Hawaiian Electric Co. announced today that it has signed a deal to buy up to 150,000 gallons of locally made algae-based biofuel to burn in its Kahe Generating Station as part of the utility’s shift away from reliance on fossil fuels.

HECO has successfully tested other types of biofuel in its generators but this will be the first time the utility will be using fuel derived from algae, which is capable of yielding more oil per acre than any other biofuel feedstock.

Phycal Inc. has agreed to deliver the first shipment by 2014 as part of a pilot project using algae grown in ponds at its facility in Wahiawa. HECO has already proven that it can use crude palm in the petroleum-fired steam generating units at the Kahe plant, and utility officials said they expect the pilot project will confirm the ability to use algae-based fuel as well.

HECO and Phycal said the expect to follow up the initial contract with a subsequent agreement for up to 3 million gallons of algae-based biofuel per year for three years to run a full-scale demonstration project at Kahe.

HECO did not disclose the price it will pay for the biofuel under the contract that will require approval from the state Public Utilities Commission. Most biofuels are priced at a premium to petroleum-based fuels.