Energy For Tomorrow The State…

                                       Energy For Tomorrow

The State of Hawaii's New Year's Resolution is to provide "Energy For Tomorrow." Hawaii
relies on imported petroleum for nearly 90% of its energy needs. Hawaii is presently facing the
highest energy costs in the nation. This heavy dependence on oil, places Hawaii's long-term
economic viability at risk because high oil prices will be passed on to consumers ­ This is a
compelling state interest.

To make sure there is energy for tomorrow ­ it is important to properly marshal our resources
today and stimulate the production and use of biofuels to reduce our addiction to foreign oil. For
years there has been much talk about weaning our state off oil and creating a renewable energy
industry ­ cheap oil prices has blocked implementation of meaningful bioenergy policies. It is
time to make Hawaii energy self sufficient!

This comprehensive energy bill sets forth an integrated strategic policy framework that
provides reliable, cost effective methods to conserve energy for tomorrow, with state agencies
taking the lead to implement conservation measures. The bill establishes bold initiatives to
provide a catalyst to produce new energy for Hawaii ­ launching Hawaii as a leader in
renewable fuel production. These initiatives will provide measurable achievable results
in the near, mid and long term ­ creating more Energy For Tomorrow.

Low Oil Prices Not Expected to Return

Experts indicate that world oil prices have reached new highs - the low prices of the past are not
expected to return because worldwide demands continue to surge.

For example, from 1992 to 2003, Hawaii's average annual oil imports from the Middle East were
less than 1%. In 2004, Hawaii imported 13.5% of its crude oil from the Mid East. In 1998,
Indonesia, Australia and China, combined, provided approximately 80% of Hawaii's crude oil
demand. By 2004, their total declined to 31%. In fact, China's demand in 2004 skyrocketed by
about 1 million barrels per day.

Hawaii, like much of the Asia-Pacific, and the world, is competing with strong demand for
increasing oil imports from the oil-producing countries. Countries that used to be net exporters
to Hawaii, like China, have become oil importers. This intense competition for the same
diminishing energy resource ­ crude oil ­ has led to a significantly higher new "plateau price",
from which experts have concluded historical low price trends will not return.

Exactly 1 month ago, December 12, 2005, the US Energy Information Administration (USEIA)
released its updated oil price forecast.1 The USEIA is the federal agency with the primary

1
    USEIA Overview Summary: "In preparing AEO2006, EIA reevaluated its prior expectations about world oil prices in
    light of the current circumstances in oil markets. Since 2000, world oil prices have risen sharply as supply has


                                                           1
responsibilities for this country's energy statistics. The agency's "Early Release" of its Annual
Energy Outlook 2006 (AEO2006) confirmed that this intensely competitive global oil market,
together with major disruptions like Hurricane Katrina, and inadequate investment in new oil
supplies, has prompted the agency to reevaluate its previous oil price forecast due to sharply
increased world oil prices. In the words of the EIA analysts, they are projecting: "Much higher
world oil prices than were projected in AEO2005..."

In fact, EIA's December 2005 report has revised last year's forecast of the price of oil for the year
2025 sharply upward. Last year, EIA's 20-year forecast projected that oil prices would be
$32.94 per barrel. Now, the agency projects that light, low- sulfur crude oil ­ the only kind used
in Hawaii ­ will cost $54.08 per barrel in 2025 (about $21 per barrel higher than the projected
2025 price in AEO2005), rising to $56.97 per barrel in 2030. (All prices are in "2004 dollars.")

A final note on oil price forecasts: Traditionally, USEIA's oil price forecasts have been fairly
conservative; i.e., on the low side.

Hawaii Has Abundant Renewable Fuel Potential

A 2003 study by Stillwater Associates projected that an ethanol industry of 90,000,000 gallons
per year "could add as much as $300,000,000 to Hawaii's economy in direct and indirect value."

In addition, emerging energy technologies can increase the use of renewable resources through
conversion to hydrogen-rich liquid or gaseous fuels as energy carriers, stimulating more economic
growth, while making the state more self-reliant. With advanced hydrogen technologies,
renewable resources can be stored, distributed, and used in a variety of clean, efficient power and
transportation applications.

The State's combination of abundant renewable resources, high fossil fuel prices, limited
geographic area, and recognized expertise in hydrogen technology research and development,
makes it an ideal location to lead the transition to a hydrogen economy over the long term and
bring considerable investments of dollars and expertise to Hawaii.

Strategic Plan ­ Energy for Tomorrow

This bill establishes a long-term strategic plan, which provides near, mid and long term results
that moves Hawaii to be not only energy self-sufficient, but will create Hawaii as a leader in



 tightened, first as a result of strong demand growth in developing economies such as China and later as a result of supply
 constraints resulting from disruptions and inadequate investment to meet demand growth. As a result of this review, the
 AEO2006 reference case includes much higher world oil prices than were projected in AEO2005. In the AEO2006
 reference case, world crude oil prices, which are now expressed in terms of the average price of imported low-sulfur crude
 oil to U.S. refiners, are projected to increase from $40.49 per barrel (2004 dollars) in 2004 to $54.08 per barrel in 2025
 (about $21 per barrel higher than the projected 2025 price in AEO2005) and to $56.97 per barrel in 2030. (AEO2006
 Overview, USEIA Website.)"



                                                            2
hydrogen production and possibly an energy exporter. The bill contains the following integrated
system of initiatives:




1.       Create More Transparency In Gasoline Markets And the Energy Industry
     ·   Repeal the gasoline price caps as contained in Act 242 (Session Laws Hawaii 2004) -
         Replace with systemic industry monitoring system.

     ·   Increase competition by increasing transparency of industry information for all types of
         fuel producers and handlers with improved data collection and reporting requirements to
         establish and effective statewide watchdog monitoring system.

     ·   Provide consumers with information as to the cost of importing the product to compare
         with market price (import parity price) ­ increases competition.

     ·   Repeal restrictions on the vertical integration of gasoline refiners and wholesalers, and
         retailers, first instituted in Hawaii in 1991. In 2000, a Federal Trade Commission staff
         analysis found that these divorcement policies actually harm consumers, because they
         have raised gasoline prices. This econometric analysis examined the effects of
         divorcement policies in Hawaii, Connecticut, Delaware, Maryland, Nevada, Virginia, and
         the District of Columbia. The analysis concluded that divorcement added about 2.7¢
         cents per gallon at retail (self-serve) on regular unleaded gasoline, costing consumers an
         estimated $100,000,000 annually.

     ·   Improve the State's data and analytic capabilities and understanding of energy industry
         and systems, by all of the state's energy-related agencies ­ DBEDT, Public Utilities
         Commission, and Consumer Advocate. Provide accurate, reliable information for
         informed policy and regulatory decisions, energy emergency planning, and assessments of
         renewable energy, energy efficiency, and fossil fuels in all sectors.

         Understanding Hawaii's energy markets and its energy industry is not just about prices ­
         it is about energy and economic security. With nearly 90% of all our energy coming from
         imported oil, state government has a duty to protect Hawaii's energy and economic
         security. The kind of energy industry data and information needed has previously been
         unavailable on a systematic basis. This package aims to obtain it and use it judiciously.

2.       Develop And Increase Use Of Alternate Transportation Fuels

     ·   Establish statewide Renewable Fuels Standard (RFS) ­ by December 31, 2020, 20% of
         highway fuel demand be provided by renewable fuels such as ethanol, biodiesel, or




                                                  3
         hydrogen produced from renewable resources. Interim standards would be 10% in 2010
         and 15% in 2015.

     ·   Allow State agencies to take the lead in purchasing energy efficient vehicles and vehicles
         that use alternative fuels. Beginning July 1, 2006, at least 20% of newly purchased light
         duty vehicles acquired by covered fleets shall be energy efficient and alternative fuel
         vehicles. Covered State fleets will comply with the federal requirement for vehicles to be
         capable of using alternative fuels.
     ·   Provide alternative fuel and highly efficient vehicles with special license plates and free
         vehicle registration.

     ·   Extend the excise tax exemption for alcohol fuels.

     ·   Prepare a statewide multi-fuel biofuels production assessment to quantify the potential
         for ethanol and biodiesel production in Hawaii ­ provide long term comprehensive
         evaluation of potential feedstocks, technologies and economics of various types of
         renewable fuel sources. Appropriate $200,000 to prepare study.

3.       Stimulate State and Consumer Energy Efficiency

     ·   Retrofit and renovate existing State facilities using energy efficient design and equipment -
         agencies will be directed to build new facilities to meet energy efficient standards and
         procure recycle materials. Appropriate from General Funds (Total: $630,000) for energy
         efficiency and renewable energy programs to include: Two (2) budgeted positions
         Renewable Energy Analyst, and Energy Efficiency Analyst (Salaries & fringes:
         $130,000); and, program funding ($500,000).

     ·   Remove the sunset date (1/1/2008) for renewable tax credits ­
            o Increase the dollar cap from $1,750 to $10,000 for single-family residential
              taxpayers who purchase and place into service photovoltaic systems.
            o Increase the dollar cap from $350 to $1,000 for multi-residential taxpayers who
              purchase and place into service solar water heating or photovoltaic systems.
            o Increase the dollar cap from $250,000 to $500,000 for commercial taxpayers who
              purchase and place into service a solar energy system.
            o Cost estimate ­ estimated $1.5 M more than presently paid out ($1.75M).

     ·   Redirect demand side management fund currently collected by the utilities companies to
         utilize the majority of the funds for initiatives to promote the use of renewable energy
         products and services to reduce Hawaii's dependence on oil ­ establishing a Public
         Benefits Charge. The public utility commission approved the first demand-side
         management programs in 1995. In 2003 the public utility commission approved


                                                   4
         Hawaiian Electric Company's request to impose a $.0023 per kilowatt-hour surcharge,
         which raised approximately $16,600,000. Only $6,200,000, (37 percent of the surcharge)
         was used for demand-side management programs, with the majority of the funds (63
         percent - $10,400,000) going to the electric company for lost sales recovery payments
         and shareholder incentives. Cost to administer the program by a third party will be taken
         out of funds collected.

     ·   Request that the Public Utilities Commission consider and encourage the utilities to adopt
         advanced pricing tariffs for all electrical customers. This kind of pricing aims to lower
         consumer costs, reduce production costs by reducing reserve power generation
         requirements, and increase electric system reliability. Across the country, utilities have
         cost-effectively achieved from 7 to 23% reductions of peak electric system demand load.
         (Letter request by Governor to PUC.)

4.       Significantly Increase Use of Renewable Energy Resources

     ·   Strengthen the Renewable Portfolio Standard for electricity production ­ each utility
         company that sells electricity shall establish a renewable portfolio standard (10% by
         2010, 15% by 2015, and 20% by 2020). Subjects utilities to penalties, if the PUC
         determines the targets have not been met.

     ·   To encourage and facilitate renewable energy development and streamline permit process,
         Department of Land and Natural Resources is to complete a comprehensive inventory of
         state lands available for renewable energy, and establish renewable energy resource
         development sub-zones. Appropriates $200,000.

     ·   The State's Department of Agriculture is to develop programs jointly with Hawaii's
         farmers to encourage energy crop production and use of bioresidues for energy
         production, and develop funding from the Farm Bill. Appropriates $150,000.

     ·   Share oil price risk with utility.

     ·   De-link renewable price from oil price.

5.       Establish Hawaii as Leader in Hydrogen Production

     ·   Establish a world class renewable hydrogen program ­ The State's combination of
         abundant renewable resources, high fossil fuel prices, limited geographic area and
         recognized expertise in hydrogen research and development makes Hawaii an ideal leader
         for hydrogen production. The hydrogen program would develop hydrogen education and
         outreach programs to accelerate use of renewable energy to produce hydrogen and create
         public private partnerships to expand development. Appropriate $750,000 requested to
         include: Three (3) budgeted positions (Hydrogen Program Manager, Hydrogen Program


                                                   5
       Specialist, and Hydrogen Project Specialist (Salaries & fringes: $250,000)); and, program
       funding ($500,000) to manage and conduct hydrogen energy program activities; e.g.,
       formation of partnerships, technical analyses, and project implementation.

   ·   Establish seed capital fund of $10M to leverage federal funding and partner with private
       investments to establish Hawaii's energy self-sufficiency.

The Vision ­ Hawaii, the World's Renewable Hydrogen Energy Leader

Hawaii's unique focus is on production of hydrogen using renewable energy resources, not
conversion of hydrogen from fossil fuels. This vision will secure a competitive niche for Hawaii
in the context of larger national and global initiatives.
This unique strategy will bring together private industry, the best minds in our research
community, and government at all levels to attract the necessary additional investments of dollars
and expertise to Hawaii. At the same time, we will be fully developing our renewable energy
resources. This is an innovative "no regrets" renewable energy development approach to
accelerate the development of Hawaii's indigenous energy assets and reduce Hawaii's precarious
dependence on imported fuels.

In the long-term this initiative could convert Hawaii from an energy importer to an energy
exporter. With this comprehensive, integrated energy policy package Hawaii is positioning itself
to become the world's leader in renewable hydrogen energy.

The Results

The Lingle Administration's energy package provides clean, reliable, affordable, and
secure energy for today. It does not stop there. In light of the increasingly competitive
and insecure global oil market, this package aims to ensure Hawaii's own clean, reliable,
affordable, renewable, and best of all "homegrown", energy for tomorrow.


                                               ###




                                                6