Rebuild Hawaii Consortium November 13, 2008

1. State Energy Program Hawaii Clean Energy Initiative Rebuild Hawaii Consortium November 13, 2008

2. What is important to Ted Peck • Collaboration - I will look for opportunities to give others the opportunity to contribute and I will value what they bring • Excellence - always giving my best in everything I do; bringing my best self to each situation • Gratitude - expressing appreciation for what I have and who others are in my life • Humility - viewing myself realistically and recognizing I don't have all the answers • Humor - not taking yourself too seriously • Respect - valuing the individual regardless of the situation • Service - aligning myself for the betterment of others; being others-centered • Trust - believing the best of the people around me

3. Mission • Advance the State’s goal to reduce our dependence on imported oil and develop our renewable resources • Work with all branches of the State government to form a sound policy foundation and funding for achieving shared goals of energy independence and renewable energy development • Continue to support strategic initiatives to transform our energy system through partnerships with federal agencies and public/private sector partnerships

4. Reducing Hawaii’s dependence on fossil fuels is a long-standing objective Over 36 years, petroleum consumption remains at about 89% Despite objective, little progress made – the needle has not moved

5. Hawaii is the most petroleum dependent state Petroleum dependence for electricity – top six states

6. Volatile petroleum prices also impact our economy:up 500% since 2002 http://tonto.eia.doe.gov/dnav/pet/xls/pet_pri_spt_s1_d.xls

7. Hawaii has the highest electricity prices in the U.S.

8. Hawaii’s gasoline prices are among the highest in the U.S. Hawaii National

9. Economic impact of dependence on expensive energy • Household fuels and utilities costsrose 36.4 percent, year-over-year, in the Honolulu CPI during 2Q’08 • Mainland energy costs are 4% of a state’s Gross Domestic Product; in Hawaii, it approaches 11%, almost 3 times as much • Between 2007 and 2008, State Government consumption of electricity has decreased 1.17%, but expenditures have increased 19.55%

10. Dependence on foreign oil = dependence on foreign political instability • October 16, 2007 -- $87.61/barrel • “Weak dollar and international tensions (anxieties over northern Iraq, where there is potential for a Turkish strike on Kurdish separatists)” • “Crude options expire tomorrow and the market was thought to be heading toward $90/bbl.” • “The market, said OPEC, is ‘very well supplied.’” • January 2, 2008 -- $100/barrel • “…a weakening dollar, the flow of money into commodities from faltering stocks and bonds, and Nigerian and Kenyan political unrest…and oncoming Winter storm, apprehension over tomorrow's DOE report” • July 11, 2008 -- $147.27/barrel • “…market watchers pointed to concerns in regards to Nigerian production, the ongoing tensions with Iran and an impending strike of Petrobras workers. In addition, dollar weakness and an early exodus from equities into oil were also considered factors today.”

11. What has held back renewable penetration? Barriers must be removed for Hawaii to realize energy independence and economic stability

12. Problem: Four legacy drivers support the status quoand represent barriers to be overcome • Policy/Regulatory Framework • Utilities compensated for increased electricity sales; pass-through of fuel price increase is renewable disincentive • IPPs need transparent “rules of the road,” certainty and predictability • No clear policy support or incentives for significant new investment and technology upgrades in renewable generation, advanced transmission and distribution  • Need policy on net metering, interconnection, wheeling, and utility protocols for integrating variable generation which will impact transmission and distribution systems • Technology Development & Integration at System Level • Solutions needed for reliable integration of high levels of variable renewable generation with traditional baseload generation and with existing grid • Energy storage and “firming” technologies are probably part of the solution, but which technologies will be most effective and how much storage is needed to effectively manage the grid is under development • Few incentives for advanced metering, dynamic rates, load management, demand response or distributed generation • Financing/Capital • Need a healthy and financially viable utility to make necessary investments • Significant new public and private investments required to support the magnitude of system changes needed for a clean energy future: Open up Hawaii’s markets to private capital • Costs have to be understood and rate structures designed to balance utilities' financial and consumers’ rate needs • System Planning • Hawaii’s energy system is built on the assumption of consistent supply of low-cost oil, central power plants, grids that could be continually adjusted to meet load needs; utilities are structured to control transmission and distribution as well as generation

13. The Hawaii Clean Energy Initiative was launched onJanuary 28, 2008 with the signing of a Memorandum of Understanding between the State of Hawaii and the U.S. Department of Energy “…the Department of Energy will help Hawaii lead America in utilizing clean, renewable energy technologies.” Governor Lingle “Hawaii’s success will serve as an integrated model and demonstration test bed for the United States and other island communities globally...” Assistant Secretary Karsner

14. Hawaii Clean Energy InitiativeNational Partnership to Accelerate System Transformation The goals are: • Achieve a 70% clean energyeconomy for Hawaii within a generation • Increase Hawaii’s security • Capture economic benefits of clean energyfor all levels of society • Foster and demonstrate innovation • Build the workforce of the future • Serve as a model for the US and the world

15. Hawaii urgently needs to transition to an economy powered by clean energy, instead of imported foreign oil In 2004, Hawaii’s RPS included 6% renewables, which would increase only incrementally Range of scenarios under transformational assumptions (i.e., exploiting technical & economic potential) GAP Fundamental systemic transformation is required Percent Renewable Energy Range of scenarios under business as usual assumptions (i.e., attainment of RPS, RFS) …but doing so will require a substantive transformation of regulatory, financial, and institutional systems

16. HCEI has assessed strategic changes needed to Hawaii’s policy, regulatory, financial, & technology structures End use efficiency Policy Electric generation Regulatory Framework Integration Institutional Change Financing Energy delivery • Integration group: • Integrate strategies for policy & regulatory frameworks, financing, and technology development • Lead partnerships • Integrate regulatory & legislative recommendations • Communicate Technology Development Transportation • Technical Working Groups: • Identify barriers • Identify projects • Recommend regulatory & legislative actions • Build key partnerships

17. We now know what it will take to reach 70% clean energy in 2030 Hawaii Electricity Portfolio 15,000 4365 GWh 30%Energy efficiency 10,000 5820 GWh Total GWh per year 40%Renewable energy 5000 4365 GWh 30%Maximum fossil fuel 2008 2020 2030 Note: This just reflects the 2030 targets; still need to determine/set interim targets

18. McKinsey & Company Potential Abatement Roadmap ILLUSTRATIVE Phase 1 Phase 2 Phase 3 Biofuels • Ethanol 1st wave • Convert existing sugarcane to ethanol production • Biomass 1st wave • Build dedicated co-firing and bagasse plants • Ethanol 2nd wave • Expand ethanol production to 1969 sugarcane peak • Biomass 2nd wave • Expand biomass capacity with ethanol production • Ethanol 3rd wave • Develop cellulosic production facilities on the Big Island • Biomass 3rd wave • Build cellulosic firing plants Renewable electricity • Baseload geothermal • Expand reliable geothermal production on the Big Island • Intermittent wind • Deploy wind capacity on top of existing grid infrastructure • Solar CSP • Develop utility scale solar • Firm wind • Connect Maui county and Oahu via cable • Develop pumped storage • Wind and geo for PHEVs • Deploy PHEV fleet and power with renewable resources • Distributed solar • Encourage residential / commercial adoption of PV Efficiency • Efficient lighting • Encourage adoption of high efficiency lighting (e.g., CFLs) • Sea water AC and CHP • Create distributed generation and cooling capacity • Efficient electronics and LEDs • Expand penetration of LEDs, efficient electronics Incremental annual impact in 2030* 2.3 Mt CO2e 6.0 MMB oil 3.9 Mt CO2e 10.3 MMB 3.4 Mt CO2e 8.3 MMB * Abatement impact only reflects largest abatement opportunities. Additional 6 Mt of abatement from initiatives with smaller potential. Source: McKinsey & Company analysis

19. 37.2 Target BASED ON FORECAST GROWTH, HAWAII FACES A SIGNIFICANT CHALLENGE TO MEET ENERGY AND EMISSIONS TARGETS ESTIMATE GHG emissions forecast Mt CO2e +40% -41% -53% 1.0 7.9 12.6 2005 baseline 2005-2025 growth 2025 RMI forecast Adjustments to RMI forecast and growth to 2030 2030 emissions under BAU Abatement required to reach 1990 levels 2020 target (1990 levels) 20% below 1990 emissions levels* Oil demand forecast MMB +22% -70% -40% 20.0 9.0 43.4 37.2 18.6 2005 baseline Less int’l aviation and marine Adjusted 2005 Growth to 2030 2030 BAU Abatement required to reach 70% renewables 2030 Target (70% from renewables) 1990 Levels *Proposed Lieberman-Warner legislation Source: State of Hawaii DBEDT; BEA Economics (2007); McKinsey & Company analysis

20. ANALYSIS BASED ON $60/BBL OIL HIGH CASE SHOWS 13.0Mt AT LESS THAN $50/TON AND 15.4Mt  IF HIGHER COST OPTIONS ARE INCLUDED Abatement cost <$50/ton Hawaii GHG Abatement curve (13.0 MtCO2 Abatement Opportunity)* Cars Hybridization Light Trucks Hybridization Cost Real 2005 dollars per metric ton CO2e Cars Plug-In Hybridization Biomass 200 Firmed Wind Solar PV Light Trucks Plug-In Hybridization T&D loss reduction CHP Commercial HVAC equipment efficiency Residential retrofit HVAC Forest mgmt. – reforestation Hydro Solar CSP Manage hot feeds Residential HVAC equipment efficiency 150 Gas recovery from landfills Composting Residential water heaters SWAC PHEV Geo Energy recovery Intermittent Wind Refrigerators 50 Geothermal HFCs Biofuels Sugar Solar water heaters 0 0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 10.5 11.0 11.5 12.0 12.5 13.0 13.5 14.0 14.5 15.0 15.5 Potential Metric megatons/year Medium Trucks Fuel Economy Packages Heavy Trucks Hybridization Biofuels Cellulosic Reduce fouling -50 Afforestation – cropland Control systems Fired/Steam Medium Trucks Hybridization Combined heat and power Forest mgmt. – passive mgmt. Non-refrigerator appliances -100 Flaring Commercial shell Afforestation – pastureland Residential NB HVAC Oil refining Light Trucks Fuel Economy Packages Air Transport Cars Fuel Economy Packages -150 PHEV Wind Commercial T8 lighting Dairy cow manure mgmt. Commercial LED Capping and restoration layers improvement Residential electronics Commercial electronics Residential general use lighting -200 Source: McKinsey & Company analysis

21.  30% efficiency renewable 40% 30% fossil Energy Agreement signed October 20, 2008 • RPS (Renewable Portfolio Standard) • This package will increase the existing RPS to 25% by 2020 and 40% by 2030 • It will also limit the amount of biofuels that will count toward the utility obligation; until 2015, the utility can only meet 30% of its obligation by simply substituting biofuels for oil in its existing power plants • The PUC will set financial penalties for utility non-compliance • Energy Scenario Planning • To replace Integrated Resource Planning (IRP) Why is it important? To reach the RPS, the electricity system requires planning with clean energy as the priority Why is it important? An RPS is critical because it sets a long term binding target for the utility; penalties make it more than a goal

22.  ASSETS • Power plant retirements • The utility commits to retiring a number of oil-fired generating units to transition away from fossil fuels • Adding RE to the grid • Identifies wind, ocean, biomass & other projects that the utility pledges to connect to the grid • Net metering: eliminates systemwide cap • PV host program: utility can install solar on rooftops while preserving market competition Why is it important? To reduce the use of oil, the utility must retire fossil-fired plants Why is it important? Any goal needs an implementation plan; this provision lays out the first steps to get to the 70% goal

23.  PRICING • Rate pricing • Time of use rates: let consumers benefit from using electricity at off-peak times • Clean energy infrastructure surcharge: to help fund grid upgrades • Energy Cost Adjustment Clause: For now, the utility will be allowed to keep passing on fuel costs via ECAC to maintain a financially sound utility • Feed-in Tariff • Feed-in Tariff (FiT) • Very successful in Europe • Standard prices for Power Purchase Agreements • Rather than the utility negotiating each contract, the PUC will set prices for each technology, i.e. wind, solar, ocean, geothermal Why is it important? Why is it important? Restructuring rates will align rates and consumer price signals with clean energy goals A feed-in tariff provides certainty to developers and fair prices to consumers • Decoupling • Decoupling weakens the utility bias for selling its own power before IPP power • It also decouples the utility’s revenue from the number of kilowatt-hours sold Why is it important? Decoupling ensures that the utility stays financially sound while kWh demand is driven down by energy efficiency

24.  GRID • Grid Management • The utility will be responsible for demand response, storage, and other system upgrades to help incorporate and manage renewable energy on the grid • The utility will do a big build-out of advanced metering infrastructure, which they can put into their rate base • Undersea Cable • HECO commits to working with private developers and the state to buy power from a big wind project from MauiCounty, and integrating that power onto Oahu’s grid via an inter-island cable Why is it important? A cable is a game-changer for Oahu, which has the highest demand of any island but limited RE opportunities Why is it important? New grid systems & technologies help create a 21st century grid ready for high levels of renewables

25. What This Means for HawaiiEnergy System Transformation Energy efficient buildings need less energy to operate Hawaii’s businesses will have more predictable energy costs Petroleum price spikes will have less severe impacts on our economy Needed energy will be available from more than one source Economic benefits of clean energywill reach all levels of society Hawaii’s economy will be strengthened and diversified Local renewable energy projects willfoster innovation and success

26. Ted PeckEnergy Program Administrator Strategic Industries Division Department of Business, Economic Development and Tourism Telephone: (808) 587-3812 Email: tpeck@dbedt.hawaii.gov