Saturday, March 03, 2012


Is Avoided Cost to blame for high electric rates?

By Henry Curtis

Synopsis: Utilities talk about energy prices but hide the data, making it impossible to verify whether public utilities are really concerned about the public or instead are more concerned about their bottom line.

Robbie Alm (HECO) spoke to the Democratic Party Environmental Caucus on July 18, 2011. On the tape at 21:10 he said that the high cost of Power Purchase Contracts (PPAs) are the reason that electric rates are so high:

 "The next ones over are out major PPAs. And you'll see something in common with a number of them, and that's how much they look like each other. That is called "avoided cost contracting." And since the 1970s it has been a legal requirement with renewable energy that when we sign a contract with a renewable producer that they get paid whatever we have to pay for oil. So oil goes up their contract goes up; oil goes down their contract goes down--but it tracks oil. You'll see this particularly on the Big Island: it doesn't matter how much of that renewable energy I just showed you, it hasn't helped their bills there because almost everything on the Big Island is avoided cost contracting."

The other thing in common about these contracts is if you go down to the Public Utilities Commission (PUC) to read them, the pricing information is all redacted. This is to prevent anyone in the public from understanding them.

Following the two Arab Oil Embargoes in the 1970s, the federal government wrote a number of laws mandating that fossil fuel producers buy energy from Independent Power Producers. The price the utility had to pay was the price that the utility would have paid themselves to produce the same energy. This concept is called avoided cost. Thus as the price of coal, natural gas and nuclear varied, the price of the PPAs varied.

In Hawaii, unlike the mainland, the utilities rely on oil to make electricity. Thus as the price of oil rose and fell, the price paid to Independents rose and fell.

The state legislature recently allowed utilities to set prices that are independent of their avoided costs. Thus, in theory, the utility will be able to purchase energy from others at lower prices thus driving costs on a downward trajectory. In reality, the utility still does not want you to see the pricing information, and there are so many conditions and pricing variations embedded within one contract that it is nearly impossible for the lay person to understand it, even if they were permitted to see the document.

For example, HECO recently requested that ratepayers finance the Aina Koa Pono biofuel contract, which is the single highest priced fuel purchase contract ever submitted to the PUC for approval. Many connected people felt that Aina Koa Pono was so connected to rich and powerful political insiders that state regulators would approve ratepayer subsidies to these people. The Governor was furious that the PUC, under enormous public pressure, rejected the contract.  

The secrecy surrounding pricing is why I wrote SB 656 which “requires the public utilities commission to publish contracts, including price information, for the purchase of renewable energy by energy utilities on a publicly-accessible portion of the commission's website.”

SB 656 passed the State Senate last year and Representative Denny Coffman has stated that he will move it this year.

However, HECO is fighting its passage.

It is one thing for them to tell you the reason prices are so high. It is quite another thing for you to be able to ascertain the validity of their analysis.

# # #


Henry, thank you for responding to my question. Also apologies for giving you the wrong video link. The correct video link is:

Question: Can you speculate *why* HECO EVP Robbie Alm disclosed HECO's (Oahu) cost structure back in May 2011 slide 3 (as demanded by SB656)?

Obviously if Alm could do it for HECO (Oahu), why not MECO (Maui) & HELCO (Big Island)?

Again, thank you for responding to my inquiry. :)

Wow. Great info. Thank you.

energy from renewables should be bought in such a way to allow renewables to compete meaningfully with oil by subsidizing start up costs if/when needed. all of that should be determined through PUC adjudication in the open, not privately between HECO and private proposed renewable energy businesses since the central feature of this scheme is public policy -- not HECO's or the rate payers' bottom lines.

Re *Avoided Cost* Contracting, Star Advertiser article "Geothermal gaining ground with public" (03-14-2012):

"The bulk of the geothermal energy produced at the [Puna Geothermal Ventures] plant -- about 25 megawatts -- is priced under an old "avoided cost" system in which HELCO pays PGV a price equivalent to what it pays to generate electricity by burning oil.

HELCO also pays avoided cost to independent power producers for electricity generated by a 10.5-megawatt wind project in Hawi and a 20.5-megawatt wind project at South Point."

Henry: It appears that Puna Geothermal Ventures and the Big Island's wind folks are making out like bandits under avoided cost contracting. For my historical edification what Hawaii Legislative Session bill phased out the avoided cost regime, and what was the public policy rationale (i.e., the "problem" it was designed to solve) for avoid cost contracting?

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