Prospective Alternative Energy Producers Find Lava Fields of Keahole a Bumpy Road

posted in: August 2007 | 0

There’s been a slight change of plans at the state’s natural energy lab at Keahole, just south of the Kona airport on the sunny leeward coast of the Big Island.

For nearly two years, Ron Baird, administrator of the Natural Energy Laboratory of Hawai`i Authority (NELHA), had been working with a Honolulu company to lay the groundwork for an operating ocean-thermal energy conversion plant at the site, where some of the most important research on OTEC took place over a 20-year period that ended in the early 1990s.

Baird had teamed up with OCEES of Honolulu, which proposed to build a plant that would generate 640 kilowatts of electricity, after its own operational needs were met. OCEES would then sell the power to NELHA and its tenants, which include commercial aquaculture farms and bottlers of desalinated ocean water.

But by late May, the relationship had dissolved. “There have been some developments on the OTEC front,” Baird told the NELHA board at its May 29 meeting. “At the present time, there will be no further proceeding with what we tried to do for the benefit of the people of Hawai`i in terms of OTEC – this proposal that we worked on for a year and a half.”

Instead, he said, NELHA would put out a request for proposals that qualified companies, including OCEES or the East-Coast-based Sea Solar Power, which had recently shown interest, could respond to.

Yet at the NELHA board’s next meeting, in July, a consortium involving a local company, Makai Ocean Engineering of Honolulu, and a major defense contractor, Lockheed Martin, asked the board to defer installation of any OTEC power generation facility and instead reserve the use of the valuable on-site infrastructure for the sort of research that is essential if OTEC is to scale up to where the technology is capable of generating the quantity of power – 25 to 100 or more megawatts – that commercial utilities typically require.

Joe Van Ryzin, a vice president of Makai, noted that the facilities at NELHA – chiefly, a 55-inch pipe that brings up deep ocean water – “are a little limited. That’s a relatively small pipe for OTEC.”

Still, he said, “it’s extremely valuable, because it’s the only one around.”

“Be aware of the oncoming OTEC research-and-development need,” he told the board. “Let researchers set the R&D goals and agenda, and be confident that OTEC benefits to the state will come.

“Realize that you possess a unique, incredibly valuable facility. You’ve got the only show in town, and you should position yourself to take advantage of that,” he said.

According to Van Ryzin and Robert Varley of Lockheed, research could be far more lucrative than any power-generating facility to NELHA, which now has been weaned almost entirely of state support through the general fund budget.

Later this year, Varley said, “we’ll want to talk about what it’ll cost us to do testing at these sites.” Driving the process, he said, was the intention of HECO, the O`ahu electric utility, to issue a request-for-proposals in 2009 for a 100 megawatt renewable energy plant, which Varley said could cost on the order of $600 million.

“The market in Hawai`i is sufficient to interest my masters at Lockheed Martin,” Varley said, and “with Hawai`i leading the way, there are other markets around the country for OTEC, and clearly there are international markets.”

“For me to build a plant in 2009, I must do a lot of homework between and now and then, to write a proposal and get management sign-off. Between now and 2009, we believe we have to do large-scale testing. And if we’re going to do testing … to the point we can credibly extend our designs to a full-scale plant, we’re identifying NELHA facilities as the site to do that. No other sites around the country are capable of doing that.”

For NELHA, it’s an either-or choice. Van Ryzin said that while no specific research proposal is on the table at the moment, “we were trying to encourage them to be open and flexible in terms of how they have their facilities available.” A producing OTEC plant, he said, would mean the end of any hope of using the facilities for research.

Other Players

Regardless of what occurs with respect to OTEC, other companies are looking to develop energy-generating plants on NELHA land.

One such firm, SOPOGY, recently was the beneficiary of legislative action allowing issuance of up to $10 million in special purpose revenue bonds to finance its proposed solar thermal concentrating system, which it hopes to build on 10 acres of land controlled by NELHA.

John Rei, SOPOGY’s chief operating officer, gave the NELHA board an update on the company’s plans. Unlike the OTEC proposal that had been under consideration, SOPOGY would sell its power to the Big Island utility, HELCO, under an independent power-purchase agreement, Rei said.

But until it has a firm commitment to use the land, he added, HELCO has said it cannot move forward with the power-purchase agreement. Without the power-purchase agreement, it can’t obtain financing.

Company founder and president Darren Kimura told the board that he was taking a technology that had been proven elsewhere, and adapting it to Hawai`i conditions. The technology had been in use in California for more than 30 years, he said. When a small-scale facility using the same technology was tested at a Kohala resort five years ago, it failed because of problems with exposure to salt air and other issues.

“Since then,” he said, “we’ve been trying to make the technology work in Hawai`i.” With measures now in place to protect against salt spray and other improvements, he said, he’s confident the technology will now be effective in generating steam that, in turn, will produce electricity.

“Our goal,” he said, “is to use the technology we demonstrate in Hawai`i to take our company to the national market.”

Deputy attorney general Bryan Yee asked if the company was seeking a variation from the standard lease terms.

“I don’t think so,” Rei replied.

Baird quickly corrected him. “We have been in negotiations and looking at a different lease for energy projects. Ten acres, at $1,200 a month.” The customary lease rent is $3,000 per acre per month for most other NELHA projects.

But there was more, Baird said. “We have an equity kicker in place.”

In other words, Baird was once more seeking an equity, or ownership, share in the developing technology, even though a similar effort to get a stake in the proposed OTEC plant fell through. (For details, see the OTEC article in this issue. – Editor’s note)

“It’s kind of unusual,” Kimura told Environment Hawai`i. “There’s a problem with energy projects. They’re not like bottled water, which you can sell for a premium. Utilities will only buy power in a certain range.” For that reason, the $3,000 per acre per month standard rental rate for other NELHA tenants won’t work for energy producers, he said.

In return for the discounted rent, he continued, “NELHA had proposed a warrant in the company – an exercisable option to purchase stock at a future point in time at a given price,” known as a strike price, which generally is about 10 percent of the appraised value of the stock.

For Kimura, the warrant solves one problem. “We’re not public yet,” he said. “If we tried to give them stock now, that wouldn’t work.” And because warrants typically are sold as soon as they are exercised, this approach would not give NELHA any long-term equity in the company. “It’s basically a financial transaction,” Kimura said.

With the NELHA board having authorized a lease to SOPOGY at the July meeting, he said, “we can take it to HELCO and finish our power purchase agreement, then begin construction.”

Yet another energy proposal was floated last December by Hannon Armstrong, a company with a long history of financing power generating projects. It proposed to install a 5 megawatt, $40 million photovoltaic solar field on 93 acres of partly cleared land near the Keahole airport.

NELHA board member Maurice Kaya, chief technology officer for the Department of Business, Economic Development, and Tourism, was enthusiastic, describing Hannon Armstrong’s proposal as “a very exciting prospect.”

“Both SOPOGY and OCEES, they’re dabbling in technologies that are not fully developed. This project, it’s commercial, you know what the cost is. You can get going from Day One.”

Maybe it’s just too good to be true – for NELHA, at least. Since making its appearance last year, the Hannon Armstrong proposal has not surfaced at any subsequent board meeting.

Efforts to reach a company spokesman by press time were unsuccessful.

— Patricia Tummons

Volume 18, Number 2 August 2007