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Two contracts for locally-produced biofuels, aimed at supplying a portion of the state’s electricity needs, are under consideration by the Public Utilities Commission, and more are expected. But the cost of the energy to ratepayers could be significant.

The recent contracts have touched off a stormy public policy debate about whether biofuel is in the best interest of the state and its ratepayers, or whether the benefits will ultimately be reaped by Hawaiian Electric Co.’s shareholders.

Fueling the controversy is what some critics see as a lack of transparency on the part of the utility about biofuels’ cost.

Hawaii’s 2008 signed by the state, Hawaiian Electric and the U.S. Department of Energy, states that “we commit to being open and truthful with our community about the investment necessary to transition to a clean energy future.”

Yet, the utility has declined to disclose pricing information for a contract with Aina Koa Pono, a start-up company that hopes to supply 16 million gallons of biofuel to the Big Island electric company. Hawaiian Electric has argued that the disclosure could compromise current and future negotiations with other biofuel companies.

A second contract with Maui-based Pacific Biodiesel was announced earlier this month. Neither Hawaiian Electric or Pacific Biodiesel would divulge the pricing to Civil Beat.

Hawaiian Electric also wouldn’t say whether the pricing of future contracts currently under negotiation for biofuels are expected to be higher than the current or projected cost of petroleum.

The 2008 energy agreement affords biofuel a role in the state’s renewable energy mix, and says that “paying a reasonable cost premium for locally-produced biofuels is acceptable.”

How much higher that cost can be, in comparison with petroleum, is unclear.

Ultimately, it will be up to the PUC to decide whether the contracts proceed.

Current Contracts

The issue of ratepayers paying a premium for biofuels came to the fore after the PUC ruled in March that it didn’t have the authority to implement a cost-sharing mechanism in the Aina Koa Pono contract that would spread the premium for the fuel that would be used on the Big Island across ratepayers on Oahu and Maui. Hawaiian Electric subsequently went to the Legislature and a bill was passed that gave the PUC this authority, not just for the Aina Koa Pono contract, but for any renewable energy project. The PUC recently ordered Hawaiian Electric to hold community meetings on Oahu and the Big Island to explain the surcharge in the Aina Koa Pono contract.

The Aina Koa Pono contract is for a period of 20 years and the company is hoping to produce fuel from a variety of agricultural feedstocks, such as sweet sorghum.

The negotiated pricing of the contract is significantly higher than the price of petroleum. In order to offset the cost burden to Big Island ratepayers, the utility has proposed spreading the costs across Oahu ratepayers.

The contract, submitted to the PUC for review in January, contains redacted pricing information. The utility’s argument for why the pricing is reasonable is also redacted. The information is available to the PUC and the Consumer Advocate for review, but not the public.

The utility has said that if spread among ratepayers on Oahu and the Big Island, the cost to purchase the fuel from Aina Koa Pono is expected to add about $1.75 to $2.10 a month to a typical residential electric bill. If spread amongst Big Island ratepayers only, a much smaller population that pays higher rates than Oahu, it would increase the cost for residents exponentially.

The Pacific Biodiesel contract is for much less fuel – 25,000 gallons a year – and will be derived from used cooking oil. Pacific Biodiesel is the only commercially successful biodiesel company in the state, and is particularly focused on ground transportation.

Rosegg said that given the small amount of fuel to be purchased from Pacific Biodiesel, the impact to residents’ electric bill is “very minor.”

The Debate Over Pricing Disclosure

According to Rosegg, “Actual pricing information for fuel contracts has always been confidential in order to allow negotiation of the best possible price for customers. The Public Utilities Commission and the Consumer Advocate scrutinize proposed contracts in detail to ensure pricing is fair.”

Pricing for renewable energy projects, such as wind, geothermal and solar energy, has been disclosed in the past, however. The PUC recently required that pricing in a contract for a large solar array, currently under review, be disclosed, and the utility complied. Hawaiian Electric officials have said publicly that the Big Wind project is expected to cost ratepayers 19 cents to 20 cents a kilowatt hour. Pricing information for past wind farms is publicly available in PUC documents. And pricing for a program passed last year that allows independent power producers to sell energy to the utility at fixed rates for 20 years is publicly available and standardized.

But the nascent nature of the biofuels industry in Hawaii makes disclosure of their costs different, according to Hawaiian Electric.

In PUC documents, the utility argued that if pricing for the Aina Koa Pono contract were to be disclosed it could set “initial expectations for biofuel developers at a predetermined price point that may not be realistic as the industry evolves, thus prolonging biofuel contract negotiations and creating a biofuel price benchmark that is at a higher level than could otherwise be achieved through negotiations [with pricing information kept confidential.]”

But Michael Champley, a retired executive of Detroit’s DTE Energy, who consults for Blue Planet Foundation and other energy companies in Hawaii, said greater disclosure could be beneficial, not only to ratepayers, but biofuel companies.

“Price transparency is important. I would probably err on the side of more disclosure,” said Champley.

“It makes it easier for the developer when the nominal or notational price is known, so they can tell whether the project will pencil out. They don’t have to wonder whether they can get price x or price y.”

Oil Prices Rising

Oil prices are expected to rise, according to data from the Department of Energy, and Hawaiian Electric has argued that while the pricing for biofuels may not be attractive now, at some point it’s expected to equate with or be lower than petroleum prices.

The utility would not say at what point in the future Aina Koa Pono’s biofuel prices were expected to intersect with petroleum.

“It is impossible to predict because there are a variety of projections for the cost of oil, that is the DOE projections offer a high, low and median prediction,” said Rosegg. “Further, experience shows that while the trend is upward, actual month to month changes are erratic.”

(Hawaiian Electric’s pricing predictions for diesel can be found in the document below.)

While, the utility wouldn’t say how much biofuels could cost ratepayers in the long run, a commissioned by the state, says that “biofuels are substantially more expensive than fossil fuel.” The estimated premium for burning biofuels in Hawaiian Electric’s generators, is $31.89 to $48.69 per barrel.

With oil trading at $83 dollars this week, the premium for biofuels could raise that price by up to 60 percent.

Biofuels can also entail additional costs that go beyond the price of the fuel.

“I think there is a lot more cost to biofueling than just the premium over oil,” said Champley. “There is the whole fuel infrastructure investment, and secondly, it’s still a combustion process and you are still having emissions. So you will also have to make sure the plants comply with increasing environmental regulations.”

Rate Base

A significant part of the biofuels debate has centered on whether the fuel is in the best interest of ratepayers or whether it’s only in the best interest of Hawaiian Electric’s shareholders.

Rate base is the value of a utility’s assets for which they are allowed to earn a specified rate of return. The higher the rate base, the higher the return.

“If the utility was going to go forward with wind and solar, it doesn’t add to the rate base and doesn’t do anything for the bottom line.” said Champley. “In Hawaii, or any other state, the only engine for earnings or earnings growth is rate base.”

If the utility doesn’t own an asset, such as a wind farm, then it forgoes the opportunity to increase profits, said Champley.

“This brings up an interesting situation in respect to biofuels. In all honesty, there is definitely a positive nexus between biofuels and the utility protecting its rate base,” he said.

The alignment between biofuels and Hawaiian Electric’s financial interests has angered portions of the energy sector, in particular the solar industry, which contends that the best interests of the public – namely, lower electricity rates – are not being protected.

Hawaiian Electric disputes this argument.

“Regarding the costs and modifications to our generating units to use biofuel, they are not significant when compared to the total value of existing capital facilities. The work is minor and generally focuses on a few key units,” said Rosegg. He added that by using existing power plants, customers are saved billions of dollars by avoiding having to pay to build “massive new infrastructure.”

However, information from a recent earnings call disclosed that the utility plans to invest $226 million in fuel infrastructure and $284 million in environmental compliance during the next five years. The items comprise 23 percent of the utility’s capital expenditure plan.

“Look at what HECO told investors as part of its second quarter earnings call,” said Champley. “Their projected capital investment over the next five years contains quite a bit of money for generation, environmental compliance and fuel supply infrastructure upgrades to handle biofuels. So these investments have to be considered in addition to the biofuel cost premium in determining the total cost of the biofuel strategy.”