Hawaiian Electric Industries Could Profit By Supporting Rooftop Solar

Feb. 4.14 | About: Hawaiian Electric (HE)

You can't stop the rising tide, but perhaps you can profit by it.

This metaphor is apt for Hawaiian Electric Industries (NYSE:HE), the utility which supplies electricity to 95% of Hawaii's residents. Electric rates on Hawaii are extremely high -- about 2 to 4 times more than rates on the continental US. For example, residents on the island of Hawaii pay 42.5 ¢/kWh. The main reason, of course, is that Hawaii must import its fuel. Until recently, 83% of Hawaii's electrical generation was fueled by imported oil.

Those expensive rates have made Hawaii one of the first places on Earth where solar power is cheaper than electricity from the grid, even without subsidies. Other locations where "grid parity" has been achieved are India, Italy, Arizona, and Spain. These are generally sunny locations near the equator. Solar has become so popular, in fact, that 10% of utility customers on the island of Oahu have a PV system, and 26% of construction jobs were attributable to solar power. 40% of the energy sold by Hawaiian Electric in 2013 was renewable. That is remarkable, and it places Hawaii far ahead of the curve. Developments in Hawaii are carefully scrutinized by the rest of the solar industry.

Hawaiian Electric claims that in some areas, the heavy use of photovoltaics has begun to strain the electrical grid. However, the claim has become contentious because the utility has not provided facts to support it. Despite the contention, in September 2013, Hawaiian Electric began to require an approval process before residents could connect solar systems. In some cases, the solar installer is required to fund a study of the grid; if grid upgrades are required, the soon-to-be "resident-generator" must foot the bill.

The new requirements have wreaked havoc for solar installers in the state (the big names here being SolarCity (NASDAQ:SCTY) and Sunrun). PV permits are down 49% as the state has swung from boom to slowdown. The Hawaiian legislature is not pleased. It has tried to encourage public utilities to adapt by giving Hawaiian Electric an opportunity to actually increase its rate of return by upgrading the grid to accommodate rooftop solar. This bill (passed in 2013) "authorizes the public utilities commission to establish a policy to implement economic incentives and cost recovery regulatory mechanisms to induce and accelerate electric utilities' cost reduction efforts, encourage greater utilization of renewable energy, accelerate the retirement of utility fossil generation, and increase investments to modernize the State's electrical grids."

Our power distribution system was designed 100 years ago when one or two changes to the grid per day were sufficient. With increasing use of distributed generation, the grid may need to reconfigure itself every few minutes. So, the legislature has essentially said, "We realize that solar power will require some changes to your business model. We authorize a new policy to make it work." The key word is authorized; so far, the utilities have not proposed any incentives that would fund grid modernization. Hawaiian Electric seems to be dragging its feet, reluctant to depart from the historical model of power generation.

A recently proposed bill contains even stronger language. It "requires the public utilities commission to adopt rules for improved accessibility to connect to the Hawaii electric system for any individual or business." If the bill passes, the Public Utilities Commission would start work by July 1, 2014, and present a final report in 2016.

Some have described the tug-of-war on Hawaii as another Blockbuster vs. Netflix scenario. If Hawaiian Electric Industries does not pivot its business model, cold hard economics may slowly push it out of the marketplace. A solar system can be connected to batteries and then an electric utility is not necessary. While batteries are expensive, so is electricity on the islands. It seems strange that HE would ignore the implorations of the Hawaiian legislature, especially when the legislature dangles a carrot.

Of course there are two sides to any issue, and here is a link to one dissenting opinion. The author argues that more solar power places too much of a burden on taxpayers, that more solar will prevent a transition from oil to liquefied natural gas, and that Hawaii's fossil-fuel generators may become obsolete before paying off. A few flaws in his thesis:

  1. The author states a cost of $3.5 billion to Hawaiian taxpayers if "stranded" fossil fuel plants are retired. However, the fossil fuel capacity should be retired slowly, starting with the most outdated plants. Hence, I believe, the true cost of "stranded" plants would be much less and it would be spread over time.
  2. A transition from oil to liquefied natural gas will not eliminate the problem of transporting fuel to the islands.
  3. If solar is cheaper than fossil fuels, it will win out in the end.

Two interesting quotes from the dissenting opinion:

  1. "When the utility purchases power from independent power producers, like large solar farms, the utility is exposed to additional financial risk (something it can't afford, given its current credit rating of triple-B minus, one notch above junk bond status)."
  2. "Along with long-term expected earnings growth of 6.4%, this stock also offers a solid dividend yield of 4.9%.... substantially higher than the industry average of 2.2%."

I do wonder why Hawaiian Electric is paying such large dividends if it has a poor credit rating and cannot afford grid improvements. More importantly, I hope the solar situation gets resolved in a mutually agreeable fashion ASAP.

Disclosure: I am long SCTY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.