HECO-NRDC

Policy Implementation Report

February 2009

This report is presented in accordance with Section 8 of the HECO-NRDC Policy, which calls for a public report summarizing progress and issues encountered in the efforts to implement the policy.  This is the first progress report to be presented since the policy was instituted.

In August 2007, Hawaiian Electric Company (“HECO” or “Hawaiian Electric”) and the Natural Resources Defense Council (“NRDC”) jointly published the “Environmental Policy for the Hawaiian Electric Company’s Procurement of Biodiesel from Palm Oil and Locally Grown Feedstocks” (“HECO-NRDC Policy”). This policy was developed to guide Hawaiian Electric and its subsidiaries in obtaining biodiesel from sustainable sources only.
 
The NRDC is one of the nation’s leading environmental advocacy groups with a membership that combines the grassroots power of 1.2 million members and the expertise of more than 350 scientists, experts and professionals. 

Hawaiian Electric and the NRDC jointly researched and discussed the issues to draft the HECO-NRDC Policy.  The policy was reviewed by a panel of academic specialists with expertise in biofuels, agriculture, and energy policy.  Following the academic review, a public review draft was made available and public meetings were held in Honolulu, Hilo, Kona and Kahului.  The HECO-NRDC Policy was revised based on the comments received during the public meetings, and the final version was released in August 2007. 

Hawaiian Electric’s partnership with the NRDC is instrumental in seeking to reduce the environmental impact of burning petroleum diesel to generate electricity in Hawaii.  Increased use of biofuels, ideally locally grown, is part of a broader strategy to move on the path to increased energy self-reliance and sustainability.
 
Hawaiian Electric is aware of concerns about unsustainable palm oil cultivation practices and their negative social and environmental impacts.  Voluntary certification has emerged as an option for those who want to choose sustainable palm oil.  For the longer term, Hawaiian Electric supports the production of feedstocks that are grown in Hawaii.  The HECO-NRDC Policy was developed to ensure that imported palm oil -- and eventually locally-grown and other sustainable feedstocks -- used to create biodiesel for Hawaiian Electric and its subsidiaries come from sustainable sources only.

There are eight (8) components to the HECO-NRDC Policy:
1) Local Feedstock Support Mechanisms
2) Sourcing Requirements for Palm Oil
3) Additional Baseline Environmental Criteria for all Feedstock
4) Chain of Custody Tracking for Feedstock and Oils
5) Greenhouse Gas Emissions Accounting and Reporting
6) Establishment of a Biofuels Public Trust Fund
7) Public Review and Notification
8) Public Progress Reporting and Contingencies.

Hawaiian Electric and the NRDC recognize that the Policy represents a first step toward sustainability of biofuels.  New issues and problems, or opportunities, may arise that require further discussion to resolve.  Both Hawaiian Electric and the NRDC are committed to working collaboratively to resolve any issues that arise in the application of the HECO-NRDC Policy.  Hawaiian Electric will be reviewing the policy periodically, and will inform and work with the NRDC to resolve any issues, as needed, associated with either the content or application of the HECO-NRDC Policy. 

This report covers the following subjects:
• RSPO Membership
• Biodiesel Supply Contract with Imperium Services, Inc.
• Maui Electric & Hawaiian Electric Biofuel Test Projects
• Greenhouse Gas (“GHG”) Emissions Accounting and Reporting
• Local Agriculture Research & Development

RSPO Membership
(related to HECO-NRDC Policy sections 2 & 4)

The HECO-NRDC Policy requires that all palm oil feedstock sourced under this policy meet or exceed all of the Roundtable on Sustainable Palm Oil (“RSPO”) Principles and Criteria. Hawaiian Electric applied for and received RSPO membership on October 26, 2007.  Hawaiian Electric is currently an "ordinary" RSPO member and continues to participate in annual RSPO conferences.

The principal objective of the RSPO is to promote the growth and use of sustainable palm oil through cooperation within the supply chain and open dialogue among its stakeholders.  This is done through the development, implementation and verification of credible global standards and the engagement of stakeholders along the supply chain. The RSPO also provides criteria, certification and enforcement mechanisms to ensure the integrity of the certified sustainable product.  The RSPO reviews and approves independent auditing firms that do the field work to inspect and certify the specific plantation.  The RSPO was formally established under Article 60 of the Swiss Civil Code on April 8, 2004 in Zurich.  There were eight (8) organizations accredited as RSPO certification bodies on August 21, 2008.  As of February 9, 2009, there are eleven (11) RSPO certification bodies.  There are also currently five (5) companies/plantations that have RSPO certificates of conformance. 

Biodiesel Supply Contract with Imperium Services, Inc
(related to HECO-NRDC Policy sections. 2, 3, 4)

On October 18, 2007, Hawaiian Electric Company, Inc. filed an application with the Hawaii Public Utilities Commission (“PUC”) for approval of a Biodiesel Supply Contract (“the Contract”) between Hawaiian Electric and Imperium Services, LLC, dated August 13, 2007.  The Contract is to supply Hawaiian Electric’s new Campbell Industrial Park combustion turbine (CT-1).  An Evidentiary Hearing was held on October 6-7, 2008 (Docket No. 2007-0346).   Subsequently, the Contract was amended and assigned to Imperium Grays Harbor, LLC (“Imperium”).  The parties anticipate an additional evidentiary hearing will be held in March 2009.  The Contract expressly requires Imperium to comply with the sustainability provisions of the HECO-NRDC Policy.  On February 6, 2009, Hawaiian Electric also filed with the PUC a Terminalling and Trucking Agreement with Aloha Petroleum, Ltd.  That Agreement will help Hawaiian Electric receive, store and have biodiesel delivered to CT-1.

Hawaiian Electric & Maui Electric Biodiesel/Biofuel Testing Projects

Hawaiian Electric and its subsidiary Maui Electric Company are developing plans for biodiesel combustion testing in selected existing units.  The fuel procurement contracts for these tests incorporate the HECO-NRDC Policy requirements for sourcing and chain of custody.

Maui Electric Biodiesel Project
In order to fully evaluate biodiesel’s potential as a primary fuel in utility scale diesel engines, Maui Electric is undertaking a demonstration project of 100% palm-oil-derived biodiesel with the objective of determining the longer term effects biodiesel will have on air emissions, heat rate, material compatibility, associated ancillary equipment, as well as operation and maintenance costs.  The overall goal of the project is to assess a potential future fuel conversion from petroleum diesel to biodiesel.  Maui Electric issued a Request for Proposals (“RFP”) for a Biodiesel Supply Contract on July 24, 2008.  Three proposals were received and contract negotiations are currently underway.

Hawaiian Electric Biofuel Project
Hawaiian Electric is undertaking a Biofuel Co-Firing Test Project at Kahe Unit #3.  This is a full scale co-firing project to test palm oil derived biofuel(s) blended with low sulfur fuel oil ("LSFO") to evaluate the effects of firing biofuels in steam generators. The primary objective is to determine the maximum amount of biofuel that can be fired without implementing major equipment modifications, violating environmental compliance requirements, de-rating of generating capability, or compromising the ability to operate on LSFO.  Hawaiian Electric issued an RFP for Kahe Unit #3 Biofuel Supply Contract on November 11, 2008. Seven proposals were received and contract negotiations are underway.

Greenhouse Gas (“GHG”) Emissions and Reporting
(related to HECO-NRDC Policy section 5 of the policy)

Hawaiian Electric is participating in efforts to develop protocols for calculating and tracking GHG emissions from biofuels.  Hawaiian Electric is taking a number of proactive steps to address GHG including, but not limited to, the following:

1. A palm-oil life cycle analysis was completed and submitted to the PUC (HECO-R-401) as a part of the Rebuttal Testimonies and Exhibits in the Biodiesel Supply Contract with Imperium Services, Inc. evidentiary hearings held in October 6-7, 2008.  The life cycle analysis found that palm-based biodiesel used in Hawaii will provide greenhouse gas benefits.  The GHGenius Model was used to develop the analysis.  This is a life cycle assessment tool for the evaluation of current and future fuels.  The GHGenius Model runs generated greenhouse gas reductions between 74.4% and 76.8% compared to petroleum diesel, and a fossil energy balance of 10.5 and 12.9 compared to a fossil energy balance of 4.5 for diesel fuel.  A copy of the Life Cycle Analysis can be found here.
2. The Hawaii State Legislature passed the Global Warming Solutions Act of 2007 (Act 234) which established a ten-member task force to drive development of a work plan due at the end of 2009 to enable the State to reduce GHG emissions to 1990 levels by 2020. Hawaiian Electric is a member of the task force.  The State Department of Business, Economic Development and Tourism (“DBEDT”) has completed that state inventory of 1990 GHG emission, on which the Act 234 target is based.  Hawaiian Electric is monitoring its GHG emissions and actively evaluating measures to reduce GHGs, including active participation with the state task force

Local Agriculture Research & Development
(related to HECO-NRDC Policy sections 1 & 6)

It is Hawaiian Electric’s goal to preferentially procure as much as possible of its biofuel from locally-grown feedstock in Hawaii.  To encourage and promote the cultivation of locally-grown feedstock crops, Hawaiian Electric has taken the following steps:

1. Hawaiian Electric is working with the Hawaii Agricultural Research Center (“HARC”) on a biofuels agriculture crop research project.  HARC is conducting research and is coordinating the work of the University of Hawaii at Manoa’s College of Tropical Agriculture and Human Resources (“CTAHR”) and University of Hawaii at Hilo’s College of Agriculture, Forestry and Natural Resources Management (“CAFNRM”).  Hawaiian Electric executed an agreement with HARC in 2007 and used matching funds from the Electric Power Research Institute (“EPRI”) to co-fund this research.  With EPRI’s cost-matching of $53,000 and Hawaiian Electric’s participation, Phase 1 of the biofuel agricultural crop research project cost was $103,000 in 2007.  The EPRI agreement was amended in 2008 (Phase 2) with a similar Hawaiian Electric grant award and EPRI co-share totaling $100,000.  Hawaiian Electric also plans to provide a third installment of seed funding to HARC in 2009 (Phase 3) with EPRI cost-sharing.  Hawaiian Electric will provide $50,000 (test year 2009 estimate) and EPRI will provide another $50,000 towards this effort.  The goal of the research effort is to identify crops, production yields, infrastructure and other requirements for potential feedstocks that are adaptable to marginal land use. 
2. In 2008, Hawaiian Electric announced an agreement to work with HR BioPetroleum, Inc., a high-tech start-up with roots at the University of Hawaii, and Alexander & Baldwin, Inc., to pursue the joint development of a commercial-scale microalgae facility on Maui.  The objective is to produce lipid oil for conversion to biodiesel and other products, such as animal feed.  The algae project will be located adjacent to Maui Electric’s Ma‘alaea Power Plant that will provide carbon dioxide from its stacks for algae nutrients.  The use of algae as a biofuel feedstock is still in the exploratory stage, but appears quite promising.  Microalgae have significant potential as an energy crop with the prospect for very high yields of oil per acre. 
3. Hawaiian Electric is currently working on the establishment of a Biofuels Public Trust Fund (“BPTF”).  Hawaiian Electric has secured legal and accounting services needed to prepare necessary paperwork required to establish the 501(c)(3) organization. Paperwork is currently under internal review. Next steps in process include selecting a board of directors, drafting by-laws, and filing of pertinent federal and state tax exemption paperwork.
4. Hawaiian Electric’s contract with Imperium for the supply of biofuel for CT-1 contains provisions establishing a preference for local feedstock, which is  intended to advance the State’s goal of encouraging development of local agriculture by providing a market for locally-grown and produced biofuels.

This constitutes the first report by Hawaiian Electric summarizing progress and issues encountered in the efforts to implement the HECO-NRDC Policy. Hawaiian Electric will continue to provide annual updates summarizing progress and issues encountered in implementing the HECO-NRDC Policy, in accordance with Section 8 of that policy.