Dive Brief:

• Hawaii energy regulators are beginning to see some initial successes from their newly adopted performance-based regulation (PBR) framework, and are simultaneously considering additional reliability metrics as the state prepares to retire a series of fossil fuel plants in the coming years, Public Utilities Commission Chair James Griffin said at a conference Wednesday.
• The commission approved the new PBR framework late last year and a portfolio of new performance incentive mechanisms came into effect on June 1. Earlier this month, regulators announced their intention to consider developing additional incentive mechanisms, that will focus on retiring fossil fuel generation units and interconnecting large-scale renewable energy projects.
• Setting up the PBR framework involved a resource intensive process and took around two and a half years, and states that want to follow should not underestimate the undertaking, Griffin said at a Smart Electric Power Alliance summit on Wednesday. "But I’m glad we’ve done it and we got to the place that we have, and we’re going to continue to work with the various stakeholders here to make it successful," he added.

Dive Insight:

Hawaii’s PBR framework essentially ties together two of the state’s challenges — being a high-cost electricity environment and navigating aggressive clean energy goals, according to Griffin. Part of this challenge is weaning off its dependence on oil, which in turn can offer savings for customers.

"So we really want a highly motivated utility to be managing costs as well as rapidly integrating renewable energy resources of all types," Griffin said at the summit. 

Last December, the agency issued a decision that set up that framework, moving the state away from a traditional cost-of-service regulation model where rates are based on system costs, to one where rates are structured to incentivize a utility’s performance. The framework also included a "customer dividend," which will reduce rates by around $12.6 million in 2021 and a little under $70 million through 2025, according to the commission. The portfolio of performance incentive mechanisms and other metrics that make up that framework includes incentives to accelerate the move toward Hawaii’s renewable energy goals and expedite the interconnection of distributed energy resources.

A key element of the new framework is a revenue cap that gives utilities a strong incentive to control costs, Griffin said. And over the course of the development of this policy, he noted that Hawaiian Electric (HECO) has begun offering guidance to investors on their cost control measures. 

This is "the first time we’ve certainly seen it for this utility, and I’m not sure I’ve really seen that anywhere else in the industry yet. So I think it’s good evidence that this is starting on the right path," Griffin added. 

Other performance incentives are still works in progress, Griffin said, "but the initial feedback has been promising so far."

"We’re still in the early stages of working with our regulators and other stakeholders to successfully implement this new framework for the benefit of our customers and to support our state’s renewable energy goals – lots of work still ahead but definitely a positive start," HECO said in an emailed statement. 

One example of concrete change that stakeholders have observed is around interconnection processes, Isaac Moriwake, a managing attorney at Earthjustice, said.

"Since the commission has made it clear that … interconnection experience is a high priority in this PBR framework, the utility has visibly put more effort into cleaning up that process, and it’s been a long-time sore point in Hawaii going for years now," Moriwake said. 

"I think both the establishment of … a performance incentive mechanism directly targeting interconnection experience, along with a lot of other strong signals and even admonishments, threatening penalties, coming from our commission, I think has gotten the utility’s full attention on that issue right now," Moriwake added.

One reason that interconnection processes are a key focus at the moment is Hawaii’s broader effort to retire a suite of fossil fuel plants. HECO is planning to retire the 180 MW AES coal plant, which serves around 15% of demand on Oahu, in 2022, followed by the 38 MW oil-fired Kahului plant in 2024, and two units of the Waiau oil-fired plant as soon as it can. However, regulators are concerned that issues with the utility’s interconnection processes could delay the renewables that will be needed to replace these power plants, and earlier this year opened a docket to take a closer look at its transition plans. 

Now, the commission is considering addressing some of the concerns through performance incentive mechanisms. In its July 9 notice, it announced a working group that will begin developing additional incentive mechanisms this August, including to address the timely retirement of fossil fuel plants. 

A key issue for regulators is ensuring that placing a cap on utility costs does not lead to trade-offs that involve skimping on reliability, Griffin said. The commission has pre-existing performance incentive mechanisms for reliability, but "one area … we’ll be looking into further as we’re doing the fossil fuel retirements is other resource adequacy-type metrics that you might want to include in this," he said.