Context and Introduction
A growing number of local homeowners and businesses are taking advantage of Oahu's sunshine by using photovoltaic (PV) panels to power their homes. The costs to convert to PV are not cheap, though. Householders make upfront investments around $30,000 for a system to supply 600 kilowatt-hours per month according to what Hawaiian Electric Co. (HECO) considers typical usage for a Honolulu household. However, with tax credits -- thirty five percent from the state and thirty percent from the federal government --, the system pays for itself in five or six years (Sinclair, 2008).
The combination of Oahu’s sunlight, high electricity prices and tax incentives make the payback period among the shortest in the country. Installation of PV systems has exploded in the past five years, providing a boost to the local solar industry that was previously limited to hot water systems. A record of 7,300 kilowatts of PV power was installed in Hawaii in 2010, compared with just 167 kilowatts in 2005. However, only 4,000 of the state’s 267,000 single-family homes have PV systems (Yonan, 2011).
The boom in solar electricity generation in the past five years was driven by a confluence of factors, including rising oil prices, Hawaii Clean Energy Initiative (HCEI) and the availability of cheaper Chinese-made PV panels (Timilsina, 2012). The increased demand for PV has also resulted in a rapid expansion of PV companies. In 2005 there were just a handful of companies in the business, and now there are more than a hundred. In 2009 the Legislature amended the rebate law to make the thirty five percent tax credit refundable. As a result, homeowners and businesses that do not have a tax liability can be reimbursed directly by the state (Yonan, 2011).
HECO is concerned about some aspects of PV power system. The greatest is over the uncertainty about the integrity of electrical grids at night and during cloudy days. Hence, HECO has determined that homeowners from some localities must undertake an electricity study before installing a PV panel. Householders argue that the financial burden in determining existing risks should not be placed entirely on homeowners or businesses wanting to join those who have already gone solar.
This issue arises at a time when the use of rooftop solar panels in a PV system is at an important crossroad. The amount of energy generated from residential PV systems in Hawaii has doubled every year over the last five. This rate is expected to continue since the state needs to reach the goal of getting forty percent of electricity sources from sustainable sources (Editorial, 2011).
Energy Systems (Centralized vs Decentralized)
Hawaii's centralized electricity production and distribution faces competition from a small but growing movement among homeowners and businesses tapping into mostly solar panels to generate power. The amount of energy generated from residential PV systems statewide, however, is still just a small fraction of the centralized electricity production statewide but the transition toward a more decentralized energy system is gaining momentum. Supporters of a decentralized system have argued that the US Department of Energy has not been successful addressing the three Is: inconsistency, inadequacy, and incrementalism (Sovacool, 2007).
On the mainland, decentralized or "distributed generation" (DG) refers to small-scale energy production from a variety of sources, from renewables to natural gas-fueled micro-turbines to diesel generators. In Hawaii, DG consists of rooftop PV systems. DG reduces the amount of energy lost in transmitting electricity because the electricity is generated near where it is used. It also reduces the size and number of power lines that must be built and gives consumers more control over energy costs (Rad, 2011).
Hawaii’s electric utilities are at the center of the transition and working under the mandate of the HCEI, which requires the state to generate forty percent of its energy from non-fossil fuel sources by 2030. For advocates of DG, the clean energy mandate represents an opportunity to bring about changes in the way Hawaii's utilities are structured (Cassel, 2011). DG supporters maintain that HECO's preference to fill its renewable energy portfolio with large-scale proj¬ects highlights the utility's reluctance to give up control of its monopoly. HECO has invested heavily in power plants and transmission lines and needs to continue using them to recoup that investment (Yonan, 2011).
HECO officials acknowledge that a transition to greater decentralization is under way. However, they say any perception that the utility is putting its self-interest ahead of the interests of its customers is wrong. "Our role is to make sure that we can accommodate that distributed power generation, maintain the power reliability and maintain the safety," says HECO's vice president for energy resources. "It's going to be a mixture. It can't just be distributed generation (DG). It's going to be a combination of DG plus solar farms, plus wind farms, plus biofuel plants and smart grid to better control and communicate with all of these different resources" (Yonan, 2011; Jensen, 2000).
There are a few barriers slowing the state's push toward energy self-sufficiency. One of the state's top installers of PV systems affirms that while the feed-in tariff program has contributed to the growth of the solar power market, the industry has been severely constrained by a regulation that limits the amount of PV generating capacity that can be connected to any one of the 465 circuits on Oahu that make up HECO's grid. When the amount of PV on a circuit reaches fifteen percent of the total capacity, HECO requires the homeowner or business seeking to install the system to conduct an interconnection study. The specter of having to do the costly study kills the proj¬ect. "We would literally be able to do at least double the number of proj¬ects but for this restriction," PV companies complain. On Oahu the fifteen percent trigger point has been reached on eleven of the island's circuits. The threshold, which is also used by California’s utilities, is a level that has been recommended by the Institute of Electrical and Electronics Engineers, according to HECO.
HECO claims the regulation is needed to protect grid integrity. High levels of customer-generated solar power on the grid can be problematic for utilities because the generation systems are outside their control, and the source of the energy -- the sun -- fluctuates with cloud cover (Feinstein, 2003). Those factors can potentially upset the balance between electricity production and consumption that is needed to keep the grid operating smoothly (Aldi, 2010). Because solar power is intermittent in nature, it can have a negative impact on HECO's efforts to balance the load on its grid (Yonan, 2011). Thus, the utility requires a study to determine how any particular proj¬ect exceeding the threshold will affect other customers on the circuit (Martinot, 2009).
There is an example of a company that has been working closely with HECO. Hoku Solar, a Honolulu-based company, said that many of its projects trigger the interconnection study because of their large size. "We feel like we've been able to work collaboratively with HECO to resolve their concerns with respect to the interconnection of these PV systems," said Hoku’s president. "And in certain cases we've been able to avoid the requirement of an interconnection study just by working collaboratively and openly with the utility". The Public Utilities Commission (PUC), along with HECO and solar industry representatives, is working on changes to the interconnection study that could lessen the impact of the "overly conservative" threshold, said the president of the Hawaii PV Coalition. "Under the proposal the utility and the industry are working on a new process that would enable us to fast-track projects and bring more PV online" (Yonan, 2011).
PV Public Policies
Governance is pivotal in the strategy of deploying local incentives (Wasilik, 2009). The State Capitol has drafted some bills related to the solar power industry in Hawaii. SB 199 ensures that electric utility customers with PV power systems are able to continue "net energy metering" agreements with their utility in the event the PUC establishes alternative programs to compensate those customers for the surplus energy they feed back into the grid (KPMG, 2011). SB 704 clarifies that third-party companies that own and operate solar energy systems installed on customers' homes are not considered public utilities. The bill encourages companies that have recently expanded to Hawaii with a business model in which it installs PV systems with no upfront cost and sells the electricity back to the homeowner or business at a fixed rate over 20 years. SB 1482 requires the PUC to weigh the benefits of capital spending by utilities on renewable energy and efficiency projects against the short-term expense. The bill also requires the PUC to consider the need to reduce the state's reliance on fossil fuels when it rules on proposals (Yonan, 2011). SB 631 allows solar farms to be built on all classifications of agricultural land except for acreage with an "A" rating -- the most productive land -- and parcels that have been designated "important agricultural lands." The bill also specifies that solar farms on lower-rated "B" and "C" lands cannot occupy more than 10 percent of the parcel's acreage. There would be no limit on the size of solar farms on land with "D" and "E" ratings, the lowest two categories (Outka, 2011).
Some bills have caused a great deal of controversy. Regarding SB 756, the Hawaii Solar Energy Association (HSEA) had asked its customers to register their opposition since it would have ended renewable energy tax credits by 2015 and imposed a one-year delay on tax credits. Although the defeat of the bill was a victory for HSEA, the effort to maintain government subsidies is increasingly difficult. As renewable technologies mature, supporters will have a harder time making a case that the industry needs to be propped up at taxpayers' expense. Authors of the bill stated that tax incentives have been successful in "encouraging the development of renewable technologies and helping to establish an important new industry in the state's economy; nonetheless, as with all measures intended to help support a nascent industry to achieve scale and become self-sustaining, the legislature is concerned that the incentive … will remain in place after the industries it supports no longer require it for financial vitality" (Dowsett, 2011). It's just a matter of time until the tax credits fade away, said the president of a PV company. "Sooner or later the training wheels will have to come off, and we in the renewable energy industry will have to be able to stand on our own two feet."
The federal government is already heading in that direction. On January 1, 2016, it will eliminate the thirty percent federal tax credit for solar and other forms of renewable energy. The combined sixty five percent state and federal tax credits have fueled an explosion in installations in Hawaii over the past five years. On Oahu alone the amount of PV generating capacity installed under HECO's net energy metering program grew to 4,650 kilowatts in 2010 from 74 kilowatts in 2006. For local homeowners and businesses, the subsidies have effectively allowed them to produce their own electricity for less than what they would be paying their utility when the cost of the PV system is amortized over an extended period (Yonan, 2011).
Federal money has also fostered research and development. HECO says it is using federal stimulus money to study the feasibility of integrating battery storage systems in its distribution networks to help stabilize the flow of electricity as it takes on more "distributed energy" from rooftop solar systems around the state. The utility is also working to improve its forecasting for sunshine so it can be better prepared for the ebbs and flows from the renewable sources, said HECO's vice president. "We're trying to be more aggressive in our approach to renewables while at the same time being prudent" (Yonan, 2011).
The Solar Power Industry on Oahu
Hawaii's pursuit of energy independence has made the state a testing ground for technology to overcome the instability of solar power generation. The surge in PV generation on thousands of rooftops of homes and businesses in Hawaii is unparalleled in any other state. Hawaii emerged as the leader in 2009 and this will be even more true in the next few years (Müller, 2011).
Many PV companies own rooftop systems and sell electricity back to homeowners or businesses on Oahu. These companies price electricity rates below what utility charges. Phasing out tax credits might reduce the financial attraction of buying a PV system and the solar power industry will only know the impacts when credits are gone and the market for renewable adjusts.
The program feed-in tariff sets standard rates at which businesses and residents sell their power to HECO. Renewable energy advocates said the program has been hindered because HECO is not required to purchase power fed to the grid, and because the utility may request that a power developer complete an expensive interconnectivity study (PV SEMI, 2009).
HECO is investing in battery storage technology and honing its grid-management skills as it braces for a surge in the growth of PV energy. A cloud passing over a PV panel presents challenges for any utility trying to maintain a flow of electricity through its grid at a constant frequency. That challenge becomes even more difficult on island grids where electricity cannot be brought in from a neighboring state to smooth out fluctuations.
The State PUC has approved a plan to build a five-megawatt solar farm on Oahu and sell the electricity it generates to HECO. The cost of energy per kilowatt hour will start at under twenty cents and will escalate at a fixed rate. A price reduction will take effect during the second half of the contract (Star-advertiser staff, 2011). In addition, a food wholesaler is preparing to install a 600-kilowatt system on its warehouse, the largest such project on Oahu in 2011 (Yonan, 2011).
Finally, PV systems will also impact the car industry on Oahu. Solar carport will be used to charge electric cars. HECO has teamed up with a research group to test an experimental solar-powered charging station for electric vehicles (EVs). The charging station features a nine-panel photovoltaic array mounted on a carport complete with a battery storage system. The project will allow HECO and the research group to collect and analyze data on the potential impact vehicle charging will have on electrical grids as the number of EVs grows. HECO will also use the experimental carport to help answer questions from customers who want to know how EVs charging might affect electric bills (Yonan, 2011).
Conclusion
Renewable energy regulations present positive and negative aspects. The positive elements refer to the safety and controlled transition of an intermittent energy source into a space prone to natural hazards, geopolitical interests, and commodity-price fluctuations. Regulations are equally important in the contexts of land scarcity, public space, and social issues. Public policies also provide stability for businessmen and consumers by ensuring PV companies and householders that contracts are enforced. However, excessive and dysfunctional regulations may also lead to deadweight losses. Public policies oftentimes impede the effective allocation of resources, which leads to economic inefficiency. This happens because the government establishes a structure in which coexist monopolies, externalities, taxes, subsidies, and price ceilings and floors. Economists and businessmen usually argue that in the absence of these political constraints, demand and supply forces would adjust prices and promote trade, which would lead to the maximization of the individual perception of a marginal benefit over a product or service consumed. In other words, it is assumed that in the absence of regulations and in a hypothetical perfectly competitive market everyone would be better off since more wealth would be generated.
The contribution of regulation and innovative business models are incremental in centralized and decentralized energy systems. Supporters of a decentralized system should not expect that local utilities would forego their economic and political power. This occurs not only because of legitimate liability and strategic issues but mainly because of power and cost problems that require a complicated negotiation process to be constantly reviewed by public and private leaders. Likewise, those who frequently argue against a decentralized system cannot ignore the economic, political and environmental changes that have been taking place on Oahu and worldwide. In general terms, taxpayers seek an optimal balance between the quality and price of public service provided. As Oahu’s residents have witnessed increased electricity bills and local and international PV companies have offered the same service and product under more competitive prices in the long term, a vibrant market has emerged based on tax credits and regulations that mandate the transition to environmentally-friendly energy sources. HECO and PV entrepreneurs must work together to design policies that allow incremental changes in the energy market to benefit both sides.
This paper advocates three main policies considering the future of Oahu on renewable energy supply. The first is related to electricity price. Feed-in tariff and net-metering programs should be permanently assessed and expanded to guarantee that householders are constantly motivated to install, sell and recoup investments. Tax credits and subsidies should be gradually replaced by attractive tariffs. The second policy suggestion refers to the existing infrastructure and its liability. It is important to upgrade existing grids and transition them into smart-grids while conducting research on how independent and autonomous off-the-grid systems would evolve and cope with internal and external threats and opportunities in the medium and long terms. The investments in existing and alternative structures and market niches would greatly help the government and the private sector understand and anticipate the risks of each scenario. The third policy is about the certification of the PV industry. As more companies are attracted to this market and renewable energy consumption exponentially increases, it is necessary to design policies that address the environmental and social responsibility in PV production chains -- suppliers and contractors -- to guarantee the safety and efficiency of these panels and to establish clear market rules and operational procedures on how new equipment should be responsibly priced and no-longer used panels be disposed and recycled.
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