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Hawaiian Electric Industries, Inc. (NYSE:HE) has been the dominant provider of electric utility service for the residents in the state of Hawai'i - approximately 1.2 million people for over 100 years. That is, until the "solar revolution."

Due to the popularity of alternative energy, Hawai'i residents have caught on to the fact that installing photovoltaic - or PV - systems are resulting in lower electric bills for them. Hawaiian Electric itself does not provide solar panels and installation. Instead, they provide a connection to the grids, with excess energy being fed back into the grid.

From 2005, the solar industry has planted a firm footing in Hawai'i, which originally was thought to be a good partner with Hawaiian Electric. As the solar industry was building in Hawai'i, residents were able to purchase new PV systems and install them in their homes. Installations in Hawai'i jumped 169 percent from 2011 to 2013. However, in September 2013, Hawaiian Electric abruptly told customers that Hawaiian Electric would not be able to connect to the grid. The reason? Hawaiian Electric stated that:

"...so many Hawaiians are stampeding to solar that circuits may become oversaturated, causing voltage spikes, damaging appliances, electronics and even the utility's equipment. The company needs more time to study the matter. ..."

The current moratorium is only O'ahu, but a similar rule is in effect on Maui and Hawai'i County- a.k.a. the Big Island.

Hawaiian Electric's Financial Highlights

With Hawaiian Electric announcing their fourth quarter and year-end 2013 earnings on February 18th, let's look at some of the financial highlights from their third quarter earnings report.

  • The Q3 Diluted EPS was at $0.48- down $0.01 from 2012
  • The Utility's net income remained the same at $38M in 2012 and 2013
  • The makeup of the monthly customer bill is 42% for fuel; 25% purchased power; 9% revenue tax; 3% income tax; 4% depreciation; 12% operating expense; and 5% return expense.

In the same earnings report, they also state that renewable energy is price competitive in Hawai'i and show that wind and solar show the lowest energy cost.

So What?

Hawaiian Electric is doing well due to their monopoly status in Hawai'i as the sole electricity provider and also with their ownership of American Savings Bank. The reason I cite the few financial highlights above is because Hawaiian Electric does well only if they have no competition. Additional companies have been coming into Hawai'i to provide solar - which are mostly mom-and-pop small operations, and a few larger names such as Solar City (NASDAQ:SCTY).

To quantify this information, let's use an example. Let's look at people who's monthly electric bill from Hawaiian Electric is approximately $300 - even more during the summer months. By installing a PV system, aside from the installation cost and the payments on any loan taken out to get a PV system, the resident would pay maybe $50 a month to Hawaiian Electric to be connected to the grid, which takes away $250 of the monthly bill, which would also include Hawaiian Electric's forecasted profits.

While Hawaiian Electric claims that their grid may not be able to support the increased demand for solar connectivity, it is highly questionable that this is really the case. The fact is, Hawaiian Electric as a monopoly cannot afford to lose any part of its revenue base. Sure, if it does, it can raise rates, which would lead to an even greater demand for solar power, which could end up crippling Hawaiian Electric.

The Political Landscape

In Hawai'i, Hawaiian Electric is frequently under scrutiny by the Public Utilities Commission - or PUC - and the State Legislature. The concern is similar to one I've raised in this article about Matson, Inc. (NYSE:MATX) in that because they're the only show in town, they can raise rates when they fall short of profitability.

What looks to be brewing is a showdown between the solar industry in Hawai'i and the Hawaiian Electric company with the referee being the State Legislature and the PUC.

How to Play The Showdown

If the State Legislature and the PUC support the solar industry and intervene, you would see Hawaiian Electric share prices drop in the short term due to a decreased revenue base. However, if that does happen, Hawaiian Electric will most likely raise rates to compensate for the revenue loss, which would return share prices to an average share price.

If the Legislature or the PUC do not get involved, solar in Hawai'i could delay permanently if Hawaiian Electric so wished, which would see share prices remain the same.

Aloha, investors!

Source: The War Between Hawaiian Electric And Solar Heating Up