Renewable Energy Installations Accelerate In Hawaii
By Megan Strand and Jake Seligman
Recent legislation, regulatory support and utility-backed initiatives are accelerating Hawaii’s deployment of renewable energy. The state’s lofty mandate is to achieve 70% renewable energy generation by 2030. The state has an innovative approach to reaching this target.
The state moved in late June to create an on-bill financing program under a new Hawaii statute called Act 211. The Act establishes an initial framework for the on-bill financing of renewables and energy efficiency improvements for utility customers.
The state will issue bonds to raise money to help utility customers cover the upfront costs of installing renewable energy systems and making efficiency improvements. Customers will pay back the costs through their utility bills.
Meanwhile, the state Public Utilities Commission has been under orders since April to implement new cost recovery mechanisms to encourage renewables by discouraging fossil fuel generation and decreasing energy costs. (Unlike on the mainland, renewable energy in the islands generally costs less than electricity from fossil fuels.)
The Hawaiian Electric Companies, including the Hawaiian Electric Company (serving Oahu) and its subsidiaries, the Maui Electric Company (serving Maui, Lanai and Molokai) and the Hawaii Electric Company (serving the island of Hawaii), have been working on complementary measures. One such measure is to implement interconnection procedures more favorable to distributed solar development by replacing system-wide de facto caps on solar installations at the circuit level with a forecast modeling approach.
In a related move, the Hawaiian Electric Company filed with the PUC in June 2013 for a waiver of the normal competitive bidding requirements. This would expedite five renewable energy projects on Oahu, representing 64 megawatts of renewable energy generating capacity, via direct negotiation with the respective developers.
Hawaii’s renewable portfolio standard and the Hawaii Clean Energy Initiative set a goal of generating 70% of electricity from renewable sources by 2030: 40% from local generation and 30% from energy efficiency and conservation measures.
In 2012, the Hawaiian Electric Companies generated 13.9% of electricity from renewable energy. The next RPS milestone is 15% renewable energy by 2015. The integrated resource planning report and action plan, which the Hawaiian Electric Companies filed on June 28, projects 18% renewable energy by the end of 2013. The steps described below support such progress.
The Hawaii PUC issued a decision and order in February 2013 concluding that an on-bill financing program for electric utility customers in the state is viable, subject to seeing how the state would implement it.
Act 211, which became law in late June, allocates an initial $100 million that the state will raise by issuing bonds to cover the deployment of green infrastructure equipment. “Green infrastructure equipment” includes rooftop solar, demand response technology and energy-use-reduction and demand side-management infrastructure.
The GEMS program, as it is called, will be administered by the Hawaii Green Infrastructure Authority, a new state agency created under the Department of Business, Economic Development & Tourism (DBEDT). (“GEMS” is short for Green Energy Market Securitization.) Loans to cover the upfront costs of such green infrastructure equipment may be made directly to electric utility customers by the Authority using funds drawn from the bond proceeds. Loans may also be made, at what are expected to be favorable interest rates compared to what is on offer from private lenders, to private entities, such as residential solar developers, who may then lease or provide green infrastructure equipment to customers.
The GEMs program is financed through a combination of up to $200 million in state-issued revenue bonds and on-bill repayment, supported by two separate funds operating in tandem.
One fund is a green infrastructure special fund into which net bond proceeds and on-bill repayments are deposited by the utilities. The utilities will serve as billing and collection agents for both the green infrastructure fee (assessed on all customers) and on-bill repayments. Amounts in this special fund will be used for customer loans and to pay principal and interest on the bonds.
With on-bill financing, participating customers recognize immediate utility bill savings by requiring less energy from the grid. In order to repay the upfront cost of the equipment, each participant pays a portion of its savings back to the utility, which deposits this amount into the special fund. The participant pays a lower bill than before the improvement, but does not realize full energy bill savings until the equipment is completely paid off.
The second of the two funds is a green bond infrastructure fund into which a green infrastructure fee assessed on each customer’s utility bill, regardless of whether such customer is a participant in the program, will be paid. This fee is expected to replace a portion of the existing public benefits fee assessed on all utility customers.
The up to $200 million in bonds that the state will issue as part of the GEMS program will be repaid out of the green infrastructure fee and be secured by the green bond infrastructure fund that is the repository for those fees.
DBEDT and the utilities will work with the Hawaii PUC to issue the financing and program orders necessary to implement the GEMS program. The fully-designed GEMS program, including specific customer loan terms and details on bond financing, is expected to roll out in early 2014.
The Hawaii PUC has been instructed to consider four incentives and mechanisms to promote renewable energy as it sets utility rates.
First, it is supposed to establish a shared cost savings mechanism that would induce utilities to reduce energy and operating costs. Under traditional rate regulation, utilities are paid based on their costs and asset base. Energy costs are passed through to customers directly. The Hawaii PUC could encourage utilities to reduce costs by allowing utilities to keep some of the savings from transitioning to cheaper energy sources. In Hawaii, this means shifting away from oil generation and toward renewables.
Second, the Hawaii PUC must consider establishing a mechanism to allow utilities to recover stranded costs from accelerated retirement of fossil fuel power plants. Hawaii is
the most oil dependent state in the nation. Hawaii’s reliance on oil electricity generation is the main reason its average electricity rates are the highest in the country, at over 36¢ per kWh.
Because utilities earn a return on their investments in assets, Hawaii’s electric utilities are generally incentivized to keep running existing oil plants, and to keep making investments to prolong their useful lives. If a plant is prematurely retired, any unrecovered investment in it is lost, or stranded.
By establishing a stranded cost recovery mechanism, the PUC would allow a utility to recover its stranded investments in old oil power plants in rates. This would assist the ongoing transition toward renewables. The Hawaiian Electric Companies plan to decommission six oil-fired generating units on Oahu, Maui and the island of Hawaii in 2014.
Third, the Hawaii PUC will consider allowing utilities to earn a higher return on investments in modern transmission and distribution infrastructure than they do for investments in fossil fuel power plants. (Most of the investment in renewable generation comes from the private sector.) This requirement would allow utilities to benefit from investing in renewables indirectly, by earning more for building the infrastructure necessary for renewables, than for prolonging the life of fossil fuel generators.
The last measure that the Hawaii PUC must consider is a renewable energy curtailment mitigation incentive mechanism. Currently, renewable energy projects can be curtailed at times of low demand when curtailing baseload fossil fuel generators would be inefficient because of on-and-off cycling costs. The PUC is supposed to encourage utilities to avoid curtailing renewable energy when it is available and cheaper by sharing cost savings with the utility.
In addition to pursuing grid modernization and lowering energy costs, the Hawaiian Electric Companies are changing how they manage interconnection. Distributed renewables, namely solar, will benefit. The new approach to interconnection is one of the country’s most progressive.
Under the existing interconnection process, the utilities essentially implemented de facto caps on renewable penetration. Out of grid balancing concerns, proxies or limits are set at 15% of peak load and 50% of minimum load (75% for certain smaller systems) on a given circuit. If a new project like a distributed solar system fails to pass these screening limits, then the utility has to perform an interconnection requirements study. These studies, which test the impact of a project on the grid, are costly and time consuming and serve as a barrier to solar development.
Under a revised “proactive approach” currently before the Hawaii PUC in docket no. 2011-0206, Hawaii’s utilities will analyze solar growth potential and interconnection issues on an ongoing basis, rather than reacting to individual projects. The proactive approach should lead to more accurate and higher circuit penetration limits. Projects are also less likely to stall because of the time it takes to perform an interconnection study. This new approach should accelerate the already rapid growth of distributed solar in the islands, which saw 12,215 new systems added in 2012 on the islands of Oahu, Maui, Lanai, Molokai and Hawaii.
The Hawaii Electric Company (HECO) filed an application for waiver of the existing competitive bidding rules with the Hawaii PUC in June. HECO is required currently to hold a competitive bidding process for power purchase agreements for projects that are larger than 5 megawatts.
The waiver application covers five utility scale projects on Oahu. Each project was recently selected by HECO through a competitive bidding process.
HECO issued a solicitation for low-cost projects in February 2013, requiring proposed projects to have a levelized energy price below 17¢ a kWh over a 20-year power purchase agreement term (before any Hawaii state tax incentives are taken into account) and an anticipated commercial operation date no later than the end of 2015. This aligns with the previously discussed RPS benchmark of 15% renewable energy by 2015.
Out of 25 submissions, HECO selected five projects with an aggregate nameplate capacity of 64 megawatts: four PV solar projects, ranging in size from 6 megawatts to 15 megawatts, and a 21-megawatt wind project. The average levelized energy price for the selected projects is 15.934¢ a kWh. This is roughly 29% lower than HECO’s on-peak avoided cost of 22.491¢ a kWh in June 2013.
According to HECO, PUC approval of the waiver request will allow HECO to negotiate directly with the five developers for renewable energy at prices significantly lower than average costs, and put the projects on a fast track to commercial operation in order to take advantage of available tax credits. HECO is requiring the project developers to agree in the final power purchase agreements to allow 90% of any Hawaii state tax incentives or credits on the projects to be passed through to ratepayers.