Subject: Hawaii Energy Challenge 2008 Conference Notes
This memo will try to capture the themes discussed at the Hawaii Energy Challenge Conference held at the Fairmont Orchid on November 20-21, 2008.
Peak Oil Is Not A Concept; It Is Reality
Matt Simmons, highlighted data from the IEA publication World Energy Outlook 2008 (available through amazon.com) that concluded that given current demand for oil and the available supply “the era of cheap oil is over.” He described how there hasn’t been a significant find of a “Super Giant” oil field in 40 years. Currently, the nine of the ten Super Giant fields are found in the middle east and one is in Mexico. The Super Giant fields provide 35% of the world’s oil supply. The remaining oil supply comes from smaller fields.
These small field suppliers will run out of oil by between 2015-2020. Interestingly, because of advances in horizontal drilling technologies, it is likely that the fields will be exhausted sooner than later. Likewise, the Super Giant fields may yield an increase of 20% over the short-term by using more powerful drilling technologies. Accordingly, it may appear in the short-term that we have an abundance of oil. Similarly, with the high price of oil (pre-September 2008), refiners increased the supply of available gasoline. Thus, prices have declined lulling many consumers into a false sense of abundant supply.
However, in the next six to ten years, these small fields will be exhausted. Even if demand for oil remains flat, demand will out-pace supply by 50% by 2020.
Conclusion: There is a real oil shortage. (For more information, google Matthew Simmons. His website is jam packed with easy to digest analyses.)
Simmons’ pearls of wisdom
o The greatest barrier to developing alternative energy is denial. We ignore reality.
o You can’t scare people enough. The energy crisis is a malignant cancer. We need to triple the cost of oil products and set a floor price to motivate development of wind, photo voltaic (PV), hydro, ocean energy, biomass, synthetic diesel, geothermal and nuclear power.
o There is no silver bullet, not even silver bb’s Conservation is key. Begin by buying local agricultural crops because we spend ten times as much in energy to transport food as we do on the food.
Hawaii Clean Energy Initiative
Hawaiian Electric Company HEI has agreed to work to reduce our 95% dependence on oil to 30% by increasing conservation (30%) and using renewable energy sources (40%).
To achieve this goal, there appeared to be two schools of thought. From the speakers focused on Oahu, they keyed in on a large grid tying the users and suppliers together. The centralized approach drew criticism from outer islanders especially residents on Lanai where the major landowner wishes to create surplus solar energy and transmit it via cable to Oahu. The residents of Lanai felt disenfranchised.
Not only did HEI foresee a centralized grid, but they advocated plug in vehicles in order to bring the transportation side of energy demand into one system with electricity power generation rather than having the energy market divided into the electricity side and the transportation side.
Participants from the neighbor islands appeared to favor a much more distributed energy generation plan. Similarly, agricultural concerns preferred distributed power generation. For example Richard Ha from Hamakua Springs Country seeks to implement a hydro energy production plant using an 18” pipe to generate power from an existing water flow for his ag. operations and to provide his employees with plug-in power to fuel their hybrids.
Similarly, Steve Bowles from Hawi Agricultural and Energy Corporation and Waimea Water Services Inc., advocated hydroelectric production integrated into agricultural operations and water systems that run from mauka to makai locations. Likewise, wind producers could use pump-hydro systems to pump water up to reservoirs/ponds during high winds. Later, during calm winds, they could generate power from allowing the water to flow back down.
Interestingly, the HELCO (Big Island subsidiary of HEI) representative, explained that while we on Big Island have geothermal as a terrific source of renewable energy, it would not be wise to establish a mega plant at Puna Geothermal because of its proximity to the active eruption site and the frequency of earth quakes. Instead, they were soliciting proposals from potential providers at alternative sites to manage the risks.
HEI and HELCO spokesmen, Robbie Alm, and Jay Ignacio respectively, emphasized that they were interested in investing in technologies that would bolster absorption of distributed power generation into the grid from diversified suppliers. Their goal is to have an interconnected two-way grid within five years. This appeared to be a point of consensus among all participants at the conference.
Two issues remain undecided under the Hawaii Clean Energy Initiative. First, HEI has not established the feed and tariff schedule to pay providers of renewable energy. Currently many residential users provide PV or wind energy to the grid on a net meter basis where they can reduce their kilowatt costs one for one by returning power into the grid. Meanwhile, there are distributed providers who supply more than they use and get paid by the kilowatt at a lower rate than what users currently pay. There is no maximum amount that these independent energy providers can supply, but it is limited by system demand.
Under the new Feed and Tariff schedule, the rate per kilowatt will not be based on the price of oil generated kilowatts. Instead, it will be designed to provide energy suppliers with a fair rate of return based on their investment in capital invested to supply the energy. The details have not been worked out. However, it appears odd to pay high cost providers more than low cost providers. That type of scheme would reward inefficient producers. Perhaps, the rate that HEI would pay providers would be sufficiently low to deter any high cost provider from participating.
Second, HEI believes that it is their responsibility to provide reliable 24/7 power to every user so they believe that they need redundancy in the system from non- wind or solar sources to provide 100% of electricity demand. Currently on the Big Island, they said that there is a 290 mw firm demand. Puna geothermal consistently provides 30 mw. The remaining supply is covered by burning oil. They currently seek to purchase 30 mw more of geothermal production from Puna geothermal or other suppliers.
To incorporate the less stable energy producers in the grid, they see the need to upgrade transmission lines over the next five years.
The federal Department of Energy representative Bill Parks, stated that the federal government had undertaken a bio-energy master plan that would be finished in December of 2009. This plan would include grid modeling.
Energy for Transportation
In Hawaii, there are two refiners, Tesoro and Chevron, on Oahu. Chevron refines 50,000 barrels of oil a day comprising 45% of Hawaii’s demand. This is a small operation for Chevron. It represents only 2% of Chevron’s capacity. For example, in India, Chevron has several refineries. The largest refines 1.3 million barrels a day. The refinery in Hawaii was built in 1960.
Besides, gasoline, the refiners create jet fuel and diesel. Tesoro is the only producer of natural gas in Hawaii. According to Albert Chee, of Chevron, demand for refined products is projected to decline. He projects that within five years either Chevron and/or Tesoro will probably exit the Hawaii market. If that is the case, Hawaii could end up importing and storing refined products. That would increase the cost of jet fuel as well as diesel. In addition storage costs would put further pressure on prices.
Chevron has opened offices on Oahu and the neighbor islands called Chevron Energy Solutions. On the mainland they are the leading supplier of PV arrays, they implement wind systems, and use biofuels. In the Philippines and Southeast Asia they power 3.9 million homes using geothermal energy. They also have a financing division to provide capital for energy system investment.
Besides Chevron and Tesoro, a source of synthetic diesel and jet fuel is being proposed by Sunfuels Inc. in Waimea. The technology is described in www.Choren.com/en/. This technology is used in Germany under the brand SunDiesel as well as in Malaysia and elsewhere. Another producer was Hawaii Bio Energy that seeks to use algae to make jet fuel. They have a federal grant. Currently, in laboratory conditions they can make jet fuel for $8 per gallon. To be competitive, they need to produce sufficient quantities at $3 per gallon.
Economic Vitality
By looking at our energy challenges as an opportunity rather than reducing our standard of living, we can gain from what speaker William Bonvillian titled Structuring an Energy Technology Revolution. Bonvillian is the Director of MIT’s Washington D.C. office and works with federal R&D agencies to establish national science policy to increase national competitiveness. He sees the U.S. competitiveness tied to new jobs in science and technology.
On the Big Island, Lisa Gibbons revealed the results of the state-wide science and technology survey. She found that there are 1,681 workers doing private science and technology jobs. Their average salary is $51,585. They earn 50% more than the average Big Island worker which translates into $1500 more per month. The survey of ten industries state-wide (www.hiscitech.org) canvassed companies in Ag/biotech, astronomy, life sciences, communications and information technology, defense/aerospace, energy, environmental services, film/digital and media, ocean sciences and engineering. On the website, is a directory of every company and a description of their businesses. The growth rate of energy companies is 8.4% per year making it the fastest growth sector.
Innovative companies can take advantage of the Hawaii state tax credits. Companies, farmers, and ranchers may want to apply for loans and grants available to those investing in alternative energy systems or increasing energy efficiency under the USDA Rural Development Energy Programs. Contact Tim O’Connell in Hilo at 808-933-8313 or email tim.oconnel@hi.usda.gov
To take advantage of starting businesses, or working in these industries, on average, those Hawaii workers age 45-64 will be better prepared because they have more education than those workers age 25-34.
For those seeking to invest passively in the energy industry, T. Rowe Price just published a study concluding that Energy and Natural Resource Stocks have continued to return 10% annually over the past ten years as well as historically despite the recent fallback. I was surprised at that finding because the recent stock price declines in energy and natural resource companies throughout 2008 made my stomach drop.
My additional research confirmed T. Rowe Price’s analysis. The S&P Natural Resource Stock Index increased by 280% from 1999 through August, 2008. Since August, 2008 until November 15, 2008, they declined 60%. That means that over the past ten years including the recent drop, the S&P Natural Resource Stock Index did increase by 220% yielding an average 10% annual return.
Accordingly, for passive investors, it does appear rational to remain broadly diversified in low expense equities and indexes for the long haul (ten years) to benefit from our energy challenges.
Conservation
The best bargain in the energy sector remains conservation.
o Hawaiian Airlines’ planes use 20% less fuel. They now hedge 25% of their energy needs going forward.
o Military Facilities at Pohakuloa substituted PV for propane
o Hawaii Government Employee Union transitioning to a four day work week to conserve 20% of energy.
o HELCO users are demanding less electricity. They completed energy audits on commercial and residential buildings. They shut off the lights, computers, appliances when not in use. They replaced appliances with energy star rated appliances. They installed solar water heating.
If you have any questions or want more references or resources, please don’t hesitate to contact me.
