“It’s hard to make predictions, especially about the future.” — Yogi Berra
Hawaii is considering a multibillion-dollar commitment to liquefied natural gas (LNG) to replace oil in generating electricity on Oahu. Supporters say LNG would reduce electricity costs. But before committing billions of dollars to LNG infrastructure and long-term fuel dependence, we should ask: What are the risks, and what are the rewards? And who will pay if the costs are higher than predicted?
The Hawai‘i Natural Energy Institute (HNEI) has examined the risk-reward question by modeling more than 70 LNG scenarios, using different assumptions about power-plant repowering, fuel switching, electricity demand and renewable-energy deployment. Its analysis is important because many factors determine whether LNG will save money. The optimistic predictions depend on several indefinite factors developing favorably. If they don’t, the savings could disappear — and Hawaiian Electric’s customers could bear much of the financial risk.
Consider the LNG infrastructure. It would take years to build, and there is no way to know with certainty whether construction would be completed on schedule and within budget. Large energy projects routinely encounter delays, rising material costs and other unexpected expenses. This would be a major project, and Hawaii has ample experience with others exceeding their original cost estimates. The cost of rail, for example, is already more than double its initial estimate, and H-3 ultimately cost roughly five times its original estimate.
The price of LNG is another major uncertainty. It is impossible to know what LNG will cost in 2030, the earliest that LNG infrastructure could be built — much less what it will cost in subsequent years. Recent events demonstrate the risk. The conflict surrounding the Strait of Hormuz has severely disrupted a major global LNG supply route, removing nearly 20% of global LNG supply from the market and causing sharp price increases in Asia and Europe. Hawaii would be exposed to such global price shocks.
It is crucial to know where the financial risk ultimately falls. JERA, the for-profit energy company, may provide the private capital for the project, but if the cost of building LNG infrastructure or LNG fuel costs are higher than projected, those costs could ultimately affect the price of electricity paid by Hawaiian Electric’s customers. HNEI’s analysis indicates that even modest delays or cost overruns could eliminate the projected savings. Hawaiian Electric’s customers could bear much of the downside.
HNEI’s analysis examines a range of outcomes. Its most optimistic scenarios are based on assumptions in two sources that project substantial savings in LNG fuel costs. The first is a report issued by the Hawaii State Energy Office, and the second is a proposal made by JERA. But fuel accounts for only about 35% of an average electricity bill, which reflects other costs as well. Operating and maintaining the electric grid, for example, is another major cost. As a result, savings in fuel costs will be diluted by the time they filter down to electricity bills.
HNEI estimates that even the most optimistic LNG scenario would reduce electricity bills paid by Hawaiian Electric’s customers by only about 1 to 2 cents per kilowatt-hour.
The crucial question, then, is whether these modest savings are worth making a multibillion-dollar commitment to long-term LNG dependence. If the assumptions behind those savings prove wrong, the downside could fall largely on Hawaiian Electric’s customers. Electricity bills could go up instead of down.
LNG is a high-risk, low-reward proposition — a bad bet for Hawaii.
John Kawamoto is a former legislative analyst and an advocate for good government.
