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Building a Smart Grid

Roadblocks on the Path to Hawaii’s Energy Future

(page 2 of 3)

Capital Problems

Not all the challenges facing the smart grid are technical. Rebuilding something as complex as the grid – even a small one like MECO – will be fabulously expensive. “As an example,” says Chris Reynolds, “the meter that’s on a typical home costs about $25. For the smart grid demonstration project in Wailea, we’re looking at a cost of about $400 per meter.” He adds that MECO has about 67,000 meters.

Freedman takes an even broader perspective. “According to DBEDT,” he says, “we’re about to spend $16 billion – that’s billion with a ‘B’ – on capitalization for this energy transition.” He notes that, although the goal is to reduce our $7 billion annual expenditure on fossil fuel, that’s still a fantastic upfront investment. “The question is how are we going to capitalize this. This is a major issue for the state that hasn’t been addressed by anyone, really.”

It’s certainly hard to see how the Hawaiian Electric companies can afford it. “I don’t know what we’re counting in the smart grid,” Freedman says, “but if you include the (undersea, interisland) cable, then you’re talking a billion dollars just to hook up Lanai and Molokai. If you’re talking, like the utilities, about hooking up Maui as well, then you’re talking several billion dollars. Well, the whole capitalization of all the electrical infrastructure right now is something on the order of $3 or $4 billion.” Even if, as now seems likely, the state decides to finance the construction of the cable, Freedman points out, ratepayers will have to repay the debt. It’s still a capital liability on the utilities books.

One of the ironies in this smart grid bagatelle is that many of the policy initiatives intended to promote more renewables further aggravate the capital problems for the utility. For example, the financial arrangements that underpin distributed generation – power-purchase agreements, net-energy metering, feed-in tariffs –all appear on the utility’s books as liabilities. Each, after all, is a commitment to purchase power from customers. The feed-in tariff, at least, also shows up on the income side of the books because the customer still buys the same amount of energy as before. With net metering, the customer’s PV output simply rolls his meter backwards, reducing his bill.

Also, most of the utility’s assets – and collateral – traditionally were in its physical plant: generators, power lines, substations. “Looking forward,” Freedman says, “it looks like they’re not going to be increasing generation anymore. The new generation is going to be in renewables, it’s going to be distributed, and loads are going to met by energy efficiency. And none of those things have the utility’s own capitalization.” Hawaiian Electric Industries is publicly traded; it’s hard to see how these changes in capitalization won’t affect the company’s market valuation. “In the long run,” Freedman says, “the utility’s business model is being challenged a little bit by the whole move to renewables.”

A local smart grid is thus far from inevitable, even with Hawaii’s incomparable resources for renewable energy; even with an ambitious agenda for reform in the Hawaii Clean Energy Initiative; and even with a cadre of utilities and citizens committed to the idea of a clean, distributed power generation.

Up at the Kaheawa wind farm, the students from Horizons Academy gather in the scant shade of a giant turbine to pose for a group photograph. Squinting into the late morning sun, the children smile for the camera. It’s supposed to be a picture of Hawaii’s future – the children and the energy that will power their adult lives – but that future is not yet fully in focus.

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