Reform Incentives, Transform the Grid: Making Good on Hawai'i's Renewable Energy Ambitions

Abstract

In 2008, Hawai'i's electric utilities and state government committed to transforming Hawai'i' into a world leader in the adoption of renewable energy. The characteristics of Hawai'i's electricity system – including high imported fossil fuel costs – appeared to make this project more technically feasible, economically attractive, and politically popular in Hawai'i' than in any other state. And yet, a decade later, Hawai'i's electricity grids remain less renewable than those of many mainland states (such as California), and continue to emit 35% more carbon per kilowatt-hour than the U.S. average. Why? In this article, I trace the disappointments of the last decade to incentives problems endemic to Hawai'i's electricity law. Specifically, Hawai'i's attempt to hybridize the traditional vertically integrated utility model with pro-competition policies encourages independent power producers to take the lead in developing transformative renewable projects, but leaves them reliant on traditionally regulated utilities with an incentive to favor their utility-owned projects. In the resulting stalemate, both utilities and independent power producers propose transformative projects, but neither has the power to bring those projects to completion. The options for improving incentives in Hawai'i's electricity sector fall into three categories: (1) performance-based ratemaking; (2) industry restructuring; and (3) cooperatization or municipalization. I conclude that performance-based ratemaking, wheeling-based restructuring, and ISO-based restructuring are unlikely to furnish a sound framework for Hawai'i's electricity sector. By contrast, a simpler generation divestiture reform based on the Transco model of restructuring has potential, as do governance changes like cooperatization or municipalization. By clearing out the unnecessary incentives conflicts that have hampered progress over the last decade, these policies could allow Hawai'i' to make good on its renewable energy ambitions over the next decade.