{"id":9723,"date":"2017-06-01T17:37:16","date_gmt":"2017-06-01T17:37:16","guid":{"rendered":"http:\/\/www.environment-hawaii.org\/?p=9723"},"modified":"2018-06-07T00:32:16","modified_gmt":"2018-06-07T00:32:16","slug":"hawaiian-electric-revives-renewable-projects-it-cancelled-while-nextera-deal-was-pending","status":"publish","type":"post","link":"https:\/\/environment-hawaii.org\/?p=9723","title":{"rendered":"Hawaiian Electric Revives Renewable Projects\u00a0It Cancelled While NextEra Deal Was Pending"},"content":{"rendered":"

Nearly a year after NextEra\u2019s proposed takeover of Hawaiian Electric was voted down by the Public Utilities Commission, four of the renewable energy projects that were axed by Hawaiian Electric \u2013 at the behest of NextEra, some claim \u2013 have seen new life breathed into them.<\/p>\n

Three are utility-scale solar farms on O`ahu. The fourth is the power plant on the Hamakua Coast of the Big Island that is designed to burn biofuel \u2013 mainly eucalyptus logs grown on former sugar plantation land stretching from Ka`u to Hamakua.<\/p>\n

Whether these projects move forward is now up to the PUC, which has indicated it intends to move quickly. And time is of the essence if the projects are to be eligible to take advantage of tax credits by the end of next year, when the window of eligibility begins to close, ultimately shutting altogether at the end of 2021.<\/p>\n

Meanwhile, the PUC shot down Hawaiian Electric\u2019s proposed $86 million purchase of a 60-megawatt naphtha-fueled power plant near Honoka`a, on the Hamakua Coast of the Big Island. Hawaiian Electric has indicated it intends to challenge that decision.<\/p>\n

 <\/p>\n

* * *<\/i><\/b><\/p>\n

The Solar Farms<\/i><\/b><\/p>\n

 <\/p>\n

The three O`ahu projects were originally proposed by subsidiaries of First Wind Solar Portfolio, LLC, a Boston company. The largest was a 49 megawatt solar farm to be built at Kawailoa, next to the wind farm that First Wind had already built there. A second project was for a 45.9 MW facility at Waiawa. The smallest of the three was a 14.7 MW facility, Lanikuhana, to be built near Mililani.<\/p>\n

In January 2015, SunEdison, a company based in St. Louis, purchased First Wind. By December, however, it was experiencing serious financial problems and identified an investor, D.E. Shaw Renewable Investments, Inc., that was both willing and able to take over the three O`ahu projects, all of which had been given the green light by the PUC in late July of that year.<\/p>\n

Initially, HECO indicated it was willing to work with SunEdison and Shaw, offering in January 2016 conditions to resolve missed milestones in the power purchase agreements (PPAs). Yet after SunEdison and Shaw accepted those conditions, HECO reneged on them in February and the agreements were terminated. A report prepared by PUC staff found that by that time, the developers had paid $31.4 million to HECO to cover its costs of linking the projects with the utility grid and had spent more than $42 million on other costs, including land purchases and leases, design, and the construction.<\/p>\n

In April, SunEdison did file for bankruptcy. In October, in a sale approved by the bankruptcy court, NRG Renew, LLC, a subsidiary of NRG Energy, Inc., purchased all three of the O`ahu projects for $2 million.<\/p>\n

The following month, NRG and HECO began negotiating new power purchase agreements. By the end of January, terms had been worked out for the Lanikuhana and Waiawa facilities, and HECO was formally seeking PUC approval for these amended PPAs. Not until April was the third and final amended PPA, for Kawailoa, completed. It was submitted to the PUC on April 21.<\/p>\n

On May 10, the PUC ordered the new PPAs be consolidated into one new docket in an effort \u201cto promote administrative efficiency.\u201d<\/p>\n

All the projects had originally been approved under a waiver from the requirement that independent power producers engage in competitive bidding before being awarded with a power purchase agreement with the utility. In submitting the revised PPAs, HECO indicated it was assuming that the earlier waivers could be transferred from the previous developer to NRG. If that would not be allowed, HECO asked that the PUC grant an \u201calternative waiver request.\u201d<\/p>\n

In its May 10 order, the commission declared that \u201cHECO\u2019s presumption\u201d of a still-valid waiver for the three projects \u201cis incorrect.\u201d Thus, it will be considering the alternative waiver request.<\/p>\n

The PUC then went on to identify the \u201ctwo issues that will govern this consolidated proceeding.\u201d First, has HECO \u201cmet its burden of proof in support of its request to waive NRG Renew LLC\u2019s \u2026 projects from the commission\u2019s competitive bidding requirements.\u201d And second, \u201cwhether HECO has met its burden of proof in support of its request for the commission to approve\u201d the PPAs for the three projects.<\/p>\n

HECO and the consumer advocate \u2013 the only other party to this proceeding \u2013 were instructed to work out a procedural order, including a schedule, by May 31.<\/p>\n

The revised PPAs call for HECO paying less for energy than what was specified in the original agreements. In the case of the Kawailoa project, the contract price is 12.37 cents per kilowatt hour, representing a 5.5 percent reduction from the original PPA. For Lanikuhana, the price is 13.5 cents per kWh, a 3.9 percent decrease from the original agreement. And for energy produced by the Waiawa plant, HECO will pay 12.81 cents per kWh, a reduction of 9.6 percent from the price in the original PPA.<\/p>\n

 <\/p>\n

* * *<\/b><\/p>\n

Hu Honua<\/i><\/b><\/p>\n

 <\/p>\n

\"\"<\/a>
Work has begun anew at the Hu Honua biofuel plant near Pepe`ekeo, Hawai`i.<\/figcaption><\/figure>\n

 <\/p>\n

It didn\u2019t take a bankruptcy for Hu Honua to force Hawaiian Electric back to the bargaining table, but a federal lawsuit that the company brought against Hawaiian Electric Industries, its Big Island subsidiary Hawaiian Electric Light Company (HELCO), NextEra, and Hamakua Energy Partners, which owns a naphtha-fueled power plant near Honoka`a, probably had a role in nudging the electric utility in the direction of renewed negotiations.<\/p>\n

Hu Honua Bioenergy, LLC, had been rehabilitating a plantation-era power plant near Pepe`ekeo, north of Hilo, intending for it to generate 28 megawatts of electricity by burning biofuel grown on former plantation lands in Hamakua and Ka`u. In 2012, it executed a power purchase agreement with Hawaiian Electric, which the PUC approved in December 2013. The base rate for power was set at this time at 21.5 cents per kilowatt hour.<\/p>\n

In 2014 and 2015, Hu Honua faced a number of challenges. These included labor disputes, unpaid contractors, and liens and foreclosure actions from numerous creditors and suppliers. The company fell behind on its construction schedule and missed several milestones in its agreement with Hawaiian Electric.<\/p>\n

On March 1, 2016, HELCO cancelled the power purchase agreement with Hu Honua. By then, Hu Honua had sunk $120 million into rebuilding the plant, which was 50 percent complete, it said, adding that it had identified $125 million in financing to finish the work within another 14 to 16 months.<\/p>\n

Hu Honua appealed to the PUC to overturn Hawaiian Electric\u2019s decision, but, as Hu Honua was not a party to the original docket, the PUC demurred in an order issued last September.<\/p>\n

At that point, Hu Honua undertook to restart negotiations with Hawaiian Electric. Yet the fall talks did not bear fruit and, in December, Hu Honua sought redress in federal court. It asked for recovery of the $120 million already invested in the plant, plus $435 million in lost profits, for a total of $555 million in actual damages. Hu Honua also claimed it was owed treble this amount since the conduct of HELCO and the other defendants violated federal antitrust laws and state laws against unfair methods of competition.<\/p>\n

Hawaiian Electric responded to the lawsuit with a request that the court force Hu Honua into arbitration. A hearing on that motion was set for May 18. In advance of that deadline, Hu Honua and Hawaiian Electric appear to have worked frantically to iron out a deal.<\/p>\n

By May 5, they had generally agreed to the power purchase agreement submitted on May 9 to the PUC.\u00a0 Among the other terms included in that agreement was the condition that the PUC would need to approve it no later than July 3, a date that, in a filing with the court, Hu Honua attorney Barry W. Lee stated was \u201ccritically important as Hu Honua must begin to ramp-up construction of its facility in July so that construction can be completed and the plant operational no later than December 2018.\u201d<\/p>\n

Judge Seabright then agreed to Hawaiian Electric\u2019s request to postpone the hearing on Hawaiian Electric\u2019s motion to dismiss until August 7. At that time, Seabright is to hear NextEra\u2019s motion to dismiss. If Hawaiian Electric and Hu Honua have a final deal by then, Hawaiian Electric and HELCO will be removed as defendants, but NextEra and Hamakua Energy Partners will remain in the litigation.<\/p>\n

A New Rate Structure<\/i><\/b><\/p>\n

When the PUC approved the power purchase agreement between HELCO and Hu Honua back in 2013, the agreed upon price that HELCO would pay over the 20-year term of the contract was 25.3 cents per kWh, which, adjusted for inflation, would be 28.6 cents today. This represents the levelized cost of electricity, which is basically the total cost of building and operating the plant over the life of the contract (including return on investment) divided by total energy output. In the more recent PPA, the levelized cost is said to be 22.1 cents per kWh, which reflects, in part, the longer term over which the construction costs may be amortized. The cost to the consumer would be about 7 percent higher, or around 23.6 cents per kWh. (These figures come from a May 5 letter to HELCO from Hu Honua that is included in the revised power purchase agreement.)<\/p>\n

In other power purchase agreements approved recently by the PUC, including those for the O`ahu solar farms, rates have been far lower. As Life of the Land\u2019s Henry Curtis has pointed out in his Ililani Media blog, \u201cKaua`i Island Utility Cooperative (KIUC) agreed to pay Tesla 13.9 cents per kilowatt hour for its fully dispatchable solar+storage project, which went online earlier this year. The system will allow solar energy to be delivered in the evening and at night.\u201d<\/p>\n

Hu Honua rejects the comparison with the KIUC agreement, stating that the \u201cbattery+solar\u201d projects \u201cdo not provide the same level of firm dispatchability as Hu Honua and are not capable of replacing fossil fuel baseload generation.\u201d<\/p>\n

\u201cFor example,\u201d Hu Honua goes on to say, \u201cfor the [Kaua`i AES plant] \u2026 with pricing at 11 cents\/kwh, the 20 MW of storage capacity reportedly would only be dispatchable for a five-hour duration, whereas Hu Honua is capable of being dispatched 24\/7.\u201d<\/p>\n

Hu Honua acknowledges that when its plant is included in HELCO\u2019s rate base, the result \u201cwill likely be higher than the estimated \u2018open market\u2019 cost of a \u2026 long-term resource portfolio that does not include Hu Honua.\u201d That is a result of the company seeking \u201cpreferential rates\u201d for its energy \u2013 that is, rates over and above what would be established through open competition.<\/p>\n

What the PUC is now going to have to decide is whether Hu Honua will receive these preferential rates.<\/p>\n

In 2009, a new state law allowed for preferential rates \u2013 rates, that is, that are higher than those obtainable on the open market \u2013 to be charged for electricity generated in connection with agricultural activities. \u201cIt is the policy of the state to promote the long-term viability of agriculture by establishing mechanisms that provide for preferential rates for the purchase of renewable energy produced in conjunction with agricultural activities,\u201d according to the new law, codified as Section 269-27.3 of Hawai`i Revised Statutes. \u201cThe public utilities commission shall have the authority to establish preferential rates for the purchase of renewable energy produced in conjunction with agricultural activities.\u201d<\/p>\n

Because of that clause, giving the PUC the authority to establish the preferential rates, HELCO was unable to arrive at anything more than a proposed pricing framework. As noted in the May 5 letter of Hu Honua, \u201cWith respect to the [power purchase agreement], except for the price reduction amendments set forth in section 5.1 therein, Hu Honua and the [Hawaiian Electric] companies have agreed to all of its provisions\u2026.\u201d<\/p>\n

While it\u2019s true that the proposed price schedule yields a per-kWh cost less than that of the first power purchase agreement, a table that is included in that May 5 letter suggests that many of the factors that were folded into the cost have greatly increased from that first PPA.<\/p>\n

The cost of the fuel has dropped \u2013 from a high of around 24 cents in 2015 to just 8 cents today. But the \u201cvariable O&M [operations and maintenance] component\u201d more than tripled, going from three-tenths of a cent per kWh in 2012 to 99\/100ths of a cent. The fixed operations and maintenance component went from $7,727.27 a month for each megawatt of energy produced to $25,000. And the \u201ccapacity charge rate,\u201d which is a fixed amount the utility is charged for each megawatt of power generated over a month, went from $4,364 in 2012 to $54,000.<\/p>\n

At the time of the filing, HELCO had not done an analysis of the impact of the PPA on customers\u2019 bills. This was to be submitted by May 24.<\/p>\n

The commissioners\u2019 initial response to the revised agreement with Hu Honua throws cold water on some of the assumptions that HELCO was hoping it would agree to.<\/p>\n

As with the revised PPAs for the O`ahu solar farms, Hawaiian Electric was hoping that it could again have the Hu Honua agreement qualify as a waiver project. But the presumption that this applies to the new PPA, the PUC stated in an order issued May 17, \u201cignores the conditions placed upon the waiver\u201d that was first granted in 2008. Under that waiver, HELCO was required to file \u201ca fully executed term sheet within four months of the date\u201d the waiver was granted (November 14, 2008) and to demonstrate that the price paid by HELCO to Hu Honua \u201cwas fair and in the best interest of the ratepayer.\u201d<\/p>\n

\u201cBecause the timing and pricing structure of the new PPA makes compliance with these conditions impossible, the commission concludes that HELCO\u2019s presumption is incorrect,\u201d the order stated.<\/p>\n

With respect to the \u201cpreferential rates\u201d relating to energy produced as a result of agricultural activities, the commission made it clear that it was not inclined to rush a decision on this: \u201cA request for such preferential rates filed pursuant to HRS \u00a7269-27.3 has never been granted by the commission, and merits a thorough review.\u201d<\/p>\n

The order set out at some length the problems that the PUC has had with HELCO in getting the utility to submit an approved long-term power supply improvement plan. The most recent version, filed last December, \u201cdoes not reference Hu Honua\u2019s proposed biomass fuel within the 2020 period,\u201d the order stated, even though the \u201ccommercial operation date deadline of Hu Honua\u2019s facility is completion by 2020.\u201d<\/p>\n

All told, the commissioners wrote, there is a \u201ccritical need for sufficient, up-to-date resource planning on HELCO\u2019s part.\u201d<\/p>\n

In opening a new docket for the Hu Honua agreement, the commissioners identified three issues to be determined: whether HELCO had met its burden of proof in support of its waiver request; whether it could justify its request for approval of the new PPA; and whether Hu Honua had met its burden of proof in support of its request for preferential rates. \u201cThe three issues set forth \u2026 do not constitute an exhaustive list of the issues to govern this proceeding,\u201d they went on to say.<\/p>\n

 <\/p>\n

* * *<\/b><\/p>\n

Hamakua Energy Partners<\/i><\/b><\/p>\n

 <\/p>\n

One of the defendants in the Hu Honua lawsuit is Hamakua Energy Partners (HEP), which owns a naphtha-fueled power plant in Honoka`a. When the Hu Honua power purchase agreement was filed with the Public Utilities Commission back in 2012, HEP sought status as an intervenor, arguing that the commission needed to consider what Hu Honua\u2019s approval would mean for HEP, especially if power production at HEP were curtailed as a result of Hu Honua\u2019s operation.<\/p>\n

Then in December 2015, HELCO announced that it had reached an agreement with the owners of HEP, ArcLight Capital Partners, LLC, calling for HELCO to purchase the 60 MW plant for around $86 million. In a press release, the utility said that by purchasing the Honoka`a plant, HELCO customers \u201cwill save from the elimination of payments to HEP under the current contract for making energy available 24 hours a day,\u201d among other things.<\/p>\n

HELCO asked the PUC for formal permission to purchase the plant in February 2016. The utility said the company had given it right of first refusal to buy the facility in the event HEP wanted to sell, as it now did. The Division of Consumer Advocacy weighed in, saying that the purchase should be approved, but the price should be no more than $60 million.<\/p>\n

On May 5, the commission issued its order disapproving of the purchase. The PUC determined that HELCO had not demonstrated any ratepayer benefit, that its assumption that the plant, built in the late 1990s, would remain useful through 2040 was \u201cspeculative,\u201d and that the purchase price had not been shown to be reasonable.<\/p>\n

Twelve days after the commission issued its order, HELCO asked that it be allowed to ask for an enlargement of time in which to request a reconsideration \u2013 to May 31.<\/p>\n

\u201cThere are changed circumstances with respect to the purchase price,\u201d HELCO stated. In mid-April, \u201cHamakua Energy Partners \u2026 and Hamakua Land Partnership, LLP [owner of the underlying land] \u2026 approached the companies [HELCO and its parent, Hawaiian Electric Industries] to explore ways to accelerate a favorable decision regarding the proposed HEP sale transaction. These discussions resulted in a materially lower purchase price that allows for full depreciation of the companies\u2019 investment in HEP by 2030 and provides significant savings to customers. The [PUC order] was filed on May 5, 2017, before any new purchase price was finalized. On May 17, 2017, the seller and the companies agreed on a price of $\u25a0 million.\u201d<\/p>\n

Although the original purchase price was stated in previous HELCO filings and press releases, this time, the price was blacked out. In a footnote, HELCO states, \u201cPublic disclosure of the proposed price would adversely affect seller\u2019s negotiations with other potential buyers and cause substantial competitive harm to seller should the amendment to the purchase agreement not be approved. Public disclosure of the confidential information could also harm the companies\u2019 relationship with existing and potential vendors, place the companies at a competitive disadvantage in current and future negotiations, and may discourage vendors from doing business with the companies and making confidential disclosures to the companies in the future.\u201d<\/p>\n

The new price, HELCO argued, \u201cincreases and solidifies the significant benefits to consumers over the remaining term of the HEP [power purchase agreement] through 2030, which essentially allays the vast majority of concerns with the transaction raised by the commission, the Division of Consumer Advocacy, \u2026 and participating\u00a0 parties.\u201d<\/p>\n

— Patricia Tummons<\/i><\/b><\/p>\n

For Further Reading<\/i><\/b><\/p>\n

The following articles are available on the Environment Hawai`i <\/i>website, www.environment-hawaii.org<\/a>:<\/p>\n