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Hawaii’s energy policy took a sharp turn toward natural gas recently when Gov. Neil Abercrombie asked the state’s main electric utility to begin exploring it as a potential energy source. The news came just as The Gas Co. that it had hired an engineering firm to begin assessing what it would take to import liquefied natural gas to Hawaii.

But can natural gas help Hawaii’s energy problems?

There have been discussions within the local energy sector for years about LNG replacing costly oil-fired electricity generation. But the idea gained momentum in January when Abercrombie lumped it in with wind, solar, geothermal, biofuels and ocean technology as a potential alternative energy source for Hawaii.

Supporters of natural gas argue that it could reduce the electric bills of Hawaii residents who have been paying triple the national average. And with prices reaching record highs this past year after the Japanese tsunami caused a sharp spike in the price of oil that Hawaii needs, government officials have expressed a greater sense of urgency in weaning the state off of petroleum which drains upward of $4 billion annually from Hawaii’s economy.

The recent focus on natural gas doesn’t mean that the state is turning away from its commitment to switch to clean energy, Lt. Gov. Brian Schatz told Civil Beat. But in the meantime, cost-saving options should be explored, he said.

“There are very few people who think that we can actually go from 90 percent foreign imported oil to 100 percent renewable energy in just a few years,” said Schatz. “So in the meantime we need a bridge fuel. We would like to accelerate the transition as quickly as we can, but the truth is that we are vulnerable and we’ve got to make sure we do something.”

But how feasible is the switch to natural gas and will it really deliver lower and more stable energy prices for Hawaii consumers?

A change would mean new infrastructure which would require hundreds of millions of dollars in investment, according to experts.

And the price of gas could go up before Hawaii could be in a position to take advantage of it. Natural gas prices have reached record lows on the mainland as new technology opens up large deposits of shale gas, but analysts expect that cost will rise as domestic producers begin exporting it.

“Everyone agrees it will affect (the price), they just don’t know by how much,” said Larry Persily, the federal coordinator for Alaska Natural Gas Transportation Projects, the office overseeing an effort to build a natural gas pipeline from Alaska’s North Slope to Canada.

More companies are looking to foreign markets to capitalize on increasing reserves and rising demand. The U.S. Department of Energy is currently reviewing a number of permit applications from companies seeking approval to export natural gas anywhere in the world, noted Persily.

Infrastructure

In order to bring gas to Hawaii, it has to be liquefied, loaded onto special container ships and then “regasified” once it gets here.

The total cost in Hawaii of the distribution infrastructure, which includes port modifications, a regasification terminal, a storage facility, gas pipelines and the retrofitting of boiler units, was estimated at $390 million to $590 million in a 2007 prepared by Facts Global Energy.

But the price of gas is so much lower than oil that some experts think the switch to LNG would still result in significantly lower electric rates than Hawaii pays now.

Currently, natural gas is compared to $15 for oil, according to Shasha Fesharkai, an oil expert and chief operating officer at Facts Global Energy.

And while gas prices could go up, Fesharaki said he was confident that they would remain lower than oil for the next 20 years.

But basing policy decisions on future global energy prices is always a gamble.

“Some folks are coming in and saying the savings would be considerable and others are coming in with price points that are closer to what we are paying for oil,” said Schatz. “So that is what this process is for, to determine what is viable and what is not.”

And unlike the 20-year fixed-price contracts that Hawaiian Electric Co. signs with wind and solar companies, natural gas prices are subject to the same price fluctuations as oil.

While natural gas prices are about $2.50 per MMBtu today, in July 2008 the price was almost $14 per MMBtu, noted Persily.

“It’s about how good of a contract you can negotiate,” he said. “As prices jump around you don’t want to find yourself choking on the bill.”

Commitment

Jeff Kissel, chief executive officer of the The Gas Co., said his company is seeking to import LNG for its 70,000 customers. Currently, The Gas Co. obtains natural gas from an oil byproduct produced by the state’s two local oil refineries, Chevron and Tesoro. State regulators would have to approve the imports.

Kissel said that The Gas Co. is committed to making the investment needed in Hawaii. “We are going as fast as we possibly can,” he said. “The unknown right now is permitting and regulatory approval.”

The Gas. Co. also hopes to sell the gas to HECO.

Robbie Alm, executive vice president of the electric utility, which serves Oahu, the Big Island and Maui County, said HECO is taking the option seriously.

“At the request of the governor, the chair of the Public Utilities Commission, and in the interest of lowering the cost of electricity for our customers, we are very seriously examining the possibility of using LNG to replace petroleum oil in our units,” Alm said by email.

He said that the utility is evaluating the cost to switch its generators to run on natural gas, which he said was not expected to be a major issue. He said the larger challenge is the infrastructure that must be built to import LNG into Hawaii.

The Facts Global Energy report says that it could cost $3 million to $5 million to convert one of HECO’s generators and estimated the total cost at $30 million to $60 million.

Experts say that if Hawaii is going to incorporate natural gas into its energy portfolio, it would mean a bold political commitment from the state, including regulators and permitting agencies, as well as financial staying power on the part of investors.

While Schatz characterized natural gas as a “bridge fuel” in Hawaii’s transition to renewable energy, experts note that financing for infrastructure and return on that investment takes time, even decades.

Gas-fired power projects are usually assumed to have a lifespan of 40 years or more, according to a 2010 by the Aspen Environmental Group.

“It may turn out that these investor and cost recovery expectations are not compatible with the idea of using natural gas merely as a bridge fuel,” according to the report.

Oil Refineries Could Be Impacted

A move toward natural gas could cause financial issues for the state’s two oil refineries which are already facing decreased sales as the state moves toward renewable energy. And that could mean the price of gasoline, marine and jet fuel could be higher.

Tesoro announced that it was pulling out of the Hawaii market in January and is currently looking for a buyer. Lance Tanaka, a spokesperson for the company, would not comment on whether the state’s push for natural gas could hurt its ability to sell its refinery.

Both Chevron and Tesoro import crude oil that is then refined into fuel oil for electricity generation and other petroleum products. Hawaiian Electric Co. accounts for about a quarter of the refineries’ business. And the loss of business from The Gas Co. would also decrease sales.

Civil Beat reported earlier this year that the loss of one or both refineries could make the state more vulnerable to disruptions in the global oil supply and that importing an already refined product for use in the electric companies’ generators could be more costly.

“We already have a refinery that is up for sale and another that is kind of skidding,” said Jeff Mikulina, executive director of Blue Planet Foundation, which is working to eliminate the state’s reliance on fossil fuels. He said that the loss of the refineries could drive up costs for gasoline, diesel and other oil products used in the state’s generators.

But both refineries are already facing an uncertain future with the push for clean energy, noted Fesharaki.

“So they can see the future regardless of whether LNG is coming or not,” he said.