Amid much hoopla and ceremony, in June of 2006, as a smiling Governor Linda Lingle looked on, Ron Baird of the state’s Natural Energy Laboratory of Hawai`i Authority and Hans Krock, president of OCEES, signed a letter of intent, committing both NELHA and OCEES to “reach an agreement” to develop an ocean-thermal energy conversion plant at NELHA’s Keahole facility.
Stephen Oney, vice president of OCEES, told OTEC News that the plant would be the “first commercial plant in operation in the world and is anticipated to be completed and operational in 2008.”
Over the next six weeks, email traffic between Baird and various OCEES officers was flurrious. A draft business plan was developed, which anticipated the establishment of an entirely new corporation, Kona OTEC, to run the proposed plant. Kona OTEC (KOTEC for short) would be a joint venture of NELHA and OCEES, with OCEES providing the technological expertise and arranging the capital, and NELHA providing the land. In addition, NELHA was to receive “an initial 25 percent interest in the plant and intellectual property to be developed,” according to Baird. NELHA would also get electricity from the plant, at a price that was yet to be determined.
It all came to a screeching halt in mid-August.
On August 10, Baird had drafted a letter to the state procurement office, requesting an exemption to Chapter 103D of Hawai`i Revised Statutes, the law that generally prevents agencies from circumventing the open-bid process for purchases of goods and services.
Baird acknowledged that no other company had been approached to develop an OTEC plant. “A preliminary letter of understanding with OCEES was signed June 2, 2006,” he wrote. “In the intervening 43 days, despite numerous radio and newspaper articles about that letter of understanding, no other party has come forth and asked to be considered as a possible participant in such a plant. Therefore at the very least, we believe this may be a single source exemption from the procurement code. There may be, based upon your extensive knowledge and understanding of the procurement code in which we are hardly experts, some other form of exemption that this might fall under.”
Yet the letter was never sent. And four days later, without any explanation appearing in the records provided to Environment Hawai`i, a frantic-sounding Baird wrote to Oney: “Steve: Please give me a call. We have to change the concept.”
Bryan Yee, the deputy attorney general advising NELHA, told Environment Hawai`i he did not remember exactly what happened at that time, and in any case, he added, attorney-client privilege would prevent him disclosing any advice he might have given NELHA.
Oney, however, said he had been told that the show-stopper was the equity involvement of NELHA. “NELHA had wanted part-ownership,” he said. “There was a belief that NELHA, being an independent state agency, could enter into a joint venture with a private entity, but the AG said no.”
In the 2007 Legislature, a bill (803 in the Senate, 194 in the House) was introduced that would have specifically allowed NELHA to “acquire, hold, and sell qualified securities.” It languished without so much as a hearing.
Riding a Horse Backward
Over the next few months, the OTEC concept did evolve. By October, Baird and OCEES had developed a plan whereby OCEES would obtain a land lease from NELHA, build the plant (now said to be capable of generating 1.3 megawatts, with 1 megawatt of net power), and sell the power to NELHA under a long-term power purchase agreement. At the October 24 meeting of NELHA’s finance committee, Baird outlined the change in plans. “Under the concept we were previously following,” he said, “NELHA would get a working interest in the plant and interest in intellectual property going forward,” but that “had too many regulatory and statutory problems to proceed. In the interest of getting the technology going forward for the benefit of the state and elsewhere, OCEES will accept a leasehold position so they can commence working on that. The other item that will be required, in terms of their ability to finance the plant, is [our] signing a power purchase agreement for the electrical output of the plant.” According to Rudy Ahrens, OCEES director of European operations, if NELHA was willing to forego lease rents, it could exercise an option to purchase 25 percent of KOTEC.
When the full NELHA board convened, Ahrens pressed home the need for a quick decision in colorful, if not always clear, English: “March 13, we discussed the objectives of the OTEC plant. June 1 [sic], we executed the letter of intent. Today is the twenty-second [sic] of October… We’ve worked very hard at it, and if I might take the liberty of mounting the horse from the back [sic!], we should realize that money is available to build the plant. I have a commitment letter for financing…. We are anxious to get this going… We feel time is of the essence…. Also, I might add, the financing commitment cannot stay on the table indefinitely.”
Regarding NELHA’s option to cash out the lease rent in exchange for a share of the company, Ahrens said that doing so “would put assets on the books of NELHA… A New York investment company has an interest in purchasing power plants. That’s an option, should NELHA and us want to do that. Please keep that in mind: I’m talking about large amounts of money that could be made that way.”
Jan War, NELHA’s operations manager, pointed out that at present, NELHA had the capacity to deliver only half of the cold water that the plant would need. Installing additional infrastructure to meet the OTEC plant’s needs on this score would cost $5 million to $6 million. In addition, the plant would require more warm seawater be brought to shore, most of which would have to be dumped back into the ocean.
An investigative committee was established to look more closely into the regulatory and financial issues surrounding the proposed deal. Its final report was released to the NELHA board on May 2.
The report identified a number of “missing elements,” including who would use all the electricity, how the water used to operate the facility would be disposed of, needs for back-up power, possible regulatory issues with the Public Utilities Commission if the power were to be exported offsite, and the cost of supporting infrastructure. The full NELHA board accepted the report and, in light of the unanswered questions, authorized another investigative committee to continue to look into OTEC.
By May 29, OTEC was once more on the table, with Baird informing the board that “a decision has been made to put the OTEC project out” for a request-for-proposals, effectively ending the plan to work exclusively with OCEES.
Meanwhile, in Diego Garcia…
When OCEES and NELHA signed the letter of intent in June 2006, OCEES representatives said the Hawai`i plant would develop concurrent with a much larger OTEC plant it was building for the U.S. Department of Defense at an unspecified “tropical island military facility,” where “we anticipate completion and commissioning of that project in 2009.”
At the time, news reports said the facility to be the Navy’s installation at Diego Garcia, in the Indian Ocean.
That timetable has been delayed, according to Oney. “There’s been no contract for construction signed as yet. We’re working towards that in a three-phase process. We’ve done the first two phases for the Navy on their dime, basically. Now it’s in our hands to build the facility with our own investment money. We are in the process of finalizing that project in the next year or so.”
Before work can proceed, he said, “we need to have a power purchase agreement with the Navy, and we’re working on that.”
“It’s our project. We won this through competition and beat out 11 other companies. We own the project, and it is up to us to make it come to fruition. We’re getting corporate partners, partners that will be building it with us.”
His best guess as to when the plant would be online? “I believe it will be operational by the end of 2010 or early 2011.”
— Patricia Tummons
Volume 18, Number 2 August 2007