Natural Gas: A More Affordable Fuel Alternative for Hawaii

Casey O'Shea

By Casey O’Shea, Spokesman, Center for LNG.

The effects of America’s emergence as the world’s largest producer of oil and gas continue to reverberate across the global economy and throughout our complex, interlinked global systems of energy security, delivery, and supply. Growth in U.S. energy production is a powerful force behind the nation’s economic recovery, and investment in the energy value chain creates jobs, increases supply, and has even stimulated a domestic manufacturing boom. With steep and inelastic demand curves, island economies, which are famously sensitive to changes in energy prices, are poised to benefit from this profound change. And with the right public policies in place to support the development of supply and to nurture the logistical infrastructure necessary to transport and consume energy, these islands of “stranded demand” can take full advantage of America’s energy renaissance by importing clean-burning natural gas for base load generation, which would deliver much-needed savings for Hawaiian consumers and businesses.

The abundant energy supply on the U.S. mainland was made possible by technological advances, which have allowed the development of previously inaccessible shale, or “unconventional,” energy resources. These breakthroughs have made it possible for net imports of natural gas to fall to the lowest level since 1987, and the U.S. Energy Information Administration expects the U.S. to be a net natural gas exporter by 2017.

These islands of  “stranded demand” can take full advantage of America’s energy renaissance.

As unemployment remained high nationwide, the oil and gas industry has created jobs across the economy. The Manhattan Institute report hailed the shale revolution as “the nation’s biggest single creator of solid, middle-class jobs – throughout the economy, from construction to services to information technology.” Similarly, the Harvard-BCG report found that just shale development alone is “supporting more than 2.7 million American jobs that pay, on average, two times the median U.S. salary.”

Beyond workers in the oil and gas industry, Americans nationwide are enjoying lower energy costs courtesy of greater production. U.S. households are now saving $800 on average per year on energy costs, and their expenditures on gasoline are on track to hit an eleven-year low this year. Lower energy costs have also been a boon for manufacturing: The cost savings are so significant that by 2018, manufacturing costs could be 2 to 3 percent lower in the U.S. compared to China.

Perhaps the state that could benefit most from lower energy costs is the one with the highest energy costs – Hawaii. With no oil or natural gas reserves of its own, Hawaii currently derives over 70 percent of its electricity from imported oil, but with a base of almost 500,000 residential and commercial customers, natural gas can be a cheaper, and viable, alternative.

A 2014 paper by the Economic Research Organization at the University of Hawaii concluded, “We find that Hawaii importing natural gas to be used in the power sector could lower costs of electric generation and benefit Hawaii’s economy.”

An increased supply of natural gas could help Hawaiians bid adieu to electricity rates that are more than three times the national average.

The report estimates that introducing natural gas could reduce electric costs by up to 25% in 2040, saving households $1,100 to $1,700 per year by 2040, lowering the cost of production in all sectors, increasing Hawaii’s competitiveness, and ultimately boosting its economy. These benefits may even be understated, as the paper relied on price assumptions made in 2013, and oil prices – and therefore LNG prices – have fallen dramatically since then. Even so, the report summarised, “In all cases considered, there is an overall increase in real GSP (Gross State Product) relative to the baseline.”

The paper’s findings are echoed by consulting firm Ziff Energy: “Certainly small islands have the opportunity to step away from the high cost of crude-based power to lower-cost gas-based power.”

For Hawaii Electric, the state’s largest utility, the infrastructure needed to import liquefied natural gas (LNG) – natural gas that is chilled and transformed into liquid form to reduce its volume – would be “minimal”, as it could rely on specialised shipping containers instead of large LNG import terminals. According to Hawaii Gas, the state’s natural gas utility, using LNG instead of oil could translate into $110 million in savings per year. So far, so good: Hawaii’s first shipment of 7,000 gallons of LNG, which was converted back into gas and integrated into Hawaii Gas’ electrical grid, demonstrated the viability of including natural gas in the state’s fuel supply. Furthermore, LNG could serve as a complement to renewables in the future by providing a crucial source of baseload power.

Just as the American shale revolution has helped the U.S. say goodbye to decades of dependence on foreign oil, an increased supply of natural gas could help Hawaiians bid adieu to electricity rates that are more than three times the national average. For the sake of their wallets and the health of their economy, Hawaiians should embrace an energy policy powered by natural gas.

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