Hawaiian Electric Co. has signed a contract to buy 16 million gallons a year of locally produced biofuel to power its generators in a move that will allow the state to take a big step toward reducing its dependence on fossil fuel.

Honolulu-based biodiesel supplier Aina Koa Pono is raising money from investors to build a $320 million Big Island plant, which could convert a variety of existing wild plants as well as cultivated crops into liquid fuel.

The supplier hopes to break ground early next year at a site near Pahala and begin full commercial production of biofuel by late 2013. The contract calls for Aina Koa Pono to supply biofuel to HECO at a fixed price over 20 years beginning in 2014.

HECO Executive Vice President Robbie Alm said the contract puts the utility on track to meet its commitment of generating 40 percent of its electricity from renewable sources by 2030.

"This helps us meet our renewable portfolio standard, but more importantly it helps Hawaii toward energy independence," Alm said at a news conference to announce the deal.

"One of the things that has really hurt Hawaii is volatile liquid fuel prices. Remember the summer of 2008 with $150-a-barrel oil? It spiked up and did major damage to our economy. And we’re still vulnerable to that as long as we’re on oil," he said.

Hawaii is the most oil-dependent state in the country, with imported oil supplies making up 90 percent of its energy use.

Terms of the contract with Aina Koa Pono were not disclosed. The contract is subject to approval by the state Public Utilities Commission.

Alm said HECO is continuing to negotiate with other companies to supply locally produced biofuel to the utility.

The biofuel will be slightly more expensive than oil at current prices. Based on fuel costs last month, the biofuel contract would add about one-third cent per kilowatt-hour, or $1.86 a month, to the bill of a utility customer using 600 kilowatt-hours per month, Alm said.

Aina Koa Pono will start out harvesting existing wild plants and trees, including Christmas berry, guinea grass and eucalyptus, said Melvin Chiogioji, co-founder of the company. The company will eventually cultivate and process crops such as sweet sorghum, which grows three times faster than sugar cane, he said.

Aina Koa Pono has signed long-term leases for 13,000 acres of land in the Kau district from the Olson Trust and the Mallick family. The land, which has been fallow for 14 years, previously was owned and farmed by the C. Brewer company.

Chiogioji said the company has obtained the exclusive rights in Hawaii from a German company to use a technology called "microwave depolymerization" which applies heat and pressure to organic material to produce biofuel. The process requires less heat and is more efficient than the traditional gasification method of producing biofuel, he said.

Biofuel produced at the plant would initially be burned exclusively at HECO’s Keahole power plant on the Big Island operated by subsidiary Hawaii Electric and Light Co. But HECO also could transport it to power plants on other islands as needed, Alm said.

The 16 million gallons of biofuel would replace 100 percent of the petroleum-based diesel currently burned annually at the 81-megawatt Keahole power plant, said Jay Ignacio, HELCO president. It also would allow the Big Island, which currently gets 40 percent of its electricity from renewable sources such as geothermal, wind and hydroelectric, to boost that share to 50 percent, Ignacio said.

Closely held Aina Koa Pono has raised $4 million from investors for the project so far and is set to close on $5 million more in funding within the next few weeks, Chiogioji said.

The fundraising effort, which has included investment banks such as Goldman Sachs, Morgan Stanley and J.P. Morgan, should accelerate with the signing of the HECO contract, he said.

The project is expected to generate about 300 construction jobs for the first two years and more than 100 permanent positions after that for the Kau district, which was hard hit by the economic recession, Chiogioji said.

Aina Koa Pono, which means "for the good of the land," was founded 3 1/2 years ago by Chiogioji and Kenton Eldridge. It has an office on Fort Street Mall in Honolulu, and its board of advisers includes Norman Mineta, former secretary of the U.S. Department of Commerce and Transportation; retired Adm. Ronald Zlatoper, former commander of the Pacific Fleet; and Robert Clarke, former CEO of Hawaiian Electric Industries. The biodiesel plant is the company’s first significant venture.