Should LNG be an Option for Hawaii?

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By John Cole, Assistant Specialist, Hawaii Natural Energy Institute, University of Hawaii at Manoa, and Murray Clay, Managing Partner, Ulupono Initiative.

For the last few years, Hawaii has been considering the importation of liquefied natural gas (LNG) as an alternative to oil and a way to lower energy costs for the State’s residents. While Governor Ige recently came out against using LNG as a solution for the electric utilities, a number of parties still support replacing oil with natural gas in a time-limited and declining volume fashion as a bridge to our renewable energy future. Studies sponsored by the Hawaii Natural Energy Institute (HNEI) and analysis by the Ulupono Initiative support the conclusion that a switch from oil to gas for some fraction of electricity production could both save money and reduce the risk associated with the volatility of globally influenced oil prices.

HNEI has sponsored two evaluations of importing LNG to Hawaii. The first was a high level assessment of the policy, economic and technical questions associated with LNG importation, performed by FACTS Inc. in late 2012 (FACTS Study). The second was a task within a larger electric system modeling study performed by GE Energy Consulting in 2015 (GE Study), that assessed potential savings in the cost of producing electricity with imported LNG, based on certain cost assumptions for both oil and gas.

The FACTS Study assessed potential demand for LNG in several sectors; including electricity production, replacement of synthetic natural gas and liquid propane gas, and ground and marine transportation. It found a potential demand for all sectors of 1.5 million tons per annum, with electricity comprising 85 percent. Both the FACTS and GE Studies noted that as renewable energy use increases, LNG demand declines, thus proportionately reducing any benefits realised by LNG importation.

The FACTS Study reviewed likely potential sources of LNG and found that LNG sourced from Alaska, Australia, and Canada are likely to be priced by indexing to international oil prices, while LNG from the US mainland is expected to be indexed to US natural gas prices. The study concluded that US natural gas indexed pricing would likely result in reduced price volatility and significantly more savings in delivered energy cost compared to oil price-linked sources.

Although LNG import infrastructure would cost $200-300 million, that cost is small compared to the nearly $6 billion per year spent on oil.

The FACTS Study estimated the total cost of LNG delivered to Hawaii, starting with natural gas price forecasts and adding on the costs of liquefaction, transportation to Hawaii, and additional infrastructure and other onshore Hawaii costs. It was concluded that LNG could provide fuel savings for the Oahu electricity sector of 40 percent or more compared to oil, and less but still significant savings for neighbour island electricity. The GE Study found that LNG could lower electricity costs by up to 27 percent.

Both studies noted that although LNG import infrastructure would cost $200-300 million, that cost is small compared to the nearly $6 billion per year spent on oil, and based on forecasts, could be “repaid” through the savings realised in only a few years.

Finally, both studies stress that the cost benefits of importing LNG are based on forecasts, and forecasts are uncertain. Therefore, large-scale imports of LNG should be pursued only if the expected percentage savings are fairly substantial. Additionally, the potential for LNG imports to lower energy costs depends on the price differential between the cost of LNG delivered to Hawaii and the cost of the fuel it would displace. Both oil and natural gas prices have declined recently, but natural gas prices are expected to be less volatile.

Volatility in fossil fuel prices makes long term planning extremely uncertain, so it is also important to be careful in estimating the range of outcomes that volatility could create. Long-term price forecasts are simply too unreliable. For example, between 2011 and 2013 Hawaii oil prices (LSFO) reached almost 3.8 times the “high” forecasted price in the 2000 Energy Information Administration’s Annual Energy Outlook. Hawaii’s electric ratepayers spent about $5.9 billion more than they would have if EIA’s forecasted prices for oil between 2000 and 2014 had been accurate.

If LNG can save money and decrease pollution as we travel the
road to a renewable future, shouldn’t we consider it?

A Monte Carlo analysis yields very informative results for evaluating risk when combining fifteen years (2000-2014) of oil, diesel and natural gas pricing data from various Hawaii sources (1), along with Hawaii pricing information for the fossil fuel power generation fleet and renewable energy generation. Several key factors become clear when considering a 30-year period comprising five years, with the status quo followed by 25 years with a new fleet that can include LNG or higher levels of renewable power. First, there is an 80 percent chance fuel savings from LNG would range between break even with oil, up to nearly $32 billion in present value for ratepayers.

Hawaii has debated seeking an LNG contract at a fixed discount to the price of oil (or an oil/diesel blend), or to the Henry Hub index price for natural gas. Assuming it is $10 per million Btu to bring in Henry Hub-indexed gas to Hawaii (and regasify it), and that a reasonable discount to oil/diesel would be 15 percent, then the Monte Carlo indicates that Henry Hub-indexed gas will be cheaper in about 80 percent of possible future price scenarios. Comparing an LNG with current levels of renewable power generating fleet to an LNG with higher renewable power (a bit more than double current levels) fleet, indicates that renewable energy added at prices below 14 cents per kWh provides something akin to free insurance against high fossil fuel prices that could cost Hawaii more than $15 billion more if we did not have the higher level of renewable energy.

Based on this analysis, the answer seems clear: add as much low-cost renewable energy as possible and consider filling the balance of demand with LNG. However, Hawaii must be careful to contract for the fuel and build LNG infrastructure so that it can ramp down overtime and not be locked into long-term excess capacity.

LNG can help accommodate renewable energy and need not conflict with the State’s energy goals if done right. It’s cheaper, burns cleaner, and is more stable in price than oil. If LNG can save money and decrease pollution as we travel the road to a renewable future, shouldn’t we consider it?

(1) Hawaii Department of Business, Economic Development and Tourism (DBEDT), Hawaii Public Utilities Commission, Bloomberg and Hawaiian Electric Companies (HECO).

For more information, visit HNEI.Hawaii.edu and Ulupono.com.