Biden’s climate agenda has stalled in Congress. In Hawaii, a key element continues
On the island of Maui, up a dirt road that runs alongside very productive mango trees, is a solar power plant with a view of the Pacific.
Beneath the solar panels, Hawaii Public Utilities Commissioner Jennifer Potter sits on the shady hillside. It’s several degrees colder outside the sun, “I think it’s about fifteen degrees,” Potter said.
A solar company built this plant, not the power company monopoly that Potter regulates, and for Potter, that’s a good thing. For the green transition to work, she says, it can’t just be about the monopoly utility producing renewable energy — many renewable energy producers will need to be connected to the grid.
The problem, she argues, is that traditionally the monopoly utility, Hawaiian Electric, hasn’t had a clear incentive to quickly connect to renewable energy from projects like this.
“This project took ten years from start to finish,” Potter says, “Ten years! That’s problematic. We see that as a huge problem..”
Sixty percent of US electricity still comes from fossil fuels and while the country is moving toward cleaner energy, it is doing so slowly. Potter thinks part of that comes down to utility regulators like her.
That’s why Potter and his Oahu colleagues embarked on an experiment to revamp over a hundred years of regulatory precedent and get Hawaii’s electric company off fossil fuels. The state has started to put in place a system of incentives – and some penalties – to accelerate the transition to 100% renewable energy.
This carrot-and-stick approach to getting utilities off fossil fuels is reminiscent of a central climate plan that Biden and congressional Democrats called for in the Build Back Better bill. Sen. Joe Manchin successfully fought to remove the program from the bill in October, before defeating the entire bill two months later.
But comprehensive reform of Hawaii’s utilities could be a tool for transformation, and other states are considering it as well. Cara Goldenberg leads the carbon-free electricity team at RMI and worked as a consultant for Hawaii’s reforms. She says the failure of the climate change bill raises the stakes for states like Hawaii to take the lead in decarbonizing electricity.
“Policymakers can set quite ambitious goals, ‘we’re going to be net zero’ or however they want to frame it. But the crux of it all is, ‘OK, but how are utilities actually going to be able to achieve those goals? Goals ? ” she says. “With no federal legislation in sight, I think it becomes even more important for states to develop the policies and regulations necessary to incentivize utilities to decarbonize.”
Utility regulation has changed little in a century
To understand how Hawaii is changing the game, it helps to go back to the 1890s, when a group of power companies competed to power America.
“If you look at some of the old sepia-toned city photos of the time, there was like a crow’s nest of wires on every corner,” says utility regulation consultant Karl Rábago. “It looked like a devil and it was probably quite dangerous.”
At that time, utility companies argued for monopoly status. “There was an argument that you could supply electricity more efficiently if only one company did it,” says Rábago.
State-level regulators would govern how the monopoly utility made profits, and the profit formula that won out was one that incentivized utilities to quickly build infrastructure, says Hannah Polikov, managing director of Advanced Energy Economy, a trade association for clean energy groups. “The way it’s set up is that the more utilities build, the more money they make,” Polikov says.
At the time, when America needed a lot of new power plants and new transmission lines, Polikov says this incentive structure made a lot of sense: “Historically, when the goal was to move from electrification zero to universal electrification, right? to deploy a whole host of assets so that everyone has access to electricity.”
But today, amid promises to get the electricity sector off fossil fuels, Hawaii regulators say that old formula is out of place. Instead of encouraging utilities to “build, build, build,” Potter says regulators like her need to encourage new things, like energy efficiency and connecting renewables to the grid — often from projects that the monopoly utility did not build itself.
The federal The Energy Information Administration estimates that 77% of Hawaii’s electricity comes from burning fossil fuels, mostly oil and some coal. With a deadline to bring the utility to 100% renewable energy by 2045, Hawaii will have to shut down oil and coal-fired power plants early. Utilities Commissioner Leo Asuncion said the old industry-typical profit formula would have motivated Hawaii’s monopoly utility to do the opposite. “They want their factories to keep running as much as possible,” he says, “because it’s in their best interest in this formula.”
New reforms mean carrots and sticks
At June 1, Hawaii has officially launched new reforms called “performance-based regulation”. In 2018, when regulators decided to do a top-down overhaul of the regulatory structure, the financial impact on the utility, Hawaiian Electric, raised concerns, said James Griffin, chairman of the Utilities Commission. Hawaiian public.
At the time, utility was “a cut above junk obligation status,” says Griffin. “There were a lot of clouds of uncertainty about how this process would play out. Will our utility be considered higher or lower risk compared to its competitors?”
But Griffin says he gained confidence when he heard Toby Shea, vice president of Moody’s, Give a presentation to the commission, arguing that the traditional regulatory model is taking utilities down the wrong path.
Shea says the old model doesn’t incentivize the utility to cut costs — which will become a big problem for utilities with climate change. “The transition to renewables and the challenges around the environment will cost money,” he says, “and one of the things that will be needed is to cut costs so that customer bills don’t become uncontrollable”.
This is where performance-based regulation comes in. What Hawaii is doing, Griffin says, is putting in place a new regulatory framework that incentivizes the utility to both cut costs and meet climate-friendly goals.
For Griffin, a key step was to put the utility on a five-year budget. “It’s a very powerful incentive to cut costs, and we’re seeing it take effect,” he says. That’s because the utility gets a fixed amount of money for five years, “and if they can cut their costs below that, they can actually keep [part of] only as profit for now.”
The five-year budget has become a target window for the utility to meet new climate change goals. Following the models of the UK and Alberta, Canada, regulators brought together community stakeholders in brainstorming workshops to determine what those goals would be.
They agreed on things like bringing more renewables on the grid and pilot projects for electric vehicle infrastructure. They also agreed to reduce customer bills. Due to its dependence on imported oil, Hawaii has the highest average electricity rates in the United States.
Now, if the utility meets the targets, it receives additional incentive payments, and if it doesn’t, it sometimes receives penalties, or as Jim Kelly, Vice President of Hawaii Electric puts it, “Carrots and Sticks! Carrots and sticks!”
An incentive program is to connect solar power to the grid faster. While Kelly argues the utility was trying to bring renewables online long before these reforms, he says Hawaiian Electric now has a specific profit motive to get rooftop solar connected faster.
“If we can continue to make this interconnect experience a positive thing, it’s potentially up to $3 million for us,” Kelly said. If the utility fails to meet solar interconnection targets across the islands, it could face up to $900,000 in annual fines.
Kelly says Hawaiian Electric is meeting solar hookup goals so far. He says a year ago, it took an average customer in Oahu seven weeks to install their rooftop solar, and now it takes about half that time.
As for the broader goal of increasing the state’s renewable energy portfolio, Hawaiian Electric says that if they continue to bring projects online, they could get up to $15 million in bonuses. here 2023.
Toby Shea of Moody’s says investors generally prefer performance-based models because they often produce better earnings and cash flow for companies. Even before the official launch of performance-based regulation S&P and Moody’s improved their rating for Hawaiian Electric. Fitch improved their rating right after launch.
And when it comes to consumer costs, Hawaiian Electric customers now receive an annual dividend to reduce their bills.
Other states are exploring this type of utility reform
While some states like New York, Rhode Island, Minnesota, and Massachusetts have implemented elements of performance-based regulation, more and more states are now considering full restructuring like Hawaii, including Washington, Illinois, North Carolina and Connecticut.
Marissa Gillett is president of Connecticut’s Public Utilities Regulatory Authority and she says her regulatory commission is looking specifically at the Hawaii model, “the only state that’s really tried to go from soup to nuts.“
Gillett says it will be helpful to point to Hawaii if she hears Connecticut’s monopoly utility concerns. “I’m sensitive to the fact that this is an industry that’s been around for centuries at this point and to move them in a different direction you have to overcome a lot of inertia.”
Ultimately, Hawaiian Electric’s Kelly argues that other utilities in the United States should recognize that performance-based regulation is coming. “If you think you can put it off, maybe you can for a few years, but it’s probably going to happen in some form or another.”
Julia Simon is a regular contributor to NPR’s podcasts and news desks, focusing on climate change, energy and business news.