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Replacing oil with liquefied natural gas as a “bridge fuel” to generate much of the state’s electricity likely would save Hawaii billions of dollars, according to a projection from the Ulupono Initiative.
If Hawaii spends five years putting the necessary infrastructure into place and then uses LNG for 15 years, there is an 85 percent to 90 percent chance it would save the state money, according to the sustainable investment firm’s managing partner Murray Clay.
The savings could be substantial. In that 20-year window, he calculated, there is a 50 percent chance the state would save $7.3 billion or more.
That projection would amount to an average annual savings on electricity of at least $367 million, or nearly $31 million per month.
On the negative side, there is a 10 percent likelihood that switching to LNG as a bridge fuel would cost Hawaii $1.7 billion or more, according to Clay’s analysis, which is based on a risk-forecasting model that uses complex Monte Carlo simulations.
Hawaii Gas recently unveiled a plan to use LNG as a bridge fuel for 15 years, based on a contract that would guarantee peak LNG use at the start and then reduce LNG as renewable energy, such as solar or wind, ramps up enough to replace it. HECO is working on its own mid-term LNG plan.
Projections of oil and LNG prices have recently made a fool of nearly all forecasters, which is one reason Civil Beat asked Ulupono’s Clay to update his comparative analysis based on declining prices.
The gas company’s plan, based on a tender they have chosen, promises to reduce fuel costs by about $1.3 billion over 15 years by replacing oil with LNG. Company executives say the actual savings could be far higher depending on the evolution of fuel prices and the cost of meeting various clean air requirements.
Projections of oil and LNG prices have recently made a fool of nearly all forecasters, which is one reason Civil Beat asked Clay to update his comparative analysis based on declining prices.
His analysis is intriguing partly because it offers probabilities based on past performance, while also incorporating a wide array of factors, to tabulate possible savings or losses.
Joseph Boivin, the senior vice president for business development and corporate affairs at Hawaii Gas, said the Ulupono projections jibed with those of his own company.
“My take away from viewing this was that it was a different way of looking at a comparison of fuels, but it ended up having similar conclusions (to ours),” Boivin said.
Hawaiian Electric had much the same take. “Our prior estimates of savings associated with LNG are consistent with Ulupono’s current results,” said HECO spokesman Darren Pai.
His company is in the process of updating its own projections to account for the rapid drop in oil prices, as well as the renewable energy goals the state revised upward last year.
Plenty of critics oppose using LNG for power generation in the islands. Environmentalists don’t like it because it is a fossil fuel and they want the state to move away from fossil fuels like oil. Others point to what they see as unnecessary financial risks from LNG.
“Imagine if Hawaii makes this bet on LNG with oil-linked pricing, and the price of oil shoots back up,” said Richard Wallsgrove, program director of the Blue Planet Foundation, a clean energy advocacy organization.
The result, he said, would be that the price of imported LNG would rise even though the cost of production would stay the same.
“So somebody in the supply chain will be getting a huge windfall. That windfall won’t make its way back to customers,” predicted Wallsgrove. “So why are customers saddled with the risk?”
Before taking the recent Hawaii Gas proposal seriously, he said, “we should be asking whether the gas company is willing to shift the risks to shareholders, rather than to customers.”
What are the risk factors for LNG to be a bad investment, large or small?
LNG sales are generally indexed — although at a lower price — to the cost of Brent crude oil. While those prices often run parallel to each other, they can diverge, as occurred after the Fukushima nuclear disaster in 2011. Japan suddenly needed a huge infusion of replacement energy, so it bought into markets that sold the low sulfur diesel blend of oil that Hawaii uses to generate most of its electricity, resulting in a large hike in the price of power in the islands, Clay said.
If the opposite happened and the price of Brent oil — and therefore LNG — dramatically outpaced the price of the oil Hawaii buys, Clay explained, “You could be indexed to a higher price; you might wish you hadn’t.”
High electricity prices have facilitated the rise of alternative energy sources in the islands, but concerns about climate change also have driven support for the shift among policy makers, as long as the transition to renewable sources can be done affordably.
Gov. David Ige announced at a renewable energy summit last summer that he would actively work against efforts to import natural gas to generate electricity.
That speech came as a big surprise to Hawaii Gas, according to Boivin, who said Ige’s predecessor, Neil Abercrombie, encouraged Hawaii Gas to investigate the feasibility of LNG.
Ige reiterated his anti-LNG stance to Civil Beat twice in recent months, even as oil prices continued slipping. His fundamental argument: replacing one fossil fuel with another would amount to a distraction from the state’s broader renewable energy goals, and the economic benefits of LNG have been evaporating with every new drop in oil prices.
He readily acknowledged that if oil prices rebound far enough, it would cost Hawaii — and he would expect to get flack for his stance.
“You could make a strong case for incorporating (LNG) as a transition, or you could make a strong case that we shouldn’t do it. It is one of those decisions whether there is no clear-cut consensus for what is best.” — Gov. David Ige
“You could make a strong case for incorporating (LNG) as a transition, or you could make a strong case that we shouldn’t do it. It is one of those decisions whether there is no clear-cut consensus for what is best,” the governor said in an interview in his office at the end of October.
That’s why, the governor said, it is very important “to demonstrate leadership because we could spend a decade going back and forth about whether LNG makes sense or not.”
The institutional energy necessary to bring in LNG could be better expended elsewhere, Ige said.
“If the state is focused on its renewable goals, there are greater gains to be found with solar and wind than the investment of time, energy and money” in LNG, he said.
Advocates of LNG, like Boivin, say that even now, with oil under $30 a barrel, it still beats oil. The financial benefits would disappear, he added, if a barrel of oil fell below $20 for a sustained period of time.
That may seem hard to imagine. After all, forecasters at the U.S. Energy Information Agency, as well as some others, expect oil to start to rise by the end of the year and to continue next year.
But few forecasters saw much likelihood that prices would drop as far as they have before the extent of a slowdown in the Chinese economy became clear, lessening demand.
“None of the oil and gas experts in the world predicted that oil would be in the $20 to $30 range,” Boivin noted. “It is an indication that you don’t know in the oil and gas markets what is going to happen.”
That leads to an interesting point that Boivin said Hawaii Gas didn’t bring up when the company made its recent LNG announcement. The company has the capacity to remove the major source of price volatility — being linked to the volatile oil market — by locking in an LNG price now for the full 15-year period his company is proposing.
Here’s how it would work: Companies can secure a price now for next year’s fuel by signing an above-market price agreement to obtain a longer-duration deal. The higher-than-market price is the hedge for the supplier.
Taking that further, Hawaii Gas could sign an agreement at what now seems to be a higher cost for all 15 years and escape price volatility questions altogether.
Normally that wouldn’t make much sense, but with oil selling for less than $30 dollars per barrel, Boivin believes now might be the rare time when it does.
Clay said that his forecast is based on costs and benefits pulled from actual LNG tenders, although he refused to disclose which company or companies shared their numbers with him.
He also made several key assumptions in building his projections. He assumed — as many experts do — that it would take about five years to get permits and install the infrastructure to start generating electricity from LNG. So his calculations assume five years of the status quo and then 15 years of LNG use, before increased renewable energy generation fully replaces it.
“None of the oil and gas experts in the world predicted that oil would be in the $20 to $30 range.” — Joseph Boivin, Hawaii Gas
To get at the growing renewable energy mix, he assumed that all renewable projects listed by the state Department of Business, Economic Development and Tourism in late 2015 come to fruition.
About 21 percent of electricity is generated from renewable sources now; that would, by his calculation, jump to 47 percent five years down the road.
He also integrated various infrastructure and operational costs associated with initiating and using LNG, including $200 million for new infrastructure — which is in line with a forecast from Hawaii Gas.
Clay added in other expenses, including the 15-year rental cost of a floating vessel to receive liquefied natural gas and transform it back into a gas. He refused to say how much that rental might cost, citing the confidentiality of the company that supplied him the information.
For his model, he used the most recent state data on oil prices, which was from September. At that time, Hawaiian Electric paid $77.65 per barrel for the low sulfur diesel blend. In December, the market price for that same oil was about $55, although it isn’t yet clear exactly how much HECO paid for its fuel last month.
Renewable projects that haven’t received a green light from authorities were not factored in. Nor were the costs of adding more renewable energy to the electric system, because the future price of energy storage, and stabilizing and upgrading the electric grid, are uncertain.
Clay also acknowledged that obtaining permits for LNG, especially given environmental opposition and other factors, could lead to the start-up process taking longer than five years.
Disclosure: The Ulupono Initiative was founded by Pierre and Pam Omidyar. Pierre Omidyar is the CEO and publisher of Civil Beat.