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March 27, 2014

Remember Our Future

Categories: Energy | Speech

Remarks by Kyle Datta, General Partner

Presented at “Electric Utilities: The Future is Not What It Used to Be” Conference & Exhibition - Maui, Hawaii - March 27, 2014

Aloha and Good Afternoon to Everyone.

I was at Governor Ariyoshi’s 88th Birthday party earlier this month, and when this great leader took the stage, he reminded us all to “Remember Our Future”. What he meant was we, the leaders of the today, have a moral obligation to care about, and plan for, our children’s future.

His words touched my heart. This is why we go to work every morning at Ulupono, it is our mission to help catalyze a better future for the children of Hawaii. It made me realize that sometimes, we can get so caught up in the work that we are doing, in the technical challenges and legal nuances, that we forget why we are working. Isn’t the reason we are all here, working so hard to define the future of utilities in this state, because we want a better future for our children?

IF we work together, we can have an energy system that is lower cost and lower risk for everyone, more profitable for the utility, with half the carbon intensity. We could stabilize our costs at the equivalent of ~$80 per barrel, equalize rates across counties, and spur tremendous economic growth.

To reach that prosperous, sustainable future for our electric and gas utilities, we need to be honest about the three big elephants in the room that are here today that could prevent that future: the Leadership to Act; the Impeding Rate Increase, and whether we use LNG to support or thwart renewables.

We have a gifted leadership team running our state’s utilities. Dick Rosenblum at Hawaiian Electric, David Bissell at KIUC, Alicia Moy at Hawaii Gas, and Ray Starling at Hawaii Energy. You’ve heard from many of them today, but without Alicia Moy of Hawaii Gas, this conversation is incomplete. The cadre of new young executives at these companies is stellar. The last time we had an executive team assembled of this caliber, Jack Burns was Governor and we built a refinery. Our energy leadership is long on intellect, but the currency of leadership is trust.

Unless we have the leadership at the PUC to focus on the real issues, define the holistic new regulatory compact, and take decisive action, then this is just theory. The cultural problem is not culture of the energy companies. The cultural problem we face is our dysfunctional politics of blame.

As business and regulatory leaders we must accept responsibility for the mess that we are in, instead of casting blame on others. Unless we accept responsibility, we will never build trust that we need to work together. I’ll lead by accepting responsibility for the elements of the Energy for Tomorrow package that we are have to improve: decoupling and Net Energy Metering (NEM). I invite the final two speakers at this conference to have the leadership to accept responsibility for the upcoming rate increase.

If every time an energy executive is this state comes up with an innovative idea, and we immediately distrust and criticize them, the corrosive effect on the morale of this new talented young executive core will be so great, that they will leave.  Give them a chance to earn our trust with their actions. This does not mean I agree with everything our state’s utilities say, but I respect them when I disagree.

We have the largest rate increase in Hawaiian Electric’s history facing us in 2016 or 2017, $160 million dollars per year—that’s $400 to 500/per customer each year[1], due to need to switch fuels from fuel oil or Ultra Low Sulfur Diesel. We fiddled away so many years, that now we are racing helter skelter to bring LNG in to prevent that.[2] We are so desperate to get out of this mess, that if someone from the Middle East offered us a herd of swimming camels that could show up before EPA does, we’d take it. Because, you know, camels have carried these goods for many years, and best of all, the regulators have no jurisdiction over camels.

If we bring in LNG under contracts that lock us in to 800,000 tons per year for 10-15 years, either directly or with unilateral options to extend, then we are thwarting the renewable future. There will be no renewable or distributed energy future, if a contract for this volume goes forward. If our best plan is to send thousands of camels down Farrington Highway to feed an aging dinosaur, then I think we have utterly missed the point of how gas can transition us to a new renewable future.

If we were serious about using gas as a transition, then we would be planning to retire all those dinosaurs and replace them with a combination of highly efficient flexible plants, combined cycles and cogeneration, owned by the utility and its customers respectively, that were well matched to the operational requirements of large and distributed scale renewables for system flexibility. The fuel savings alone would pay for the capital of these new plants. We need less than half the volume of gas due to greater conversion efficiency. Even that volume of gas needed would rapidly decline, and the infrastructure to deliver it would be flexible enough to disappear altogether when we reached our renewable future. If we did these things, Hawaii’s energy sector would find tremendous support for building a bridge to a future.

Let’s discuss the regulatory compact for Utility 2.0. We all like music, but our current business and regulatory model is as antiquated as a string quartet. The 21st Century business and regulatory model is an orchestra with audience participation and far more diversity and complexity. That’s why we need the energy sector and its regulators to get on the same hymn sheet and start harmonizing.

Hawaii is already undergoing the transformation from consumer to prosumer, utility customers that produce and consume power, like you just heard from Parker Ranch. This profound prosumer shift means that the largest customers are able to produce conventional and renewable power at a lower cost than the utility can generate from its obsolete power plants.  Smaller customers can produce power at less than the utility charges to deliver power to them. Both could afford to buy their own storage, leave the grid and still be better off. But they, and society, are better off if they stay. We are already at grid parity. The customer revolution has arrived in the form of conservative ranchers, the military, and large users. They will be bringing lawyers, not picket signs. The revolutionaries are at the palace gates, and we are ill prepared as business and regulatory leaders for the reality that is already here.

The old regulatory thinking that no renewable energy, energy efficiency, or distributed generation initiative can occur unless all ratepayers benefit from it, is based on the principle that equality is more important than economics. Never mind that it was the prosumer’s capital at risk, not the utility or the public, which is why the prosumer deserves the rewards.

For those regulators and energy leaders that choose to embrace the challenge of this century, we need to work together to create the incentives for a new utility partnership with its customers, we need the PUC, our utilities, and customers to address the 21st Century Regulatory Compact. There are six key issues:

  • Full recovery of utility distribution system investment and stranded asset recovery
  • Allowing the utility to play on the customer side of the meter, and the customer to play on utility side
  • Using the market to build out the renewable infrastructure to interconnect our archipelago and the right LNG infrastructure to support renewables, distributed generation, and transportation
  • Reinvesting in the utilities’ smart grid with meters, switching, storage, ancillary services, forecasting, and control room upgrades
  • Pricing reduction in volatility, rather than ignoring it, and making the customer suffer
  • Performance incentives for the utility based on achieving our renewable energy goals efficiently, so that we share the savings from every renewable contract between the utility and its ratepayers whenever it is cheaper than the fuel that it avoids in that year 

Finally, give the PUC enough resources and budget so that it can build its capabilities to make good decisions in a timely manner. The regulatory compact is very complex, and given the billions of dollars that are at stake, we are being foolish not to invest a few million to get it right. So many times we go to conferences and nothing changes because we take no action. If you do nothing else on Monday morning, call your legislature to support SB 2948.

If we embrace the future together, we could have power supply costs initially come down to 12-16 ¢/kWh for Oahu, Maui and Hawaii, and ultimately drop lower to 9-12¢/kWh as more efficient generation units and renewable facilities come on line. The increased grid investment costs would not only stabilize HEI’s balance sheet, but also bring customers into the energy system as participants. The lower fuel costs more than offset the increased grid costs, so everyone’s rates would be far lower and less volatile. Microgrids that increase the resilience of each county in the face of war or disaster would provide power and ancillary services to the system; our islands would be interconnected; billions of dollars in private sector funds would pour into our state, and billions more would stop leaving the state. We would have lower cost energy to support water pumping for development and irrigation, abundant local food, high technology companies, and jobs that our worthy of our children’s greatness. This is the grand bargain for our energy future.

We need to act now. There will be no call from the Governor, no call from the Senator. We are the people we have been waiting for.

We have a moral obligation to care about, and plan for, our children’s future.

Remember Our Future. Mahalo.

Download a PDF version of these remarks.

Watch the panel discussion where these comments were shared:

 

 

[1] Based on Hawaiian Electric IRP Fuel filing divided by 296,000 HECO customers, 81,000 HELCO customers

[2] The cost for gasification, transport and regasification is ~ $10-12/MMbtu plus Henry Hub costs of ~$5/MMbtu in the medium to long run, thus $15-17/MMBtu landed in Honolulu. This is lower than $20-22/MMBtu for LSFO, far lower than USLD.  Both oil and gas are equally volatile.