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UPDATED The promise of biofuels was that they would deliver a locally produced, renewable fuel source. The question is increasingly: at what cost?

As Hawaiian Electric Co. has committed in recent weeks to drive down electricity rates that are three times the national average, there are signs that biofuels may not be able to compete with other energy sources. Yet, the utility could be locked into long-term commitments to buy the fuel at a fixed cost.

What would this mean to consumers? “If electricity prices fall, I suspect we are going to get stuck,” said , an energy expert and executive at renewable energy company, Merica International. By that, he means stuck paying for fuel that carries a significant premium.

HECO has signed four contracts with local biofuel companies in recent years. Three are being scrutinized by state regulators, and the fourth, for algae biofuel, seems to have stalled.

Biofuels have played a central role in the utility’s renewable energy strategy since the state and HECO signed the Hawaii Clean Energy Initiative in 2008. Such fuel can be derived from a variety of plant feedstocks, by converting it into oil. It makes for an attractive option for HECO because the “clean fuel” can be dropped into the utility’s generators, just like petroleum. And local companies seeking to produce biofuel have touted the economic benefits of the energy projects, saying they will create local jobs and bolster the Hawaii economy.

Tens of millions of dollars have been invested in local start-up projects, but there has been little success so far and some of the technology remains unproven.

HECO signed contracts with the biofuel companies before it received any assurance that their projects would be successful in delivering the fuel. Part of it was to help stimulate a market for local biofuels.

But amid growing pressure from the Hawaii Public Utilities Commission to reduce electricity rates, HECO has stated in its new long-term energy plans for Oahu, the Big Island and Maui County, that it will pursue liquefied natural gas, retire oil-fired generators that involve costly upkeep and solicit lower-cost wind and solar energy sources. In a changing energy landscape, where there’s a new emphasis on consumer cost, it’s not clear how biofuels will fit in.

Update HECO spokesman Peter Rosegg said that the utility will seek future sources of biofuel at the lowest price possible.

“Biofuels can be part of that portfolio of renewable resources and a component in reducing the cost of the firm generation needed to support variable renewable energy that now must be largely met with fossil fuels,” he wrote by email.¹

The Aina Koa Pono contract was rejected by the PUC three years ago because commissioners said the price of the fuel was too high and not in the best interest of consumers. Aina Koa Pono and HECO subsequently negotiated the price of the project down by $125 million, but the fuel from that bill would nonetheless add to customer electricity bills based on current projections for the price of oil.

Update Rosegg said that while the Aina Koa Pono contract would initially raise electricity rates by about $1 a month for Big Island and Oahu residents, over the course of the 20-year contract the fuel is expected to produce cost savings. (The biofuel would only be used by the Big Island utility, but HECO is seeking to spread the cost of the fuel to Oahu ratepayers as well, to lessen the bill impact.)

The PUC could rule on that contract as early as next month, according to Kenton Eldridge, a founder of Aina Koa Pono, who declined to comment further because the matter is still before the commission.

Meanwhile, Hu Honua Bioenergy and Hawaii Bioenergy are awaiting final decisions on their contracts with HECO as well.

Joel Matsunaga, chief operating officer at Hawaii Bioenergy, warned that lengthy deliberations before the PUC are driving up his project costs.²

“The longer it takes to get approval, the higher the cost the project ends up being in the long term,” he said, noting that the company is currently paying for the land it intends to use for biofuels.

In September 2011, HECO announced in a press release that the project would be located on Grove Farm land on Kauai, but Matsunaga said that the location and feedstock are still being determined.

He also said that he expected the cost of the biofuel to be competitive, but noted that this depends on where energy prices go in the future.

John Sylvia, CEO of Hu Honua, didn’t return a call for comment about his company’s hopes of turning the former Pepeekeo Sugar Mill on the Big Island into a biomass facility for locally grown feedstocks such as eucalyptus. (If approved, the facility is expected to supply about 10 percent of the Big Island’s electricity needs.)

HECO also announced an agreement with Phycal in September 2011 for the purchase of algae biofuel from a farm in Wahiawa on Oahu. However, the contract between Phycal and HECO has not been submitted to the PUC for approval, according to the HECO spokesman.

“We remain in contact with Phycal and are hopeful they will move ahead on their plans,” Rosegg said by email. “Once there is more definite and detailed information, we will apply to the commission.” 

Phycal received a $48.5 million grant from the U.S. Department of Energy to develop a 34-acre pilot farm, which was expected to break ground in late 2011 or early 2012. The agreement with the power company requires the biofuel to be delivered to the utility starting in April 2014, according to a HECO press release.

Kevin Berner, CEO of Ohio-based Phycal, did not return Civil Beat’s calls for comment, and it’s not clear if the project is still moving forward. The Honolulu phone number listed on Phycal’s web site is no longer in service.