I’m starting to become a policy wonk, which was not in my plan!

Monday I testified at the legislature on behalf of resolution HR 254/HCR 504, which urges the Public Utilities Commission (PUC) to rule that all Schedule Q contracts should receive the full “avoided cost” pricing.

It was important to me to testify about this because the PUC is changing its interpretation of how to pay for electricity that is sold to the electric company under “Schedule Q.”

Schedule Q applies to small power producers that generate less than 100 KW. One hundred kilowatts is enough power to continuously run approximately 15 refrigerated containers, each 40 feet long.

Schedule Q always paid “avoided costs” of oil—in other words, the oil costs that would have been used to generate the electricity.  For instance, if HELCO charges 32 cents per kilowatt hour (KWH) for electricity, and 23 cents of that cost was for oil costs, then HELCO would pay small power producers 23 cents per KWH for any electricity they bought.

Now the PUC says that the rate the utility pays should not be tied to “avoided costs” of oil. We worry that this will mean lower returns. If that’s the case, people will not want to undertake alternate energy projects.

Because the “avoided costs” in my example of 23 cents/KWH is much less that the 32 cents/KWH that HELCO charges customers, Schedule Q actually encourages innovation as people seek ways to maximize the use of the electricity generated. I know we ask ourselves everyday: “How else can we use the excess electricity from our hydroelectric project?”

I feel it’s important that Schedule Q continue to be interpreted as-is, because then we are keeping the money for electricity in our own economy. It does not end up making electricity cost more. And why pay foreigners for oil, when you can keep the money here with our own people? And if farmers happen to take advantage of this rate, maybe more people will farm, and then we will have the added benefit of becoming more food secure here in Hawai‘i.”

Electric Bills Stun

Just a couple days ago, the Hawai‘i Tribune-Herald’s front page headline read: “Electric bills stun isle residents; Fuel surcharge adds $76 to typical home’s cost.”

Electricity rates are rising, and food costs and everything else related to oil is also getting more expensive. A couple weeks ago I spoke about food and fuel to the Hilo Bay Rotary Club, and one person there told me that he owns a service station snack shop operation. His electric costs, projected to be $70,000 just a few months ago, are now projected to cost $100,000 annually. He told me that his profit margins are shrinking because he can only raise his sandwich prices so much.

If there is an opportunity for him, and others, to sell electricity under Schedule Q, it will benefit all of us. If not, we will just keep importing more foreign oil to generate the electricity he could have produced.

Recently I looked at a modeling exercise done by Dr. Makena Coffman at the University of Hawai‘i Economic Research Organization. It was titled “Oil Price Shocks and Hawai‘i’s Economy.”

I told her of the Alternate Energy Ag Farm Loan Bill that we are pushing through the legislature. She said she was glad to hear there are “renewable energy for agriculture” bills going forward, because, she said:

“Initiatives like that are exactly what we need to mitigate a drawn-out recession. Oil price shocks historically have short-term effects that dissipate over time, largely because it induces some innovation and behavioral change. Getting local Ag through all this really depends on its ability to decouple the sector from oil as an input.”

Schedule Q plays a crucial part in enabling behavioral change.

Biofuels

More and more I hear that biofuels will play a big part in our energy future. First we need to realize that biofuel production is farming.

Here is a quick and dirty estimation of what a farmer can earn farming biofuel:

Say a barrel of oil costs $100 and each barrel contains 42 gallons; that means each gallon of oil is worth $2.38. Each gallon weighs approximately 8 lbs., so each pound of liquid oil costs 30 cents. If it takes three pounds of palm nuts, jatropha, kukui nuts, macadamia nuts or whatever to make one 1 lb. of oil, then the most the farmers could expect as a return is 10 cents per pound.

No farmer would farm biofuels, or anything else, for 10 cents/lb., or even 20 cents/lb. And the Big Island’s terrain and weather do not lend themselves to big agriculture.

I really don’t think biofuel could even take care of transportation, let alone generate electricity. So we really need to think about relying more on electricity for most of our energy needs.

Here is an analysis that says that when oil hits $162 per barrel we will go into a recession much like the recession of the 70s. http://www.financialsense.com/Market/cpuplava/2007/1003.html.

The exact price that will trigger this to happen is not important. What is important is that when we go into recession because of high oil prices, it will be very difficult to come out again – because demand will be outstripping supply by larger and larger amounts. And oil prices will continuously rise. How we fare will largely depend on how successful we have been in decoupling ourselves from foreign oil.

Schedule Q is one way to incentivize people to decouple from foreign oil.

As I have said before: “The kahuna not going save us.”