has exceeded Hawaii’s demand for refined products for quite some time, and Hawaii’s demand for oil is actually expected to shrink further due to a variety of factors. One factor affecting the prospects for Hawaii’s petroleum market is the Hawai‘i Clean Energy Initiative (HCEI), whose express purpose is to gradually wean Hawai‘i’s economy off oil. Other factors include, but are not limited to, the possible introduction of Liquefied Natural Gas (LNG) into Hawai‘i’s energy mix, existing and future environmental regulations that may limit the use of petroleum products (such as burning fuel oil to produce electricity and/or marine transportation), increased EV penetration and improved fuel economy in the ground transportation sector, and flat to moderate economic and population growths in short- to medium-term future.

In addition, in today’s worldwide refining industry, the most profitable facilities have the following characteristics:
- large[1]  enough to achieve economies of scale
- small enough relative to the local market to sell all of its production in the local market regardless of its operating strategy
- in a market where imports of all products are required (to have a natural price floor through import-parity pricing). 

 

Hawai‘i’s refineries do not enjoy any of these conditions!

Taken as a whole, it is clear that the closure of at least one of Hawaii’s refineries was expected, and baring some significant improvement in the local refining industry, Chevron may very well follow Tesoro’s conversion to an import facility.

[1] Current average-sized refinery worldwide is about 400 kb/d

 

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


Hawaii's Proposed 400MW Wind Energy Project Explained

How will the proposed 400 MW Wind Energy Project contribute to the State’s Renewable Energy goals?

Hawaii has one of the most stringent Renewable Portfolio Standard (RPS)* policies in the country as well as the highest electricity rates due to dependence on oil for electricity generation (Coffman et al., 2012). As such, renewable energy technologies like wind tend to be more cost-effective in Hawaii than elsewhere in the U.S.

After the signing of the Memorandum of Understanding between the State of Hawaii and the U.S. Department of Energy, the Hawaii Clean Energy Initiative, Hawaii increased its’ RPS law to achieve 40% of electricity sales based on renewable energy sources by the year 2030. It specifies that:

  1.      1) 10% of net electricity sales be based on renewable energy sources by the end of 2010,
  2.      2) 15% by 2015,
  3.      3) 25% percent by 2020, and
  4.      4) 40% by 2030.
  5.  

Renewable fuel/energy types include solar, wind, ocean, geothermal, biomass-based, landfill gas, hydroelectric, CHP/cogeneration, hydrogen, anaerobic digestion, and waste. In the year 2015, energy efficiency ceases to count as a “renewable” energy type and will instead be governed by an Energy Efficiency Portfolio Standard (EEPS).

Using a model of Hawaii’s electric sector, we find that the proposed 400MW wind project will meet about 10% of the State’s energy needs in the year 2030. Figure 1 shows Hawaii’s possible energy mix from 2010 to 2030. The figure represents a scenario where:

  1.      1) the least-cost mix of electricity generation is selected assuming that the 400MW
  2.           wind project is built in the year 2020,
  3.      2) fuel prices (oil, coal and bio-oil) follow the Energy Information Administration’s (EIA)           reference trend, and
  4.      3) the RPS law is met.
  5.  

 

It is important to note that the RPS does not govern the use of the other 60% of fossil fuels (which remains oil-dominated)** nor does it distinguish between types of renewable energy (see Coffman, Griffin and Bernstein, 2012). For example, biofuels are counted similarly to solar photovoltaic or wind energy, even though their net energy content and greenhouse gas emissions impacts are quite different. The proposed wind project largely serves to limit the amount of imported biofuel used to meet the RPS.***

 

Does the proposed 400 MW Wind Energy Project make economic sense?

Using both the model of Hawaii’s electric sector and one of Hawaii’s overall economy, we find that moving forward with the proposed 400 MW wind project has net benefits to Hawaii’s economy because of a positive terms of trade effect. Fundamentally, wind energy serves as a “hedge” against potentially rising and volatile fuel prices, including biofuel prices. Biofuel prices are highly linked to oil due to their high level of substitutability. Even when fossil fuel and biofuel prices are expected to be low (according to the EIA’s Annual Energy Outlook 2012), the proposed wind project retains its net macroeconomic benefits, albeit quite small. We find that the project has a net positive impact of $589 million (in $2007 Gross State Product) over the 20-year model time horizon, translating to an impact of $2.80 per year to households.

Although the economic impacts are relatively small (never over half a percent increase in Gross State Product on an annual basis) they are clearly positive through the model time horizon.

 

Will the proposed 400 MW Wind Energy Project reduce Hawaii’s GHG emissions?

The proposed project serves to reduce Hawaii’s net GHG emissions by about 10 million metric tons of CO2 over a 20-year time horizon. This is a roughly 4% reduction in electric-sector emissions.

 

-- Makena Coffman

 

 

Coffman, M. and Bernstein, P. (2012). “An Integrated Top-Down and Bottom-Up Analysis of Wind Energy.” Prepared for AUBER 2012, Honolulu, HI.

Coffman, M., Griffin, J., and Bernstein, P. (2012). “An Assessment of Greenhouse Gas Emissions-Weighted Clean Energy Standards,” Energy Policy, 45: 122-132.

 

* Renewable Portfolio Standards are a mandate placed on electric utilities that require a specified percentage of electricity sales be met through renewable sources of electricity by a certain year.

**The model represents all current laws and financial incentives for commercially available technologies. For example, the solar photovoltaic federal and state tax credits are accounted for to the extent that they are currently written into law. The exception, however, is coal. Although there is no law explicitly prohibiting the growth of coal use in Hawaii, we exclude more coal in this scenario because the Hawaiian Electric Company has publicly stated its commitment to limiting future use of coal. The full paper shows a wider array of scenarios.

***We assume that biofuels are imported because of the least-cost framework. It is certainly possible that locally produced biofuels are used to meet the RPS, but at a price premium.


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