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Editor’s note: This article by Jeff Mikulina of the Blue Planet Foundation is part of a series about what the Hawaii Legislature should focus on this legislative session. Other articles in the series are linked at the bottom of the article.

If we were to sit down today and design — from scratch — an energy system for Hawaii, it’s unthinkable that we’d choose one that relies on a steady supply of Middle Eastern oil and Indonesian coal. Nor would we craft a system that places control of Hawaii’s electricity in a single entity whose bottom line is indifferent to whether the energy source is sustainable.

Yet that is precisely where we find ourselves today. Hawaii has the most oil-dependent and most expensive electricity in the nation, requiring an uninterrupted flow of some million barrels of oil monthly. Electricity is largely controlled by a utility that receives scant financial benefit in plugging into clean energy sources, particularly if those sources are widely distributed.

Achieving the preferred system of energy self-sufficiency for Hawaii — one where wind and solar are no longer considered “alternative” energy — requires intelligent, transformative policy. Fortunately, lawmakers in 2011 have the opportunity to remove some of the myriad institutional, regulatory, and financial barriers blocking Hawaii’s clean energy future. New policies are needed to separate power generation from distribution, encourage financial innovation in clean energy investment, provide independent oversight of grid reliability and interconnection, and allow for the recovery of costs for unused fossil power plants.

Why are these policy changes required?

Nearly three years have passed since the state launched the Hawaii Clean Energy Initiative, ostensibly a game-changing effort to transition Hawaii “decisively and irreversibly away from imported fossil fuel.” While the increased energy focus, federal assistance, and project facilitation has been valuable, the Initiative is hindered by having to operate within the current institutional and regulatory paradigm — a paradigm that is at odds with an energy future powered by non-fuel renewable energy sources.

Existing laws give the utility little economic incentive to pursue clean energy projects. Long-term utility profits are tied mostly to capital investments that the utility makes, encouraging them to purchase expensive new plants or undertake major upgrades to existing ones. Since third-party renewable energy projects displace the need for utility investments, and energy efficiency reduces electricity use, the utility does not profit directly from such clean energy initiatives.

Further, adding substantial amounts of renewable energy and energy efficiency will render existing fossil generation facilities useless, leaving the utility holding the bag with “stranded” investments on its books. Finally, when the utility purchases power from independent power producers, like large solar farms, the utility is exposed to additional financial risk (something it can’t afford, given its current credit rating of triple-B minus, one notch above junk bond status). These institutional barriers — decreasing sales on top of increasing costs to enable a system that doesn’t help their bottom line — make change incredibly difficult for the utility.

What’s needed here is “institutional acupuncture.” The Public Utilities Commission (PUC) should be directed to implement a “performance incentive mechanism” to reward the utility for achieving clean energy goals. This will give Wall Street reasons to invest in the utility and help fund Hawaii’s clean energy transition. The PUC should also be given guidance to adopt a policy allowing for the recovery of the utility’s “stranded assets,” preventing these facilities from becoming anchors that restrain clean energy progress.

Changes also need to be made on a broader scale. Hawaii’s current utility regulatory structure is a holdover from the 19th century. A vertically integrated monopoly that controls all aspects of electricity generation, transmission, and distribution no longer makes sense in a world where entrepreneurial independent power producers (including homeowners and business owners), enabled by technological advances, can develop Hawaii’s renewable energy resources.

Solar photovoltaic (PV), for example, is rapidly evolving. The installed cost of PV in Hawaii has decreased 25 percent since 2008, and the cost of energy storage (necessary to make solar a complete solution) has dropped 8 percent annually. Given such rapidly accelerating advancements, further investment in the existing electricity model is akin to repairing an old VHS player instead of developing the capacity for streaming video.

Today’s policy should contemplate tomorrow’s innovations. This is best achieved by replacing utility control of grid access with control by a neutral entity tasked with establishing reliability and interconnection rules that encourage clean energy development in all appropriate forms. Such a third-party oversight model for grid access has succeeded elsewhere in democratizing power production. Beyond that, a new framework should be adopted to separate energy generation from transmission and distribution, enabling the utility to focus on the smart grid and the management and delivery of clean, reliable electricity.

Failing this, the utility will continue to stumble over real-world hurdles to embracing clean energy. Or it will attempt to transition within the existing paradigm. Take, for example, the utility’s push to replace oil with biofuel in its existing generating units. That swap allows it to avoid fundamental change (while passing on any increased fuel costs to ratepayers). But the result may thwart Hawaii’s overall transition to clean energy by taking away liquid biofuels from the transportation sector — where other renewables, such as solar and wind, are out of reach. If biofuels can be sustainably and economically produced locally, they should be put to work powering our cars, trucks, ships, and airplanes — not stationary power plants. A state policy clarifying this preference for biofuels would help prevent solving one energy problem at the expense of another.

Finally, the long-term planning, development, and implementation of Hawaii’s clean energy future requires dedicated funding. In 2010, the legislature enacted one of the first carbon taxes in the nation, tapping the source of our problem — imported oil — to help fund renewable energy solutions. Unfortunately, only 25 percent of the additional $1 per barrel tax is directed to Hawaii’s clean energy transition, about $5.5 million annually. Compare that investment with the more than $70 million in tax dollars that Hawaii dedicates to tourism. Yet we spend upwards of $6 billion — almost half of what tourism brings in — to pay for foreign fuel. The barrel tax should be significantly expanded to provide ample funding for Hawaii’s clean energy transformation.

Hawaii’s energy independence won’t result from tweaking the edges of an increasingly obsolete regulatory scheme. It will prevail only if empowered by forward-thinking policy dedicated to a robust, modern power system that fosters innovation and puts Hawaii’s clean, indigenous, and renewable energy sources to work for Hawaii’s people.