New projects are on hold as the electric company's credit rating sags.
Hawaii’s renewable energy sector is stepping up support for policies aimed at financially bolstering Hawaiian Electric Co., which has been battered by accusations that the utility started the fire that killed 101 people and burned down much of Lahaina in August.
Two bills aimed at shoring up HECO remain alive in the final days of this year’s legislative session. One bill would allow the company to issue special bonds to pay for future wildfire mitigation measures and legal claims related to the August fires. The other bill would set up what amounts to a no-fault insurance fund to cover damages from future wildfires.
Gov. Josh Green has expressed support for both measures to stabilize Hawaii’s energy economy and keep the state moving toward its goal of generating 100% of the electricity sold in the state from renewable resources by 2045.
“Really both of these measures will stabilize the landscape in Hawaii so that people can build here, invest in energy here and be covered against a future disaster,” Green said. “Without action we could see a major set of structural problems in our state to build and insure homes, invest in renewable energy and grow our economy.”
For companies operating utility-scale renewable energy projects in Hawaii, HECO’s stability is essential for a simple reason: HECO is their customer, and an unstable customer raises multiple problems. The consequence of not stabilizing HECO, renewable advocates say, could be to stop Hawaii’s progress toward a goal intended to mitigate the effects of climate change that contributed to the Lahaina wildfire to begin with.
“It’s a concern if we don’t recognize the importance in the long run of replacing fossil fuels,” said Wren Wescoatt, vice president of development for Longroad Energy, which has developed about half of Hawaii’s utility-scale wind and solar projects over the past 15 years. “This is exactly why we have a 100% renewable goal.”
Already HECO’s instability is having an impact, Wescoatt said. The issue involves the way large renewable energy companies finance their projects, which routinely cost tens or hundreds of millions of dollars to build. Longroad alone, for instance, has spent more than $500 million building local projects, Wescoatt said.
Typically, developers like Longroad enter contracts to sell energy to HECO at a wholesale rate for the life of the renewable project. Once approved by the Hawaii Public Utilities Commission, these power purchase agreements are used to secure loans to build the projects, with the lender being assured there will be dedicated cash flow to pay back the loan.
The problem now, Wescoatt said, is that Hawaiian Electric’s credit rating has been cut to below investment grade, so lenders are reluctant to issue loans secured by contracts with the utility. Projects that were being planned are now on hold, he said.
“The banks require that we have a credit-worthy counter-party on the other end of that contract,” he said.
The issue isn’t whether Longroad or anyone else believes HECO will honor its power purchase contracts.
“It really comes down to the credit rating agency,” he said.
One bill supported by Longroad, Clearway Energy and the Ulupono Initiative seeks to enable HECO to strengthen its credit profile by allowing it to issue a new type of bond. Unlike other types of corporate debt, the new bonds would be secured by a new fee charged to utility customers. These new bonds would not fall into the standard pecking order of corporate securities in the event of a bankruptcy. The bonds would continue to be paid off as long as customers paid for electricity.
This makes the bonds low risk, which means interest rates far lower than standard debt — particularly the junk bonds HECO would have to issue now, given its credit rating.
HECO envisions raising as much as $2.5 billion through securitization, officials told senators during an informational briefing last week. That could increase customer bills up to 5%.
While critics focus only on the higher electric bills, that’s not the whole story, says Murray Clay, president of Ulupono, which invests in Hawaii renewable energy. The lower interest rates are good for utility customers in the long run, Clay said, if the utility is using the bond proceeds to invest in things like wildfire mitigation and grid hardening — investments that will have to be made no matter what.
Under the proposed bill, the Hawaii Public Utilities Commission would have to approve the issuance of the bonds, including what the bond proceeds could be used for.
“It feels like people are somewhat being sold, in general, a false dichotomy between two extremes,” Clay said. “One being open the doors wide on securitization, it’s all fair game, go for it. Whatever you want to securitize as long as you can say it’s necessary in some way, you can securitize it.
“The other one is: Oh it’s terrible, it’s a bailout. We can’t do this. It’s a raw deal. Let’s just reject securitization entirely.
“If we go with these two extremes as the options,” Clay added, “either way the ratepayers are going to lose.”
Paying for capital expenses with money that’s cheaper to borrow is good for customers, Clay said. What would be unconscionable, he said, is to pass on costs for legal liabilities related to the Lahaina fires to the ratepayers.
“We could never agree to that,” he said.
The problem is that the bill would let HECO do just that, subject to PUC approval, and company executives have repeatedly mentioned that as an option.
HECO and its affiliated companies face more than 130 lawsuits related to the Lahaina fire. The company has acknowledged its fallen lines started a fire the morning of Aug. 8, but say it was a separate afternoon fire that destroyed much of Lahaina. How HECO could muster the money to pay or settle claims estimated to cost billions of dollars without using some of the $2.5 billion it could raise through securitization isn’t clear.
During a Senate informational briefing last week, HECO’s chief executive, Shelee Kimura, said the company would try to use the money from securitization “potentially if needed as a last resort for settling claims.”
If the bill doesn’t pass, and the company can’t resolve the lawsuits it’s facing, she said, “We don’t have a whole lot of options on financing.”
The securitization bill isn’t the only measure renewable energy firms are supporting. Clearway and Ulupono have also joined San Francisco-based Plus Power, which operates a battery storage facility in Kapolei, to support the intent of a measure to create the Hawaii Wildfire Relief Fund and corporation, which would provide compensation to victims of future wildfires.
The measure in effect establishes a no-fault insurance system for future wildfire damages. In the event of a future catastrophic wildfire, damages caused by parties that pay into the fund, such as HECO and the state of Hawaii, would be paid from the fund instead of victims seeking damages through litigation. HECO has proposed contributing $333 million raised through securitization, and has proposed the state put in the same amount.
The bill has generated substantial criticism. In written testimony, the governor’s office expressed concerns about the amount the state was being asked to contribute but said it didn’t oppose the bill moving forward to allow continued debate.
Michael Angelo, Hawaii’s consumer advocate in utility matters, was more critical, raising concerns about “ratepayers contributing to a fund where their contributions would cover costs that are not used and useful in utility operations.”
State Farm Mutual Automobile Insurance Co., meanwhile, opposed the bill, saying it doesn’t protect consumers. Property owners participating in the fund would never be made whole, State Farm’s lobbyist, Matt Tsujimura, wrote in submitted testimony.
“Instead, the proposal asks property owners and insurers to waive rights before a loss has occurred and the extent of the damage and liability is known,” Tsujimura said.
Still, in her written testimony, Plus Power’s chief external relations officer, Polly Shaw, referred to the need for a stable utility through the life of the company’s 20-year contract with HECO.
“We, our investors and other developers depend on stable, long-term revenue streams to build and operate our projects,” Shaw said. “It is of the utmost importance to our company and investors that our contract with Hawaiian Electric is honored with no interruption to Hawaiian Electric’s payment for the facility’s services.”
Whether HECO’s payments under its power purchase agreements could be interrupted speaks to what Sen. Brandon Elefante called “the elephant in the room” during last week’s informational briefing: that HECO could be headed for bankruptcy.
Under federal bankruptcy law, if HECO were to file for bankruptcy protection, the bankruptcy trustee could opt to reject — or, more likely, push to renegotiate — HECO’s power purchase contracts.
Kimura said the company is doing what it can to prevent that.
“All of our strategies are to avoid going into bankruptcy,” she said. “We don’t think that that’s the best answer for Hawaii.”
Civil Beat’s coverage of climate change is supported by The Healy Foundation, Marisla Fund of the Hawaii Community Foundation and the Frost Family Foundation.
Sign up for our FREE morning newsletter and face each day more informed.
