Decline in tourism jolt to sales of electricity; MECO pushes back plans for more power generation

KAHULUI - Maui Electric Co.'s sales, measured in kilowatt-hours, are down nearly 10 percent this year, a drop that tracks closely with declining visitor arrivals, said company President Ed Reinhardt.

Before the island's economic downturn and fewer visitors coming to the island, MECO had been forecasting that it would need its next increment of firm power generation in 2011. Earlier this year, because of declining demand, it revised that forecast to 2014.

The utility will revisit the question this summer, and Reinhardt said he won't be surprised if the estimate is pushed even further out.

The dramatic drop in electricity needs has not, however, dampened the enthusiasm of the many firms that would like to provide power, especially alternative power, to MECO.

A double-digit drop in power consumption is unheard-of, and Maui Electric isn't quite there yet. The consolidated sales are down 9.4 percent. Maui island is down 9.3 percent, Molokai is down 10.2 percent and Lanai is down 14.5 percent.

"It's amazing," Reinhardt said. Utilities are required by the Public Utilities Commission not only to forecast demand, but to get it right. They can be fined if their estimates are too high or low.

"We look at the projections of UHERO, Dr. Laney and others very closely," said Reinhardt. UHERO is the University of Hawaii Economic Research Organization, and its periodic reports are sponsored by island businesses, including MECO. Leroy Laney is professor of economics and finance at Hawaii Pacific University and the author of a long series of annual reviews of the island business climate for First Hawaiian Bank.

One reason the PUC requires close forecasting is to make sure that utilities don't overbuild, thus sinking expensive capital into rate bases that the customers are then expected to cover. The flip side is that when sales go down by a large amount, a utility (whether MECO or the county Department of Water Supply) may have a hard time covering its fixed costs, which were established on the assumption of a certain level of sales.

Since Hawaii's economy has been expanding steadily, and even in recessions has not seen a fall in electricity demand as steep as what Maui is showing this year, MECO has not had to deal with this problem before.

"It's a dilemma," said Reinhardt. "We are looking at our options."

MECO has its own indicators of the health of the economy in addition to sales.

One is counting the number of commercial customers who disappear. Since August, MECO has been losing 20 customers a month, almost all tourism-related businesses that closed their doors.

MECO has "tightened its belt like everyone else," and is treating the decline as an unusual respite. For years, the utility has been pressed to keep up with Maui's expanding population and demand for electricity.

"Lower use allows us to do more maintenance, keep our people energized," said Reinhardt, so that once things pick up again, "We will have a stronger system."

Although MECO now does not think it will need a big generating unit for at least five years, the company is covering itself in case "the economy decided to turn on us."

That would be adding some "quick generation," which involves MECO providing small amounts of electricity without the need for a full-scale power plant. For example, the electric company already has two smaller-scale, distributed-generation units in Hana that provide 1,000 kilowatts of power per unit.

If MECO builds its own generators, it has long favored combined-cycle sets: two jet engines that produce 20 megawatts each, with a steam turbine running off their waste heat that produces another 18 megawatts. These are considered the most efficient for a grid the size of Maui.

However, under the federal Public Utilities Regulatory Policies Act, MECO is required to buy power produced independently, although it does not have to offer more than what it would cost to produce the power itself.

Thus, if outsiders, and especially alternative providers, can generate firm electrical power at a competitive cost, MECO could end up putting off its own next generator forever.

It has a location, Waena, next to the Central Maui Landfill, permitted and ready to proceed with development, although it would require a large investment to prepare it for a combined-cycle unit, in addition to hundreds of millions of dollars for the generators themselves. This spot has been waiting since the mid-1990s, and Reinhardt said the company has started to write off its investment there.

The key word in planning for power generation is "firm," or reliable, consistent power, because while state law requires utilities to move toward nonpetroleum generation, most green power is unreliable. Wind doesn't always blow consistently, and the sun doesn't shine at night or on cloudy days.

Reinhardt said MECO is now considering lowering the bar for what it would count as firm power. If a wind farm, for example, could have some storage system (batteries, pumped storage) that would keep the current flowing for 15 or 30 minutes after the wind dropped, then MECO might be willing to count part of the wind output as consistent power generation.

The utility needs around half an hour notice to start up an idle combustion generator to take over from, say, wind or solar.

MECO is also striving to turn green by weaning its Maalaea generators off petroleum diesel fuel. It already uses some biodiesel at startup, in order to meet clean air emission standards; but it wants to experiment with running a major unit on biodiesel for a long period, four to six months. It has requested bids to supply a million gallons of biodiesel for this purpose and expects to have a contract early next year.

Diesel prices have been volatile, and at the moment, biodiesel is not competitive. Reinhardt said that if world oil prices were to rise to $80 or $90 a barrel, biodiesel could be competitive. Oil passed $70 last week.

MECO is still hoping to be able to buy biodiesel refined on Maui (at Waena) and supplied with raw oil from locally grown plants or, possibly, locally grown algae.

"The overall plan is to provide fuel derived from local crops with local farmers," Reinhardt said. "We cannot predict how prices will move, but we are working to be ready on the technical side."