TODAY’S STUDY: Transforming Hawaii’s Energy Future

Transforming to Deliver a More Affordable Clean Energy Future for Hawai‘i; HECO’s 2016 Power Supply Improvement Plan

April 2016 (Hawaiian Electric Companies)

Executive Summary

SHARED COMMITMENT TO A CLEAN ENERGY FUTURE

With an unprecedented 100% Renewable Portfolio Standard, Hawai‘i’s clean energy leadership is clear and indisputable. Achieving this critical goal will require a comprehensive transformation of our island power grids. A multidimensional planning process that requires near-term actions to set the foundation for the plan and a recognition that flexibility is critical as the specifics for the long-term continue to change as technology and costs continue to evolve. While there are many views on the best path to achieve our 100% RPS goal, there is notable unity in Hawai‘i in recognizing the critical importance of addressing the negative economic, environmental and energy security impacts of our state’s dependence on imported petroleum oil. Most of all, that shared mindset will be required for our entire community – government, business, developers, community and environmental groups, utilities, and customers – to come together to address the issues that must be resolved to achieve this goal for our island home.

A Dynamic Energy Environment

Changes that took place in the 18 months since we filed our Power Supply Improvement Plans in 2014 demonstrate how dynamic our Hawai‘i energy environment is. Consider just a few of the changes: ■ Passage of Act 97, which extended a 40% RPS requirement in 2030 to a 100% RPS in 2045. ■ Dramatic decline in the price of fuel oil by more than 75%, creating significant changes and uncertainty in forecasted costs, and much lower bills. ■ Hawai‘i Public Utilities Commission (Commission) Decision & Order No. 33258 ending the Net Energy Metering (NEM) program for new solar customers and concurrently creating two new replacement programs: Customer Grid-Supply and Customer Self-Supply. ■ Valuable ongoing experience with increasing levels of distributed generation (DG), including the testing and installation of advanced inverters to allow greater amounts of DG and reduce the need for distribution upgrades. ■ In addition, NextEra Energy and the Hawaiian Electric Companies have proposed a merger which is pending before the Commission. Energy technology and policy is constantly evolving and customer needs and expectations are changing.

Therefore, our planning in this context of change must include: Actions to be taken in the immediate future to take advantage of available resources and achieve near-term energy goals, satisfy customer preferences, and provide a hedge against uncertainty in future oil prices. Near-term steps that help us further understand, explore, and develop longer-term resources. Long-term energy planning using the best information available today but recognizing the limitations on insights into the future. The actions identified in the 2025–2045 time period are less certain, and are expected to be further optimized and adjusted based on changing circumstances in future planning updates to reach our 100% renewable energy goal in other ways. Preservation of a reliable and resilient power grid. Hawai‘i’s small and islanded power grids make this especially challenging and even more critical to achieve. The resiliency of our grid and reliability of service is vital for our economy, for our military partners, and for critical infrastructure. Our customers expect and deserve it.

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Key Results—What Are the Takeaways?

There are several notable high level results from this Power Supply Improvement Plan Update:

1. Our companies’ project we can exceed the RPS requirements as defined under the current law and can also chart a path to achieve true 100 percent renewable energy for electricity by 2045. The Additional Insights section (below) highlights some considerations and challenges to meeting these bold goals.

2. Customer participation through the use of market-based distributed energy resources (DER) plays a critical role. We project that the capacity of installed DER, largely private rooftop solar, can grow by about 370 percent compared to our 2014 PSIPs.

3. We can essentially re-invent our power system—by modernizing generation to be more flexible and efficient, transforming our transmission and distribution system to be smarter and better integrate distributed private and larger scale renewables, and obtain the energy security and environmental benefits from a 100% renewable future—all while keeping electric rates stable and relatively flat on a real dollar basis.

4. Liquefied Natural Gas (LNG) as a transitional fuel, combined with more efficient and flexible modern generation, provides the best path with the lowest cost and lowest carbon footprint to reach Hawai‘i’s 100%renewable energy goal. Additional Insights Despite future uncertainties, long-term planning should be viewed as providing useful directional insights.

Some of these insights include:

a. Our long term portfolios must include a diverse set of resources. With greater use of renewable energy, a diverse mix of renewable resources provides greater assurance of self-sufficiency and energy resiliency as weather patterns vary and other unforeseen events occur.

b. Dispatchable, firm renewable energy (currently biomass and geothermal) on Maui and Hawai‘i Island are key to achieving high levels of renewable energy at reasonable costs. This suggests that policymakers, government agencies, and private organizations with interests in energy, agriculture, water use and land use, need to be involved in developing clear policies and rules that will determine the feasibility of these options for the future.

c. With their more abundant open spaces, the neighbor islands will lead the way and in fact, Moloka‘i and Lāna‘i are projected to reach a 100% RPS by 2030, while Maui and Hawai‘i Island could achieve a 100% RPS by 2040. This will help O‘ahu, with its larger population and energy needs challenged with limited land and on-island renewable resources, meet the 2030 70% RPS goal. To reach 100% RPS in 2045, O‘ahu appears to need additional resources beyond those available on island (e.g., currently, offshore wind, biofuels, neighbor island renewables transmitted via interisland cable). These alternatives need to be studied further to better understand their respective risks and relative costs.

Such endeavors require the efforts and input of our entire state, not just the utility. Policies, environmental permits, community and cultural issues and concerns must be addressed. Changes in state policies, statutes, and regulations governing resource development may also be needed. And as circumstances change in the years ahead, the alternatives for O‘ahu may be revised. In the context of the potential need for resources to be shared amongst the islands to cost-effectively achieve 100% renewable energy, the concept of consolidated rates for the Hawaiian Electric Companies should be evaluated.

d. Planning must be looked at as a continuous process—a process in which analysis is updated for changing circumstances, new technologies, changing economics, and new policies. Action plans and long-term directions should be reviewed continuously, especially given the rapid change in the clean energy sector.

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KEY RESULTS: THE PATH TO 100% RENEWABLE ENERGY

Each Preferred Plan considered a number of factors. Electricity Rate and Bill Impacts.

Recognizing the importance of affordability to our customers, limiting overall costs and annual rate increases was a high priority. Customer Choice. To meet the diverse needs of our customers, all plans must facilitate customer choice and aim to be fair to all customers. Future Fuel Prices. Because of changing fuel markets, each plan must be evaluated for different oil, biofuel, and LNG price scenarios. Infrastructure Investments.

To ensure electric grid resiliency and meet our state’s clean energy goals, all approaches require investment in new infrastructure by customers, developers, and the utility. Service Reliability and Resiliency. To meet the needs of our customers and our state’s economy, the modernized grid must be reliable and resilient to ensure all resources remain connected, even during severe or abnormal weather conditions. Flexibility. Recognizing our dynamic energy environment and the benefits for our customers, plans must adapt to accommodate future technology and pricing breakthroughs. Minimizing Risks. Our Preferred Plans minimize the risks—financial, implementation, and technology among them—inherent in any plan of this magnitude Under the current Preferred Plans, our tri-company consolidated renewable energy mix in 2045 could be the amounts listed in Table ES-1.

Figure ES-1 shows the total capacity of renewable energy included in the Preferred Plans on a consolidated basis. By 2045, the total capacity of renewable energy on the systems is more than double the total of the system peaks to be served. Again, while instructive for directional planning, this prediction of a renewable resource mix 30 years into the future is certain to evolve as we adapt to take advantage of rapidly evolving technology, policies, and energy options.

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Achieving the RPS

Under the current Preferred Plans, RPS will exceed requirements as our companies move toward 100% renewable energy by 2045 (Figure ES-2).

The calculation of the RPS per the law does result in values over 100%. To emphasize that we are committed to achieving 100% renewable energy in 2045, Figure ES-3 shows the renewable energy as a percent of total energy including customer-sited generation. Figure ES-4 provides a long-term view of a path towards 100% renewable in 2045. Under the current Preferred Plans, the possible path as our tri-companies move toward 100% renewable energy by 2045 is as follows:

Future Alternative Fuels: During the last intervening years in the transition to 100% renewable energy, potential fuels at this time could include biofuels, LNG, oil, other renewable options or a mix of options. Given rapidly evolving energy options and technology, the exact fuel mix is difficult to predict today.

Multiple Benefits Provided from Demand Response Programs

Demand Response (DR) programs—market-based programs that incentivize customers for change in electricity usage patterns—play a key role in integrating variable renewables. In addition to providing capacity and load shifting, DR can also provide other ancillary services, such as regulating reserves. Load shifting DR programs to encourage more usage at times when solar generation is most abundant appears to provide the most value.

Distributed Energy Resources Plays a Critical Role

Economic, market-based DER contributes a significant portion of the resource mix, resulting in a 250% increase over current levels and a 370% increase over the starting point level in our 2014 PSIP. The current PSIP Update assumes market-based levels of DER for O‘ahu, Hawai‘i Island and Maui and higher levels of DG-PV for Moloka‘i and Lāna‘i, as those smaller islands are leading the rest of the state in developing new solutions for DG integration challenges. However, because the market-based DER is expected to largely be variable solar PV, the energy contribution of market- based DER, while still significant, is smaller than the megawatt capacity suggests. This is the assumption for now, but as we continue to analyze the long-term options for addressing the challenge of closing the gap to 100% renewable energy on O‘ahu and as technologies and their prices change, the option of pursuing a higher DG-PV strategy on O‘ahu in later years should be kept open.

Community-Based Renewable Energy

(CBRE) Enables Broader Customer Benefits Community-Based Renewable Energy (CBRE) could also provide a significant contribution to the attainment of 100% renewable energy, and allow many other customers to participate and benefit from renewable energy options like solar PV who otherwise cannot or would not. Liquefied Natural Gas (LNG) as a Bridge Fuel Provides the Most Affordable Pathway to 100% Renewables There appears to be alignment among most stakeholders that Hawai‘i must achieve the 100% RPS goal in a cost-effective manner. Our PSIP Update confirms that LNG and generation modernization (as described below) offer the best path forward in the transition to 100% RPS.

LNG is a prudent choice because it will displace 80 percent of our imported oil use between 2021-2040, keep electric rates lower than they were 18 months ago, lessen price volatility, and significantly reduce our carbon footprint. This is true across the range of fuel prices evaluated in this PSIP for O‘ahu, Maui and Hawai‘i Island combined. The Governor has stated his concern that using LNG will divert focus away from a 100%renewable energy future. We understand our responsibility in working with others throughout the state not to let that happen. We believe we can move aggressively towards 100% renewables with LNG as a transitional bridge fuel through 2040, limiting permanent infrastructure while allowing for variable demand and lessening the cost burden on customers as we make the transition to renewables.

Although, as noted below, the current LNG option and the significant benefits it can provide customers is available only under the merged scenario, we would still be interested in pursuing LNG in an unmerged scenario if an option is developed and provides meaningful cost savings, reliability and environmental benefits for our customers. However, the merged scenario below provides a clearer and more immediate path for delivery and earlier benefits for customers.

Furthermore, the case utilizing LNG and the advanced combined cycle generator produces fewer carbon dioxide emissions than the accelerated renewable generation planning scenario by over 4 million tons during the 30-year planning period. These results demonstrate the value of efficient and flexible generation utilizing clean burning natural gas along with renewable generation additions while meeting the 100% RPS targets by 2045. Not only will customers realize the lowest overall cost, but they will also receive the long-term benefits of a cleaner environment.

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The Need for Flexible and Efficient Generation Is Needed

As the Commission has recognized in its Inclinations paper, “the Hawaiian Electric Companies should continue to evaluate opportunities to retire and replace older, high cost plants with new resources with valuable characteristics that provide required support services cost-effectively to maintain a reliable electricity grid with high levels of renewable resources.”1 One example of a flexible and efficient generator is an advanced combined cycle unit planned for O‘ahu. Such generators have many benefits -- fast starting, cycling, fast ramping, fuel efficiency, low emissions, and improved reliability— all of which lower operating costs for customers. The flexibility of these units supports the variable nature of renewable generation and the transition to 100% RPS, as well as reduces the size of costly energy storage systems. When sited at existing generating stations, they can take advantage of existing infrastructure, minimizing the impact to the local community. On Maui and Hawai‘i Island, existing dispatchable combined cycle generators already provide a considerable amount of flexible generation, allowing higher levels of renewable generation on those islands. Use of LNG in these generators can enhance their flexibility while lowering costs and reducing emissions. LNG was not found to be cost-effective for use on Moloka‘i and Lāna‘i.

The PSIP Update results indicate that for Oahu, the lowest overall cost and lowest emissions are achieved in the case that includes a large-scale advanced combined cycle facility to replace older steam generators at the Kahe power plant combined with the use of LNG. Updated generation facilities will also make our overall system more resilient as a result of siting the new facilities outside of recently revised tsunami inundation zones. More specifically, with input from NextEra Energy, we have identified a 383 MW 3x1 combined cycle facility to replace Kahe Units 1–4 which could use LNG as a substitute for oil. This scenario—only possible as a merged entity—results in lower costs to customers over the planning period of cases evaluated, supports an increasing amount of renewables, reduces environmental emissions, and improves grid reliability and security.

Furthermore, this advanced 3x1 combined cycle option appears to be advantageous with or without LNG, but is clearly better when using LNG as a transitional fuel source to get to a 100% RPS. In fact, when utilizing both LNG and the advanced combined cycle option on O‘ahu, carbon dioxide emissions would be reduced by over 4.1 million tons by 2023. This is the equivalent of removing over 110,000 passenger vehicles from the road each year.

Again, such a scenario combined with other projects and programs envisioned for this same timeframe (such as Smart Grid, Schofield Generating Station projects, and others) would require the financial backing and development capacity of the merged organization.

Grid-Connected Microgrids on Military Installations Enhance Statewide Resiliency In Hawai‘i, there is a growing and important role for distributed generation at military sites to enhance energy resiliency and security.

Microgrids on military sites that operate in complementary fashion interconnected to the utility grid: ■ Provide resiliency and energy security for all our customers by using diversified locations for firm generation. ■ Provide enhanced energy resiliency and security on military bases that are key to national defense and emergency or disaster response. These bases house airfields, ports, logistics, manpower, and housing necessary for major humanitarian response missions. ■ Help ensure our state is capable of supporting military core missions and therefore remains a key sector of our economy.

In addition to the Schofield Barracks Generating Station previously approved by the Commission and well into the development process, this PSIP Update also includes plans for similar distributed generation on Marine Corps Base Hawai‘i and Joint Base Pearl Harbor-Hickam.

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FIVE-YEAR ACTION PLANS: SETTING A COURSE FOR OUR RENEWABLE FUTURE

Hawai‘i is well on its way to meeting its energy goals as the Hawaiian Electric Companies exceeded a 23% RPS in 2015, substantial progress from 9% achieved in 2008, the year Hawai‘i broke new ground with bold new renewable energy goals under the Hawai‘i Clean Energy Initiative. The five year Action Plans will keep up the momentum.

Again, given the uncertainty and the future changes inherent in planning for a 30-year horizon, it’s most important to focus on five-year action plans that keep up our progress, support the integration of increasing amounts of variable energy and reduce risk. The Action Plans are designed not to foreclose any future resource option…

Investments for Hawai‘i’s Renewable Future

Achieving 100 percent renewable energy takes substantial capital investment. All options, whether the Preferred Plans or other candidate plans, require substantial amounts of capital, compensated for by customer savings over time. The total capital investment over the next 30 years for Hawai‘i is estimated to be $25.8 billion (in nominal dollars), of which the utility may invest 53%, or $13.6 billion. The balance may be made by project developers, customers, and the State (via tax incentives).

However, with this investment, we are able to modernize generation to be more flexible and efficient, transform our transmission and distribution system to better integrate both distributed and larger utility-scale renewables, and obtain the energy security and environmental benefits by achieving a 100% renewable future, all while keeping electric rates stable and relatively flat on a real dollar basis. Figure ES-5 through Figure ES-8 depicts the average monthly residential bill for O‘ahu over the planning period…

WORKING TOGETHER FOR HAWAI‘I’S RENEWABLE ENERGY FUTURE

Although our energy environment is changing more rapidly than ever, what is clear is that Hawai‘i’s 100% RPS goal is achievable, technology and pricing will continue to change to make this possible, and foundational investments in more flexible generation and use of cleaner fuels in the transition can be an important step as increasing amounts of variable renewable energy resources are added on our path to 100% renewable energy. Most importantly, achieving the groundbreaking 100 percent renewable energy goal for our state will take our entire community working together to make the difficult decisions needed to achieve this clean energy future for our state.

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