Pay Now, Pay Later, and Pay Lots

posted in: January 1991 | 0

To allow investors a profit, geothermal energy would almost certainly have to be priced above what users pay for electricity from oil- or coal-fired plants. But the public won’t suffer merely by having to pay more for energy; it will be hit again in the pocket by government subsidies for geothermal development.

At a February 26, 1990, meeting of the Governor’s Advisory Board on the Geothermal/Cable Project, its chairman, former Governor William F. Quinn, is reported in the minutes to have said, apropos of the investor consortia proposing to develop geothermal generating capacity and the system to transport electricity to O`ahu, that “essentially, all of the consortia indicated some level of state financial guarantee for the inter-island transmission system” would be needed. “Without government support,” the minutes go on, “it is likely that the levelized cost over 30 years of electricity delivered to O`ahu will exceed HECO’s avoided cost by several cents per kilowatt-hour.”

The same idea appears in a memo March 14, 1990, to Maurice Kaya from Gerald Lesperance, of DBED’s Energy Division, commenting on the remarks of state Senator Richard Matsuura at a hearing on geothermal legislation. Matsuura has been one of the staunchest legislative supporters of geothermal development but, Lesperance wrote, “We need to ensure the Senator knows that State financial support for the 500 megawatt project is likely.” (Matsuura, Lesperance write, “also mistakenly believed that … public hearings for geothermal development [in Conservation District land] were still subject to the contested case provision.”)

Rosy Numbers…

A financial feasibility study prepared for the state in 1988 concluded that private development of geothermal plants and placement of the undersea cable could be undertaken with minimal state support and still have a very good chance of yielding a 14 percent return to equity investors. Bruce Plasch, who wrote the report, assumed that the state would allow the geothermal/cable developers the same low excise tax rate (one-half of one percent) allowed to its other favored industries, and that state special-purpose revenue bonds would be made available for the cable project.

Legislation would be required to allow geothermal developers the lower excise tax rate and to approve the issuance of the special-purpose revenue bonds. But it is questionable whether this method of financing would be meaningful. In a deposition by the Sierra Club Legal Defense Fund, DBED’s Gerald Lesperance said that the state “couldn’t touch anything significant on that geothermal cable project with our present allocation” of special purpose revenue bonds. The state controls $50 million and $50 million is parceled out to the counties, “and that isn’t very much money when you’re looking at the size project we’re looking at for the geothermal cable,” Lesperance stated. Underscoring that is the fact that, even though Puna Geothermal Venture was allowed $7.5 million in special purpose revenue bonds by the 1990 Legislature, it has yet to apply for them; reportedly, that amount is hardly worth the bother.

Or Is It Just Red Ink?

In Plasch’s forecast, development of the geothermal generating capacity as well as construction of the undersea and overground transmission system will cost a mere $1.7 billion. If Hawaiian Electric pays slightly more than five and a half cents (based on the dollar’s value in 1986) per kilowatt hour for geothermal energy, the project would break even. HECO has contracts with some independent power producers that already exceed that rate (for example, it pays premium rates for power generated at Honolulu’s trash incinerator). Thus, in Plasch’s scenario, geothermal energy can be developed, investors can be assured a profit, taxpayers need not worry about expensive bail-outs, and ratepayers won’t face against skyrocketing rates when geothermal energy comes on line.

Plasch’s views are regarded, even by some within DBED, as unrealistically rosy. Last month, John Richardson, a spokesman for HECO, was asked whether Plasch’s projection was comparable to the costs being discussed in HECO’s negotiations with Kilauea Energy Partners. Richardson said the figures being discussed now were on the order of $3.5 billion in current dollar terms. He added that he thought that amount was in line with Plasch’s estimates, if inflation were included. However, assuming Plasch’s estimate of inflation at 5.34 percent a year is correct, his 1.7 billion of 1986 dollars translates into just $2.1 billion by 1990.

If Hawaiian Electric is itself low-balling the figure, actual costs could well be far higher than $3.5 billion. This tends to confirm the estimates of independent analysts. In a critique of Plasch’s report, Carl Freedman of the Blue Ocean Preservation Society stated that Plasch’s figures could be off by as much as 143 percent. The analyst retained by the Pele Defense Fund, Robert McKusick, estimated development costs at $4.5 billion.

Volume 1, Number 7 January 1991

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