When cooking up its Green Energy Market Securitization (GEMS) program, the Department of Business, Economic Development, and Tourism seems to have followed the recipe for growing mushrooms.
You know the one: keep them in the dark and feed them …
The Legislature authorized the program in 2013, with passage of Senate Bill 1087. As Act 211, it was supposed to make rooftop solar and other energy-saving technologies available to sectors of the public otherwise unable to afford them.
So, two years later, and with DBEDT apparently poised to roll out the first stage of GEMS, it is not too soon to take a look at how the program is playing out.
From our close review of the program – as close a look as the overseers at DBEDT would allow, that is – it has evolved in ways that would probably shock SB 1087’s many enthusiastic supporters.
Given the way that GEMS has been implemented, cynics might be forgiven for thinking that the program has nothing at all to do with putting the state on track to reach its clean energy goals. Count us among them.
Lack of Transparency
The public was left completely in the dark as the GEMS program was being shaped following passage of Act 211, even though the act calls for a five-member board to run it. With the Hawai`i Green Infrastructure Authority’s meetings subject to the Sunshine Law, the public should have had some way to track the state’s progress in designing GEMS. But, apparently in the interest of moving the program forward with all due haste, DBEDT was given leave to “exercise all powers reserved to the authority” until such time as the board was “duly constituted.”
That didn’t happen until October 2014, nearly five months after the fundamentals of the program – including a 20-year irrevocable fee on every Hawaiian Electric customer – had been proposed to the Public Utilities Commission, a month after the PUC had approved them, and days before a scheduled bond float of $150 million. By the time the HGIA met for the first time on October 23, not only had the horse fled the barn, it was in the next county.
As for the HGIA, it elevates the term “rubber stamp” to heretofore unscaled heights. When presented with a proposal to shift $144 million from state management to that of a commercial bank “custodian,” it did so without a peep on the sole basis of a poorly written, three-paragraph summary from a DBEDT staffer.
At least two of the HGIA members, of course, knew full well the details of GEMS. By law, the head of the state Energy Office (Mark Glick) and the head of DBEDT (Richard Lim) are also members of the HGIA. And they – together with investment bankers, utility executives, and private business consultants – had been talking for months, working out how best to put the GEMS program in place.
But best for whom?
Driven by Investors
Hawai`i’s Clean Energy Initiative has as its stated goal achieving “70 percent clean energy by 2030, with 30 percent from efficiency measures and 40 percent coming from locally generated renewable resources.”
But GEMS has no place for efficiency, which, after all, is of little concern to the high-flying capital markets that helped DBEDT mold the program. What they want is to park their money in investments that will qualify for the generous state and federal tax credits associated with expensive photovoltaic systems and related technology.
In a world governed by common sense, efficiencies would be the first order of business. The size – and expense – of a PV system can be substantially reduced with a few low-tech, less costly measures that reduce demand. Solar water heating, for example, not only cuts down on the need to generate electricity, it also stores hot water for days, reducing not only daytime demand (when sunlight is usually plentiful) but also peak loads.
But common sense is in short supply at DBEDT. When it unveiled the first phase of GEMS in late December, the “loan products” it proposed were exclusively to “expand access and affordability of … a solar photovoltaic (PV) system” for nonprofits or homeowners unable to finance it otherwise. The potential pool of nonprofits is limited by the requirement that loans be in the principal amount of no less than $150,000 and that the nonprofits either own their own premises or have a long-term lease. As for consumers, if they are able to access financing through customary means, it is difficult to see how the GEMS loan product will be appealing. With interest rates “capped” at 9.999 percent, homeowners with a good credit history will probably be able to find a bank willing to front a loan for them directly, allowing them to take the tax credit themselves. People who are poor credit risks, and who, presumably, will be burdened with an interest rate toward the north end of the scale, will probably not find the GEMS “consumer loan product” very attractive. The lower-tech measures that could be of far greater benefit to them are still beyond their reach.
And what of renters? Condo owners who might want to devise a collective system?
Maybe, if the institutional investors just walk away from the program once the tax credits end, the needs of these groups will finally be addressed.
Carts before Horses
As to that escaped horse, it was probably being led away by the cart.
Any homebuyer knows that you don’t take out a mortgage until you close on the purchase of your house.
DBEDT, however, committed the ratepayers of Hawaiian Electric utilities to a 20-year, $150 million bond months before it was ready to issue the first GEMS loan. (It still isn’t ready, in fact.)
You might think that DBEDT would have parked bond proceeds in an account where earned interest would at least partly offset bond obligations. Even at 1 percent a year, by now the $144 million in proceeds from the GEMS bond could have generated $600,000 in interest. As it turns out, DBEDT is getting not one percent, but one one-hundredth of a percent – and no one has the sense to be embarrassed by this. (To make up for that, apparently, DBEDT is charging exorbitant rates for copies of GEMS-associated contracts. One can only wonder what they are hiding.)
DBEDT managers say they can’t get a higher rate since the funds need to be liquid – so that, as the HGIA was told last fall, they can immediately start “making weekly loan purchases and money transfers to a number of GEMS capital partners.”
Maybe they really believed at the time that all the pieces required for their “loan products” to work – including resolution of grid interconnection issues and approval of on-bill financing – would soon be in place.
If so, they were not paying attention. Although DBEDT’s two GEMS-related dockets moved with warp speed through the PUC process, the dockets relating to on-bill financing and utility requirements for PV installations are still walking with lead boots.
As the head of DBEDT and, for the first year and a half following approval of SB 1087, the head of GEMS, Lim might have been expected to be a bit more aggressive in protecting the state’s interest. But when you get right down to it, the state has no interest in ensuring that the proceeds of the GEMS bond, which will be paid off by ratepayers, not by any agency of the state, are prudently managed.
Throughout this whole process, in fact, no one seems to have had the ratepayers’ interest at heart – a fact that probably goes far toward explaining its perversion.
Moving Forward
It is too late to walk back the $150 million bond. But the state could still take steps to make the GEMS program deliver on the promises made when Act 211 was passed.
- First, the Public Utilities Commission should stop stalling on two dockets where decisions are well past due: on-bill financing and requirements for interconnection of photovoltaic systems. Until these issues are resolved, expansion of PV systems, whether financed through GEMS or any other means, is pretty well on ice.
- Second, the HGIA must finish putting in place all the components of the loan program so at least some customers can start benefiting.
- Third, the HGIA should immediately launch a program to make low-interest loans available to utility customers wanting to install technologies other than photovoltaic systems.
- Fourth, the Legislature should require — if not this year, then next – the HGIA to go through the rule-making process instead of leaving approval of its “loan products” in the hands of the PUC. While this may be cumbersome, it has the virtue of requiring rule-making agencies to air their plans at public hearings. Had DBEDT been forced to defend its GEMS program to the public, the outcome would probably have been far different – and far more efficient.
- Fifth, the Legislature must eliminate the procurement process exemption for GEMS. Why it granted this in the first place is a puzzle. Perhaps if competitive bids had been received for the “custodial services” contract granted to Bank of New York Mellon, the state might be getting more than negligible interest on its $144 million in deposits there.
One thing is certain: until meaningful, substantial structural changes are made in the GEMS program, it will be for ratepayers a huge burden for decades to come, with little measurable benefit to them or to the state. At this point, it is even questionable if the institutional investors, for whose aid and comfort the program seems to have been designed, will be able to draw any advantage from it.
Well done, DBEDT!