Public Comment Docketno 2014 0183 Psip Hawaii Shippers Council

HAWAII SHIPPERS COUNCIL
Representing the Interests of Cargo Owners Since 1997

49 Niuhi Street Honolulu, Hawaii 96822-4841 Tel (808) 947-4334 Email: pacmar@hawaiiantel.net
File Ref: HSC-000.lh

October6,2014
TheHonorableChairandMembersofthe
Hawai'iPublicUtilitiesCommission
465SouthKingStreet
KekuanaoaBuilding,1stFloor
Honolulu,Hawai'i96813
DearCommissioners:
Subject: PublicCommentDocketNo.20140183PSIPsHawaiiShippersCouncil
We,theHawaiianShippersCouncil,EastwindPowerPartners,Ltd.,andZEEPInc.respectfullysubmit
publiccommentsinresponsetothecaptionedHawaiianElectricCompaniesfiling.
Pleasedonothesitatetocontactusifwemayansweranyquestionsorassistinanyway.
Verytrulyyours,
MichaelN.Hansen,HawaiiShippersCouncil
TheodoreMason,EastwindPowerPartners,Ltd.
ArthurNislick,EastwindPowerPartners,Ltd.
PhilipE.Lewis,ZEEPIncorporated
Enclosure
PublicComment
DocketNo.20140183
PSIP
Filer:HawaiiShippersCouncil
October6,2014

Contents
ExecutiveSummary.......................................................................................................................................1
1. Introduction..........................................................................................................................................2
2. LNGChallenges.....................................................................................................................................2
3. WhyMethanol?....................................................................................................................................4
4. EconomicsandEmissionsofMethanolforHawaiiPower....................................................................6
5. MethanolTestProposaltoHECOandKalaeloaPP...............................................................................8
6. ImplementingMethanolforPowerinHawaii......................................................................................9
7. Conclusion...........................................................................................................................................11
A. HawaiiLNGShippingOptions,HawaiiShippersCouncil.....................................................................12
B. HecosContainerizedLNGShippingOptions,HawaiiShippersCouncil.............................................19
C. EconomicsofMethanolforPowerGenerationinHawaii..................................................................30
D. ProposalforMethanolFuelTesttoHECO..........................................................................................34
E. ProposalforMethanolFuelTesttoKalaeloaPowerPartners,LP......................................................39
F. ReportonEilatPlantMethanolConversion,IsraelElectricCompany................................................40
G. LetterofSupportforMethanolTest,KalaeloaPartnersLP................................................................66
H. LetterofSupportforTerminalingandLogistics,AlohaPetroleum....................................................67
I. LetterofSupportforMethanolTestingandConversion,IsraelElectricandDorChemicals.............68
J. LetterofSupportforMethanolSupply,MethanexCorporation........................................................69
K. LetterofSupportforMethanolSupply,ZEEPIncorporated...............................................................71
L. ExcerptsfromHawaiiIntegratedBiofuelsResearchProgramPhaseIFinalReport...........................73
PublicCommentDocketNo.20140183PSIPsHawaiiShippersCouncil 1
EXECUTIVESUMMARY
ThispubliccommentrelatestoHawaiian
ElectricCompanysPowerSupplyImprovement
Plan(PSIP)filedAugust26,2014andis
especiallyfocusedonHECOsplanswithregards
tofuelsandoperationsforsystemconventional
powerplants.
HECOplanstoconvertitsoilfueledplantsto
naturalgas.Naturalgaswillbeshippedto
Hawaiiasacryogenicliquid,firstincontainers,
andpossibly(HECOstatementsareheavily
qualifiedonthis)laterasbulkLNG.
ThePSIPholdsthatbothcontainerizedandbulk
LNGdeliverieswillbetransitory:
BulkLNGisproposedasmore
economicalsolutionfortheperiod
20232030,untilrenewablesdisplaceall
fossilfuels.Thisisveryshortlivedfor
capitalizedinfrastructure.
ContainerizedLNGisproposedasaway
toutilizenaturalgasinthetimewindow
late2017to2023,theearliestdate
whenbulkLNGcanbedeliveredto
Hawaii.
BulkLNGmaybeconsideredabridgetoa
renewablesledfuture,whilecontainerizedLNG
canbeconsideredabridgetoabridge.The
risksanduncertaintiesofthisplanare
substantialandmanifold:marketvolatility,
logistics,projectcostescalation,anddelayswill
allimpactthisplanseverely.Asoneofmany
possibleexamples,thedatesgivenshouldbe
consideredearliestpossibledates.Projectsof
thisscaleandcomplexityarerarely,ifever,
completedbytheearliestpossibledate.
Additionally,costssofarpresentedarebased
onnonbindingestimatesratherthanfirm
quotesandmaybeconsideredthelowest
possibleprice.Costswillshiftinonedirection:
higher.Nooneshouldbeconfusedintothinking
thesebestcaseestimatesarelikelyoutcomes.A
projectmanagerwhoconfidentlypredictsthe
bestcasepossibilityasalikelihoodplaceshis
teamatgreatriskandpossiblefailure.
Riskinherentlyincreaseswithlargercapital
expendituresandlongerleadtimes.Conversely,
thesurestroutetoriskreductionistominimize
theseitems.Andthesurestwaytominimize
theseitemsistoapplyexisting,orslightly
modify,existinginfrastructuretothenew
regime.Additionally,theshortdurationsofthe
containerizedandbulkLNGregimesrequire
acceleratedamortizationwhichfurther
exacerbatesrisk.
Methanolisaprovencommercialpower
generationfuel;containerizedLNGisnot.
Methanolfiringrequiresonlyminor
modificationstotheexistingoilbasedfuel
infrastructureandlogisticschaintoachievethe
benefitsofnaturalgas.Inlessthanthreeyears
time,IsraelElectricCompanytestedmethanol
firinginbothacombustionturbineandsteam
boilersandperformedallneededengineering,
permitting,andconstructiontoconverttheir
Eilatpowerplanttodualmethanol/oilfueling
atacostof4.1millionUSD.Eilatisnow
generatingpowerfrom100%methanolfiring
onaroutinebasis.Thiscompareswithcostsof
orderonehundredtimeshigherandtimelines
stretchingintodecadesforanLNGconversion.
Whilenoplanisriskfree,thereductionof
capitalandtimerequirementsmakemethanola
lessrisky(oralternatively,morerisktolerant)
pathawayfromoilandtowardnaturalgas
basedfuelsforHECOandHawaiianpower
consumers.
Finally,inadditiontoreducingrisk,methanols
lowercapitalcostandtimerequirementsalso
makesitamoreappropriatetransitionfueluntil
renewablescanfullycarrytheload.
Environmentalistsarerighttobeconcerned
thatoncetherequiredverylargeinvestmentis
madeintoanLNGinfrastructureitwillbe
difficulttowalkawayfromthatinfrastructure.
Additionally,bulkLNGmusttypicallycontracted
forverylongterms,usuallytwentyyearsor
more.Timelinesarealmostcertaintobe
lengthened,possiblydramatically.
Thefollowingdiscussionandattachments
providemoreinformationonmethanolasa
powerfuelfortheHawaiianmarketaswellas
supportingdocuments.Anactionablepath
forward,includingamethanoltestforKalaeloa
isalsodescribed.
1. INTRODUCTION
ThePublicUtilitiesCommissionsrequeststocommentersprovidesaguidelineforthediscussion,
addresswhetherthePSIPsprovideclearandactionablestrategiesto:
lowerandstabilizecustomerbills;
integrateadiverseportfolioofcosteffectiverenewableenergyprojects;
operateeachislandgridreliablyandcosteffectivelywithsubstantialquantitiesofvariable
renewableenergyresources;
containappropriatestrategiesandtimelyactionplans,supportedbywellreasonedand
compellinganalyses,toachievethesegoalsoneachisland.
ThisdocumentcommentsprimarilyuponthePSIPasitrelatestofuelsandoperationsfortheoilfueled
powerplantsintheHECOsystem.LNGistheonlyalternative(tooil)liquidfuelconsideredinthePSIP,
butthiscommentdocumentwillalsoprovideinformationonmethanolandwhyitshouldbeconsidered
aswellasLNG.
2. LNGCHALLENGES
Ideally,anindepthanalysisofthecost,timingandrisksofLNGaspresentedinthePSIPwouldbe
performed.However,thereisinsufficientinformationpresentedtodoso.Nevertheless,theHawaii
ShippingCouncilhasanalyzedtheproposalasmuchaspossible.AppendixA.,HawaiiLNGShipping
Options,HawaiiShippersCouncil(p.12)andAppendixB.,HecosContainerizedLNGShippingOptions,
HawaiiShippersCouncil,p.19eachraiseanumberofquestionswhichareignoredornotfully
addressedinthePSIP.
ForcontainerizedLNGfromBritishColumbia,theseinclude:
We believe transporting 0.8 million MT of LNG by container annually will present
many logistical challenges, is unlikely to result in significant cost savings due the
high handling costs associated with the proposed shipping method in containers;
and, as a result, containerized LNG could potentially end up costing more than the
petroleum fuels currently being used.
Presently there is no containership service between Vancouver and Honolulu, and
HECO would have to induce service, which could substantially increase unit
freight costs. Alternatively, HECOs LNG containers could be routed via Seattle,
Washington, but that would necessitate use of a Jones Act carrier.
HECO also addressed containerized LNG in their PSIP Section I in part as follows:
Based on confidential information received via the Containerized LNG RFP process, we
believe that an LNG delivery commencement date in the latter part of 2017 remains
viable if the following five key milestones are realized by their noted deadlines.
Upon achievement of these milestones, we will make the investments necessary to
construct, assemble and aggregate the various pieces of the supply chain needed to
deliver LNG to Hawaii in 2017. It nevertheless must be recognized that these milestones
are challenging, some of which are beyond our control and they will only be realized if
no significant legal, environmental, or social obstacles encumber the process.
According to the RFPs schedule, HECO was to: (i) select its preferred bidder by
the end of May 2014; (ii) finalize definitive agreements with the preferred bidder by
August 2014; and, (iii) thereafter submit an application covering the agreements to
the PUC. These milestones have not been met.
The best known manufacturer of LNG containers today is a German company
Chart Ferox GmbH and the applicable unit would be their Chart 40 foot Intermodal
unit (TVAC Pressure Transfer). The pricing for these units range from U.S.
$175,000.00 to 200,000.00 each depending on the number ordered and any special
specifications. Presumably with a large order that might be required for HECOs
requirements, better pricing could be negotiated and perhaps by arranging
manufacturing in China.
Given HECOs stated LNG requirements for 800,000 metric tons per annum and
load factor of 10,000 U.S. gallons per 40 ISO container, delivering that quantify of
LNG would require 47,059 container loads per annum or 905 container loads per
week.
There is no container facility on Tilbury Island where the FortisBC liquefaction
plant is located.
In other words, once the Tilbury expansion is completed, the plant would be able to
provide approximately 34% of HECOs higher initial requirements if the all the
plants production were to be dedicated to Hawaii, which of course cant be done
because of FortisBCs other commitments especially to their utility customers.
Assuming weekly shipments, 905 loads arriving per week and 6 week turnaround
time, that would require 5,412 40 containers. At a cost of $175,000 per container
that is very close to a billion dollars (actually U.S. $947.1 million). Presumably for
such a large order, this price could be brought down somewhat.
After investigating the possible methodologies, there doesnt appear to be any good
solutions to moving 800,000 metric tons of LNG per year in the container mode from
the Fraser River to Hawaii.
Its very probable that HECO could successfully operate a model LNG shipping
project supplying a single power plant on Oahu Island such as Kalaeloa Partners LP
facility in Campbell Industrial Park.
The Kalaeloa plant consumption would amount to approximately 615 metric tons
per day of LNG, which is nearly all the capacity of the FortisBCs Tilbury Plant
expansion scheduled for completion in late 2016.
Following from this scenario, the LNG containers would necessarily be discharged
at Honolulu Harbor and trucked to Campbell Industrial Park putting 500 additional
movements per week on Oahus highways. (The Matson containerships are
gearless and could not discharge at KBPH.)
To answer the strategic questions HECO posed at the beginning of their
containerized LNG RFP, it doesnt appear the containerized LNG approach prove
workable in the short to medium term nor the long term. Although it is probably
possible to successfully operate a model containerized LNG project, because it
cannot be scaled to provide for HECOs larger requirements, it wouldnt seem to
make any sense to pursue it.
TheHawaiiShippingCouncilpointsoutthefollowingchallengesforbulkLNG:
HECO is facing several problems arranging for a supply of bulk LNG.
The most efficient points of LNG supply to Hawaii would be on the West Coast of
North America where several LNG export terminals are being proposed as follows:
U.S. West Coast -- primarily on the Oregon Coast and lower Columbia River
Canadian West Coast -- Ports of Kitimat and Prince Rupert, British Columbia
Alaska -- A new terminal to be built at Nikiski, Cook Inlet.
However, most of these projects are unlikely to be completed within the next ten
years and offer HECO a convenient source of bulk LNG at their planning time
horizon of 2022.
ApacheCorporation,aleadingglobalproducerofnaturalgas,recentlyannouncedtheywerecancelling
theirparticipationinthepresumedleadingBritishColumbianLNGgasificationterminalatKitimat.
It is generally agreed the probable location of a shore-side LNG terminal would be
at Kalaeloa Barbers Point Harbor in West Oahu. The likely site would be the
undeveloped harbor area shown as future expansion area and sometimes called
Pier 8. It is estimated the shore-side LNG terminal and pipelines to the power
generation plants on Oahu and other potential customers would together cost
around $1 billion
There are indications HECOs FSRU Pearl Harbor proposal has encountered
problems including Navy resistance to some of the necessary aspects of a FSRU
installation, and can no longer be considered their primary solution at least for the
medium term. There are significant capital costs associated with constructing an
FSRU mooring and associated pipelines, albeit they should be lower than for a shore-
side terminal. However, a floating terminal would incur higher operating costs
primarily from chartering a FSRU, which is a very large operating expense.
Neither a floating nor shore-side LNG receiving terminal on Oahu Island would
address the delivery of LNG to the neighbor islands where HECO also has plants
and also needs to transition away from petroleum fuels for cost and regulatory
compliance reasons.
HECO addressed development of a bulk LNG receiving terminal in their PSIP and
said it could be available in approximately 8 years by 2022 based on advice from the
U.S. Federal Energy Regulatory Commission (FERC) as follows:
The development of a bulk receiving terminal will be subject to FERC review
and approval and therefore cannot be realistically achieved by 2017. Siting of
such a terminal, whether floating or land-based, will require substantial
engineering analysis and stakeholder socialization. After consulting with FERC,
a realistic schedule to develop a bulk LNG terminal is approximately 6 to 8
years.
We agree that the permitting process for a bulk LNG terminal would be lengthy, but
would estimate design, permitting and construction is likely to require ten or more
years.
In order to take advantage of Jordon Cove or any U.S. bulk LNG supply location
(including Alaska), HECO would also need to address the Jones Act which requires
the use of U.S.-built, U.S.-flag, U.S.-owned and U.S.-crewed vessels to carry cargo
between two domestic points.

There are no LNG carriers in the Jones Act fleet and none have been built in the
U.S. since the late 1970s.
Insummary,thelogisticalchallengesforbothcontainerizedandbulkLNGdeliverytoHawaiiare
daunting,tosaytheleast,andtheyareleftunansweredbythePSIP.
3. WHYMETHANOL?
MethanolmaybeconsideredtheotherLNGin
thesensethatlikeLNG,itisacleanburningliquid
madefromnaturalgas.Butwhilemethanoloffers
mostoftheadvantagesofLNG,unlikeLNG,itcan
betransportedinconventionaltankersand
pipelinesandstoredinconventionaltanks.LNG,
ontheotherhand,mustbekeptat260
Fahrenheitdegreesbelowzerotemperature.
Further,LNG(methane)isapotentgreenhouse
gas(somethirtytimesmoredeleteriousthan
CO2),whichinnonrefrigeratedcontainers,such
astheISOcontainersdescribedinthePSIP,
continuallyreleasemethanetotheatmosphere.
Becauseoftherecentabundanceofnaturalgas
production,manyworldscalemethanolplants
arecurrentlyunderconstructionordevelopment
intheU.S.
WHATISMETHANOL?
Methanolisthesimplestalcoholandis
equivalenttonaturalgasormethaneplusone
oxygenatom.Theadditionaloxygenatommakes
methanolamoreeasilyandcompletely
combustedfuelcomparedtohydrocarbonssuch
asmethaneandproducesmuchlessemissions.
Byvolume,methanolisamongthetopthree
commoditychemicals(alongwithethyleneand
propylene)butisalsoincreasinglyfindingitsway
intofuelapplicationsbecauseofitscleanburning
characteristicsandmuchmoreeasilystoredand
transportedthanLNG.
HEALTH,SAFETY,ANDENVIRONMENTAL
ASPECTSOFMETHANOL
Methanolburnsatamuchslowerratethanpure
hydrocarbonssuchasnaturalgasandoilbased
products.TheSocietyofAutomotiveEngineersis
onrecordassayingthatadoptionofmethanol
basedmotorfuelswouldresultinareductionof
motorvehiclefiredeathsof80%comparedto
conventionalfuels.In1965,theUnitedStates
AutoClubmandatedthereplacementofgasoline
bymethanolfuelincompetitionssuchasthe
Indianapolis500forfiresafetyreasons.
Incombustion,methanolemissionsaresimilarto
naturalgaswiththeexceptionofnitrogenoxides
whichareconsiderablylowerformethanol.
Methanolisanearlyodorlessandtasteless
substancethatbreaksdownmanytimesmore
quicklyintheenvironmentcomparedto
hydrocarbonssuchasdiesel,gasoline,naphtha,
ornaturalgas.Whilemethanolissometimes
brandedastoxic,infact,itislesstoxicthan
hydrocarbonfuels.Methanolisevenusedasan
additiveinwatertreatmentplantstopromote
1
LiquefiedNaturalGasInCalifornia:History,Risks,
AndSiting,CaliforniaEnergyCommission,July2003.
biodegradationandpurifywaterpriortorelease
intotheenvironment.
LNGandnaturalgasontheotherhand,are
responsibleforsomeoftheworstindustrial
accidentsintheUnitedStates.TheClevelandLNG
disasterkilled130people,injured255andwiped
out20+cityblocks.TheNewLondon,Texas
schoolexplosionkilledatleast295.TheCalifornia
EnergyCommissionhascitedanumberofrisks
whichshouldbeconsideredwhensitingLNG
facilities
1
.
THEMETHANOLMARKET
ThereisonlyoneLNGliquefactionterminalInthe
U.S.andoneunderconstruction.Therearea
totalof30liquefactionterminalsinoperation
worldwide.Alicensemustbeobtainedfromthe
FederalEnergyRegulatoryCommissiontoexport
LNGfromtheU.S.Sixprojectshavebeengranted
licensestodate.Theselicenseshavebecome
politicallysensitiveascertainenvironmental
groupsandcoalitionsofretailandindustrial
naturalgasconsumersareonrecordasopposing
LNGexportsandhavebegunexertingpressureon
FERCtodenypermits.Whileanexportpermitis
notrequiredtoshipLNGfromtheU.S.mainland
toHawaii,itunlikelythatanLNGliquefaction
terminalcouldachievefinancingandconstruction
withoutanexportpermitbecauseAsiaisthe
majormarketforU.S.LNG.
Incontrast,methanolexportdoesnotrequirean
exportpermitandisproducedfromsome300
plantsaroundtheglobe;probablyabout50areof
sufficientscaletobeconsideredexportable.
Methanexisthelargestproducer,butwithonly
30%penetration,themarketremainswell
distributedandcompetitive.Arobustworldwide
shippingfleetandinfrastructureexistswithmajor
playersbeingMethanex,MOL(Mitsui),
Mitsubishi,andSouthernChemical.
Methanolmarketgrowthhasrecentlybeenwell
over5%peryear,quiterapidforacommodity
chemical.Anewfleetofmethanolplantsisunder
developmenttocapitalizeonnaturalgas
abundanceintheUnitedStates.Mostofthese
plantsareonbeingdevelopedinLouisianaand
virtuallyallareneartheGulfCoast.
Methanolistypicallysoldundershortterm
contractsofsixmonthstotwoyearsduration.
However,thereisalsoavigorousspotmarket
availabletolargeconsumers.Thisisindistinction
toLNGwherecontractsaretakeorpayand
twentyorthirtyyearsindurationandmustbe
backedbythefullfaithandcreditoftheLNG
buyer.Thesecommitmentsarerequiredbythe
immensecapitalneedsofLNGplantconstruction.
ThescaleofLNGplantsisalsoimmense.
ConversionofHECOsentirefleetofpowerplants
toLNGwouldonlyrequireabout10%ofthe
outputofatypicalbulkLNGplant.Incontrast,
completeconversiontomethanolwould
consumeabout100%oftheoutputofoneworld
scalemethanolplant.
SomeofthenewU.S.methanolplants,South
LouisianaMethanolforexample,arebeingbuilt
withnonrecourseprojectfinancing,whichdrives
themtoseekfivetotenyearcontractswith
methanolpricesindexedtoU.S.naturalgas
prices.Thesetermsshouldbehighlydesirablefor
Hawaiipowergeneration.
Seelettersofsupportformethanolsupplyfor
Hawaiipowergenerationfromsuppliers:
AppendixJ.,LetterofSupportforMethanol
Supply,MethanexCorporation,p.69,and
AppendixK.,LetterofSupportforMethanol
Supply,ZEEPIncorporated,p.71.
THEBIOMETHANOLFUTURE
Methanol,unlikeLNG,provideslongterm
compatibilitywithHawaiisrenewableand
biofuelfuture.Notonlycanmethanolbeblended
inanyproportionwithotherbiofuels,but
methanolitselfisaviablebiofuel;itcanbe
efficientlyproducedfrombiomass.Professor
PatrickK.TakahashioftheUniversityofHawaii
haspublishedanumberofworksdiscussingthe
productionofmethanolfrombiomass(see
AppendixL,ExcerptsfromHawaiiIntegrated
BiofuelsResearchProgramPhaseIFinalReport,
p.73.Toquote:
Over$1,000,000,000leavesHawaii's
economyannuallytopayforimported
energy.Bytakingadvantageofideal
conditionsforplantgrowth,Hawaiican
harvestsufficientfastgrowingtreesand
grassesonlessthan5%ofitslandareato
providealloftheState'sliquidfuelfor
groundtransportation.ThroughaU.S.
DepartmentofEnergysubcontract
entitledHawaiiIntegratedBiofuels
ResearchProgram,theHawaiiNatural
EnergyInstituteisworkingactivelyto
demonstratethecommercialviabilityof
biomassenergyplantationsand
methanolfrombiomassfuelproduction.
Thissubcontractsupportsbiofuels
researchattheHawaiianSugarPlanters'
Associationonbreeding,culture,and
selectionofhighenergytropicalgrasses,
suchassugarlesssugarcane,toprovide
thedecliningsugarindustryapotentially
moreprofitableproduct.
4. ECONOMICSANDEMISSIONSOFMETHANOLFORHAWAIIPOWER
EconomicsandemissionsofmethanolpowergenerationarediscussedindetailinAppendixC.,
EconomicsofMethanolforPowerGenerationinHawaii,p.30.Majormilestonestoconducta
methanoltestarealsogiven.WhilethefiguresgivenhereapplytoHECOsexistingsteamand
combustionturbines,methanolisapplicabletoreciprocatingenginesalsobeingconsideredManDiesel
isdevelopingdualfueledindustrialengineswhichcanoperateonLNGormethanol.Herearesomeof
thehighlights:
The improved economics at KPP (KalaeloaPowerPartners)can bring near term ratepayer
savings of approximately $37 million per year starting in 2016 (compared to current
operations).
The KPP generating plant when converted to dual fuel capability and operating on
methanol would have a fuel cost of about 15 cents per KWH which is competitive with
renewable energy and 38% below HECOs fuel cost of 24.4 cents per kwh when using a
60%/40% blend of LSFO and diesel (to meet EPA regulations).
In comparison to HECOs Kahe steam units, KPP when fueled with methanol will reduce
greenhouse gas emissions by about 35%, reduce sulfur by 100% and reduce NOx levels by
more than 80%. Greenhouse gas emissions with the 60:40% blended fuel oil at HECOs
Kahe facility will not improve except for a 30% reduction in sulfur.
We believe the delivered cost of containerized LNG has been underestimated; we estimate
the delivered cost of LNG will be at least $16/MMBTU when all factors have been
considered. The LNG cost could be as much as $20/MM BTU when all the information is in.
The LNG container option will require more than 3,000 ISO containers to supply the
quantities specified by HECO from 2017 until 2023 which represents a very large capital
investment.
The cost of containerized LNG in the neighboring islands will be higher than the cost in
Oahu; perhaps by $3 to $5/MMBtu. Deliveries of methanol to the islands can be made via
currently used transportation methods. Methanol can fulfill the needs of the steam plants and
combustion turbine facilities at lower cost than petroleum and containerized LNG. Israel
Electric Corporation has commercial experience converting steam boilers and combustion
turbines to duel fuel capability with methanol as the primary fuel. This expertise can be made
available to HECO.
The KPP plant fueled with methanol produces 391,000 fewer metric tons stack-gas
emissions than the equivalent energy output at Kahe and 88,700 metric tons fewer than
Kahe when Kahe is converted to LNG.
KPPs annual fuel cost would be reduced by $37 million compared to present operation on
LSFO and would reduce Hawaiis oil consumption by almost 2 million barrels per year.
KPPs fuel cost would be $127 million lower than Kahe when producing the same energy
output (i.e. 1366 GWH/year). These fuel cost savings can be passed on to the ratepayer
starting in 2016 and extending through the 7 year period ending in 2023 when LNG in bulk
supply arrives in Hawaii.
The net present value of the annual savings in fuel cost from 2016 to 2023 between KPPs
current operation with LSFO and methanol would be around $200 million. The net present
value of KPPs operations on methanol vs the same output at Kahe would be around $700
million.
Action required to move forward are as follows:
Approve a test of methanol at KPP to verify operating conditions and establish
the basis for contract negotiations to extend the PPA with HECO and firm up the
purchase of methanol.
Obtain necessary approvals from EPA, DOH, US Coast Guard to re-permit KPP
for operation with dual-fuel (methanol and diesel or biodiesel back-up)
Arrange receiving, storage and local pipeline interconnection in Barbers Point
from pier to power plant.
Convert KPP to dual fuel; new fuel supply skid, new burner nozzles, fire safety
provisions, etc.
Commercial operations to commence in mid to late 2016.
5. METHANOLTESTPROPOSALTOHECOANDKALAELOAPP
OnAugust14,2014,EastwindPowerPartners
sentanunsolicitedproposaltoHawaiianElectric
Companytoconductatestofmethanolfiringat
Kalaeloa(seeAppendixD.,Proposalfor
MethanolFuelTesttoHECO,p.34).Longterm
methanolsupplyandlogisticsarealsodiscussed
intheeventthatlongtermdualfiring(methanol
andoilorbiofuelmixtures)isactuallyadoptedby
HECO.AlohaPetroleumhasexpressedaninterest
inprovidingonshorestorageandlogisticsfor
supplyingHECOsOahuandneighborisland
plantswithmethanol.
EastwindpersonneldidmeetwithRonCox,Box
Isler,andCecilyBarnesofHECOonSeptember
17,2014todiscusstheproposal.HECOexpressed
theopinionthatmethanolwasnotcost
competitivewithLNG.EastwindbelievesHECOs
opinionislargelydrivenbyunrealistically
optimisticassumptionsaboutLNGcontracting,
delivery,transportation,andstoragecosts.
Unfortunately,thereislittleinformationavailable
abouthowHECOsarrivedattheirLNGcost,soit
isneitherverifiablenorrefutable.
Basicplansforperformingamethanoltestand
conversiontodualfuelcapabilityaregivenin
AppendixE.,ProposalforMethanolFuelTestto
KalaeloaPowerPartners,LP,p.39.Kalaeloa
managementhasexpressedaninterestand
willingnesstoconductamethanoltest(see
AppendixF.,ReportonEilatPlantMethanol
Conversion,IsraelElectricCompany,p.40).Itis
estimatedthattechnically,atestcouldbe
performedwithinsixmonthsatcostofabout$1
million.However,permittingrequirementscould
addtothesefigures,especiallytheschedule.
ISRAELELECTRICCOMPANYSMETHANOLTEST
Itshouldbenotedthattechnically,thereisno
needforamethanoltest.IsraelElectric,a13GW
utility(thelargestinIsrael),isoperatingadual
fueled(methanolandfueloil)commercial
combustionturbinepowerplant(Eilat)onadaily
basis.However,itwouldnodoubtbehelpfulfor
allstakeholderstoseeanactualdemonstration
ofmethanoldelivery,storage,transportation,
andcombustioninHawaii.
Incontrast,wenotethatitisprobablyimpractical
toconductanLNGtest.Thechangesrequiredto
switchfromliquidtogaseousfuelsislikelytoo
expensiveandtootimeconsumingtoconsider
firingwithLNGonatemporarybasis.Further,
postconversiontoLNG,itwillbemuchmore
difficulttoswitchbacktoaliquidfuelsuchoil(as
anLNGbackup)comparedtoswitchingbetween
methanolandoil.
Incontrast,IsraelElectrictestedmethanolin
bothcombustionturbinesandboilerswithonlya
sixmonthleadtimeandanexpenseoflessthan
$1,000,000.Testdurationswereontheorderof
24hours.
IsraelElectricenlistedtheaidofmethanol
supplierDorChemicals,thelargestchemical
companyinIsraeltoassistinlogisticsandstorage
matters.BothIsraelElectricandDorstandready
toassistHawaiiwithtestingandconversionto
methanoldualfuelcapability.SeeAppendixH.
LetterofSupportforTerminalingandLogistics,
AlohaPetroleum,p.67.
6. IMPLEMENTINGMETHANOLFORPOWERINHAWAII
ISRAELELECTRICCOMPANYMETHANOL
IMPLEMENTATION
IsraelElectricsEilatpowerplantisintheextreme
southofIsrael.AlthoughIsraelhasrecentlyfound
andbegunproducinglargeamountsofnaturalgas,
duetoitslocation,theEilatpowerplantwillnever
beonIsraelsnaturalgaspipelinenetwork.
Therefore,itisastrandedplantthatmustburn
liquidfuels,whichhistoricallyhasmeantoilbased
fuels,asinHawaii.
IECbelievedthatmethanolfiringcouldreducecosts
anddramaticallyloweremissionsatEilat.Israel
Electricdidmostoftheengineeringdesignwork
andestimatestheconversionwasperformedata
totalcostof4.1millionUSD.EventhoughEilatisa
peakingplantthathasaloadfactorbelow25%,IEC
expectstoachieveapositivereturnontheir
investmentinconversion.
IsraelElectricsdescriptionoftheirmethanoloil
dualfuelconversionandpostconversion
operationsisgivenindetailinAppendixF.Report
onEilatPlantMethanolConversion,IsraelElectric
Company,p.40.
TheEilatplantconversionconsistedprimarilyofthe
followingchanges:
Conversionofanexistingoiltankto
methanol
Additionofamethanolfirewatersystem
2
http://www.jpost.com/
landedpages/printarticle.aspx?id=272687
Installationofanewfueldeliverysystem
withonepumpforoilandoneformethanol
Changeofthecombustionturbinefuel
atomizers
IsraelElectricsEilatplantcanrunwithanyblendof
methanol(bio)oilfrom0to100%anddosoduring
realtimeoperation.Thatis,noshutdownor
equipmentconfigurationchangeisrequiredto
changetheblend.Thismeansthatoilbasedfuels
canstillserveasabackstoptomethanol.Thisalso
givesthepowerplantoperatorthepowerto
optimizehisfuelcostintheeventofanoilprice
crash.
IECachievedthefollowingimprovementsin
emissionsunder100%methanoloperation:
NOxcutby85%
SOxcuttozero
Particulatescutby97%
ThefollowingrecentarticlefromTheJerusalem
PostshowsIECsandDorspublicannouncementof
theexcellentresultsoftheconversionofEilatto
dualmethanol/oilfueledoperation.
InthefollowingJerusalemPostarticle
2
,IECandDor
goontherecordwithEliatsdramaticallyimproved
emissions,conversioncost($4.1million),andtime
frominceptiontofullyconvertedoperation.The
entiredurationoftheproject,includingextensive
modelingandtestingonbothsteampowerboilers
andcombustionturbines,waslessthanthreeyears.
Head:IEC,DorChemicalsconvertdiesel
poweredturbinetorunoncleanermethanol
Transition to cut nitrogen oxide emissions by nearly 80 percent.
By SHARON UDASIN
10/01/2014
Photo by: REUTERS
The Israel Electric Corporation and Dor Chemicals have
completed a NIS 15 million conversion of a diesel-powered
gas turbine at Eilats power plant to run on methanol a
transition that slashes nitrogen oxide emissions by some 80
percent.
In conjunction with the National Infrastructure, Energy and
Water Ministry, the companies launched the 50-megawatt
capacity turbine at a ceremony in Eilat on Wednesday.
Implementing the project, which entailed converting one of
three turbines at the citys power station, required NIS 15m.
for the purchase of equipment and its adaption to the
particularities of the Eilat facility, according to IEC.
From Wednesday on, however, Eilat residents will be able to
benefit from cleaner, more breathable air, the companies said.
Due to the many advantages, I expect that in the not so
distant future methanol will become a significant fuel as a
substitute for diesel in the State of Israel and around the
world, said National Infrastructure, Energy and Water
Minister Silvan Shalom.
Three years ago, the IEC granted Dor Chemicals permission
to perform a trial conversion of a gas turbine at the Caesarea
power plant to methanol. Upon successful completion of the
trial, the companies chose Eilat as the location for active
implementation of a methanol-powered facility.
Eilat is the ideal site for methanol electricity generation, as
the city has an urgent need for a more reliable electricity
supply, according to the IEC.
The initial commercial facility in Eilat, Shalom stressed, has
the potential to serve as an example for the world.
This is additional proof of the importance of investment in
research and development that leads to blue and white
achievements, the minister said.
The transition from polluting diesel fuels to methanol
which is derived from natural gas provides Israel with
considerable strategic advantages by reducing the countrys
dependence on oil and diversifying its energy supply sources,
stressed Dor Chemicals chairman Gil Dankner.
In addition to decreasing nitrous oxides levels, the use of
methanol also reduces the presence of sulfur dioxide and
respirable particles in the atmosphere, he said.
There is no doubt that this cooperation will bring additional
customers around the world, as well as the correct
exploitation of the gas resources found in the sea near Israel
and the establishment of methanol plants where natural gas
will be used as the raw material, Dankner added.
These plants will contribute to the continued development of
other industries, which will mean additional jobs and the
development of the Israeli economy, he said.
IEC chairman Yiftah Ron- Tal praised the cooperative effort
that went into implementing the Eilat turbine conversion,
calling the project groundbreaking on a global level among
the efforts to find alternatives to diesel.
Methanol is a member of the alcohol family, with similar
characteristics to ethanol, and is liquid at room temperature
making storage and handling methods readily available, the
IEC explained.
As opposed to diesel, methanol contains no sulfur, has 80%
less nitrogen oxides and low respirable particle releases when
burned.
Methanol usage is considered very safe because of its
relatively cool burning temperature and the ease at which the
burning process can be shut down, the company stressed.
Common production of methanol occurs by the conversion of
natural gas to synthesis gas through a catalytic reaction that
generates methanol and water vapor.
We are the ones who will have to account for our children
and grandchildren, and we will not compromise when it
comes to their health and the quality of air that they breathe,
said Environmental Protection Minister Amir Peretz. The
breakthrough here in Eilat in the transition to the use of
methanol, with advanced technology, is a huge achievement
for the environment and for residents.
7. CONCLUSION
Methanolisafullyprovenalternativetooilfiredgeneration.
Webelievethatamethanolprovidesasuperiorpathtotheadvantagesofnaturalgasbasedpower
generationbecause:
MethanolisasgoodasorbetterthanLNGalternativesfromacoststandpoint.
MethanolisasgoodasorbetterthanLNGalternativesfromanenvironmentalstandpoint.
Butespeciallybecause:
MethanolslowercapitalcostsandshorterleadtimesmakeitclearlylowerriskoverLNG
alternatives.
Methanolslowercapitalcostsandshorterleadtimesmakeitclearlymoreappropriateasa
transitionalsolutiontoabiofuelfuture.

A. HawaiiLNGShippingOptions,HawaiiShippersCouncil
Haw ai i Shi pper s Counc i l
Hawaii LNG Shipping Options
By Michael N Hansen, President, September 6, 2014
The Hawaiian Electric Company Inc. (HECO)s formal plans state that they are seeking to
transition from liquid petroleum fuels to lower cost fossil fuels such as Liquefied Natural Gas
(LNG), which will also reduce power plant emissions to comply with U.S. Environmental
Protection Agency (EPA) regulations that will come in to effect in J anuary 2016.
HECO relies on liquid petroleum fuels to generate approximately 70% of the electricity they
currently produce; this is a very high reliance on petroleum fuels in comparison to both national
and international norms. In comparison, nationwide less than 1% (actually 0.3%) of U.S.
electricity is produced from petroleum fuels, and worldwide its approximately 5.5%, primarily
in third world countries and stranded markets (such as in island situations).
Hawaii electricity rates are extraordinarily high as compared to the U.S. as a whole: The average
current residential rate in Hawaii is approximately 38 per kilowatt hour (KWH) while the
equivalent national U.S. rate is about 13 per KWH. The Hawaii rate is effectively three times
the nationwide average.
HECOs plans state they are looking to LNG as a solution to both the rising cost of petroleum
fuels and to comply with the impending EPA regulations, as natural gas is significantly cleaner
burning than petroleum fuels and will appreciably reduce emissions.
From the point of view of shipping, there are several issues which will impinge on HECOs
planning to transition from liquid petroleum fuels to LNG, which we shall elaborate herein.
Hawaii Gas
The Gas Company LLC. d.b.a. Hawaii Gas (HI Gas) is the States only franchised public gas
utility. They are currently shipping very limited quantities of LNG to Hawaii under a Hawaii
State Public Utilities Commission (PUC) approved program known as Backup Enhancement
Project (Docket 2013-0184). These efforts are often confused with HECOs LNG supply plans.
HI Gas began shipments of LNG in April 2014 from a small liquefaction plant in Boron,
California (Clean Energys Pickens Plant) to Honolulu utilizing three 40 ISO (International
Organization for Standardization) shipping containers transported by the existing domestic
containership services operated by Matson Inc. Ocean shipment is via the Port of Los Angeles.
These are highly specialized cryogenic tank containers designed for the carriage of LNG at
minus 260F. The LNG containers are discharged from the interstate containerships at the Sand
Island container yards (Honolulu Piers 51A 53), trucked to HI Gas Pier 38 facility in Honolulu
Harbor, un-loaded using a mobile re-gasification unit and the resulting natural gas is injected into
HI Gas existing utility pipeline system.
Containerized LNG is well suited to HI Gas current and estimated future gas sales volume. The
very small quantities of LNG now being shipped by HI Gas and possible larger future volumes
would not support bulk shipments of LNG in dedicated tanker ships known as LNG carriers.
HI Gas is using the LNG to supplement local production of synthetic natural gas (SNG) at their
Kapolei plant from naphtha feed stock. HI Gas anticipates that they will increase shipments of
containerized LNG over time, perhaps completely displacing their SNG production. (SNG and
LNG are compatible and can be safely combined in the HI Gas utility pipeline system.)
On the basis of HI Gas current sales of SNG, it would appear that they would be able to
efficiently cover all their requirements with containerized LNG and perhaps completely replace
SNG at some time in the future providing the economics remain favorable. It is unlikely that HI
Gas sales volume alone would ever support bulk LNG shipments, at least given todays market.
HI Gas provides SNG by utility pipeline to customers from Kapolei to Hawaii Kai along the
South Coast of Oahu Island. In other areas in the State, HI Gas supplies petroleum gas (a
mixture of propane and butanes) by pipeline in Central and Windward Oahu, Hilo (Hawaii
Island), Kahului/Wailuku (Maui Island) and Lihue (Kauai Island). Outside of those areas
petroleum gas is supplied by tank.
Hawaiian Electric Company Inc.
HECOs situation is very different from HI Gas. HECOs requirements for LNG to replace
liquid petroleum fuels for the generation of electrical power would be on a far larger scale.
The immediate reason for HECO to pursue LNG and other alternatives is they are facing new
EPA emission regulations known as the Mercury and Air Toxic Standards (MATS) that were
adopted on December 16, 2011 and will become effective for HECO in J anuary 2016.
HECOs alternatives other than LNG to reduce emissions and comply with MATS are:
Fit their fleet of generating plants (on Oahu, Molokai, Maui, Lanai, and Hawaii Islands)
with emission control facilities commonly known as scrubbers. This would allow HECO
to continue burning lower-cost petroleum-derived Low Sulfur Fuel Oil (LSFO). HECOs
capital cost for scrubbers is roughly estimated to be around $1 billion.
Switch their steam boilers from LSFO to more expensive Ultra Low Sulfur Diesel
(ULSD), which would reduce emissions to allowable levels without scrubbers. Switching
from LSFO to ULSD in the steam boilers (and to ULSD in the diesel and turbine plants)
would substantially increase the cost of generation and appear in the fuel adjustment
portion of the ratepayers bill. (ULSD currently costs about $26.00 to $27.00 per million
British Thermal Units (MM BTUs) versus LSFO at around $21.00 per MM BTU.)
On September 4, 2014, HECO filed form 8-K with the Securities Exchange Commission (SEC)
informing investors that they will not renew their LSFO contract with Par Petroleum Corp.s
Hawaiian Independent Energy Inc. (HIE), and amended their LSFO fuel contract with Chevron
Products Company (Chevron) to begin supply of ULSD as soon as J anuary 2016 to help
HECO meet more stringent federal EPA air emission requirements known as MATS.
HECOs Power Supply Improvement Plans (PSIP)
HECO filed with the PUC its Power Supply Improvement Plans (PSIP) and Distributed
Generation Interconnection Plan (GDIP Book 1 & Book 2)) on August 26, 2014 for their group
of companies including Maui Electric Company Ltd. (MECO PSIP) and Hawaii Electric Light
Company Inc. (HELCO PISP).
The HECO PSIPs and DGIP were filed with the PUC in response to the Commissions four
orders of April 29, 2014, which directed HECO as follows:

The Hawaii Public Utilities Commission (PUC) announced four major decisions and orders
that collectively provide key policy, resource planning, and operational directives to the
Hawaiian Electric Companies (HECO Companies). The orders require the HECO
Companies to develop and implement major improvement action plans to aggressively
pursue energy cost reductions, proactively respond to emerging renewable energy integration
challenges, improve the interconnection process for customer-sited solar photovoltaic (PV)
systems, and embrace customer demand response programs.
The HECO PSIPs among other items addressed the issue of delivering LNG to Hawaii (See
HECO PSIP pages I-1 through I-3) in both bulk and containerized modes and discussed the
possibility of transitioning from containerized LNG to bulk LNG and the requirements to do so.
LNG in Bulk
Importing LNG in bulk on LNG carriers would be the most efficient way to transport and handle
LNG and result in the lowest fuel cost offered by the various alternatives. However, transporting
and handling LNG in bulk requires extensive and expensive infrastructure and long lead
(planning) times.
Among the needed infrastructure is a main LNG import terminal on Oahu Island, which would
be required to receive and store bulk LNG at -260F and re-gasify the LNG to send out the
natural gas by pipeline to the power plants and potentially other customers.
It is generally agreed the probable location of a shore-side LNG terminal would be at Kalaeloa
Barbers Point Harbor in West Oahu. The likely site would be the undeveloped harbor area shown
as future expansion area and sometimes called Pier 8. It is estimated the shore-side LNG
terminal and pipelines to the power generation plants on Oahu and other potential customers
would together cost around $1 billion.
Another bulk LNG terminal option, which HECO seriously pursued for a time and indicate in
their PSIP is still under consideration, is a Floating Storage and Re-gasification Unit (FSRU) to
be moored in Middle Loch, Pearl Harbor. FSRUs are highly-specialized purpose-designed and
built ships to act as an LNG terminal in lieu of a permanent shore-side terminal. Typically,
FSRUs are time chartered (akin to leasing) from a highly experienced operator and installed
while a shore-side terminal is being designed, permitted and built.
There are indications HECOs FSRU Pearl Harbor proposal has encountered problems including
Navy resistance to some of the necessary aspects of a FSRU installation, and can no longer be
considered their primary solution at least for the medium term. There are significant capital
costs associated with constructing an FSRU mooring and associated pipelines, albeit they should
be lower than for a shore-side terminal. However, a floating terminal would incur higher
operating costs primarily from chartering a FSRU, which is a very large operating expense.
Neither a floating nor shore-side LNG receiving terminal on Oahu Island would address the
delivery of LNG to the neighbor islands where HECO also has plants and also needs to transition
away from petroleum fuels for cost and regulatory compliance reasons.
It would be possible to operate a small interisland LNG carrier (small self-propelled ship or tug
and barge unit), which would load from the main terminal at Kalaeloa Barbers Point Harbor or
floating in Pearl Harbor and transport LNG to Neighbor Island ports. However smaller bulk
deliveries to the neighbor islands would require small LNG receiving terminals with storage and
re-gasification facilities at each port that would significantly increase infrastructure costs.
HECO addressed development of a bulk LNG receiving terminal in their PSIP and said it could
be available in approximately 8 years by 2022 based on advice from the U.S. Federal Energy
Regulatory Commission (FERC) as follows:
The development of a bulk receiving terminal will be subject to FERC review and
approval and therefore cannot be realistically achieved by 2017. Siting of such a terminal,
whether floating or land-based, will require substantial engineering analysis and
stakeholder socialization. After consulting with FERC, a realistic schedule to develop a
bulk LNG terminal is approximately 6 to 8 years.
We agree that the permitting process for a bulk LNG terminal would be lengthy, but would
estimate design, permitting and construction is likely to require ten or more years.
Potential Bulk LNG Sources
HECO is facing several problems arranging for a supply of bulk LNG.
The most efficient points of LNG supply to Hawaii would be on the West Coast of North
America where several LNG export terminals are being proposed as follows:
U.S. West Coast -- primarily on the Oregon Coast and lower Columbia River
Canadian West Coast -- Ports of Kitimat and Prince Rupert, British Columbia
Alaska -- A new terminal to be built at Nikiski, Cook Inlet.
However, most of these projects are unlikely to be completed within the next ten years and offer
HECO a convenient source of bulk LNG at their planning time horizon of 2022.
In addition, HECOs potential LNG requirements are very small by world standards and could
not justify development of a bulk liquefaction export terminal alone. Therefore to arrange a bulk
LNG supply, HECO must piggyback on the requirements of the major Asian buyers who will
induce development of LNG export terminals on the West Coast of North America and Alaska.
At the end of the day, HECOs volume may not be large enough and they may not be able to
make the long term commitment to seriously interest bulk LNG export terminal operators.
The several proposed LNG export terminal projects planned for the Canadian West Coast are
stalled today because the developers have not been able to conclude long term (typically a
minimum of 20 years) take-or-pay contracts with the major natural gas importers in their
intended markets of J apan, South Korea, Taiwan and China. The developers are seeking higher
LNG prices indexed to the price of crude petroleum oil, while the Asian gas buyers are
demanding the price be decoupled from oil and pegged to a gas industry pricing standard such as
Henry Hub.
The proposed new terminal at Nikiski, Alaska, must await development of a Trans-Alaska gas
pipeline from the North Slope to the tidewater in Cook Inlet, which is estimated to require
substantially more than a decade to develop.
The one proposed North American LNG export terminal on the Pacific Ocean that currently
appears to be making significant progress towards actual construction is the J ordan Cove project
at Coos Bay, Oregon. The J ordan Cove project, which is not anticipated to be online before
2019, will be a tolling facility meaning that the terminal owners and operators will not be the
owners of the natural gas and exporters of the LNG; rather, they will assess a toll on the natural
gas passing through and processed into and stored as LNG at their facility for ocean shipment.
To take advantage of J ordan Cove, HECO would either have to become a natural gas owner and
arrange pipeline capacity to deliver their gas to J ordan Cove, or turn to a gas merchant to make
these arrangements. Not only are these undertakings are outside HECOs usual purview of
contracting for the supply of fuel to plant gate, J ordan Cove may choose not to accommodate
HECOs smaller requirements as they need to target large customers who can make long term
commitments to finance their project.
J ones Act
In order to take advantage of J ordon Cove or any U.S. bulk LNG supply location (including
Alaska), HECO would also need to address the J ones Act which requires the use of U.S.-built,
U.S.-flag, U.S.-owned and U.S.-crewed vessels to carry cargo between two domestic points.
There are no LNG carriers in the J ones Act fleet and none have been built in the U.S. since the
late 1970s.
The most straightforward way to deal with the J ones Act problem, if HECO was to obtain bulk
LNG supplies via J ordan Cove or any other U.S. source, would be to seek an exemption allowing
use of foreign built, U.S. registered LNG Carriers in the Hawaii trade.
As the J ones Act is a federal law, an exemption would require an act of Congress signed by the
president.
Containerized LNG
Because of all the problems facing bulk LNG for Hawaii, HECO is now seeking to bring in LNG
by container in a similar fashion to HI Gas except on a vastly larger scale.
In March 2014, HECO issued a request for proposals (RFP) to supply up to 800,000 metric tons
(hereinafter, MT) per annum of LNG by container. There have been reports that HECO is
attempting to finalize their container LNG contracts by October 2014, but that deadline would
seem optimistic at this time.
We believe transporting 0.8 million MT of LNG by container annually will present many
logistical challenges, is unlikely to result in significant cost savings due the high handling costs
associated with the proposed shipping method in containers; and, as a result, containerized LNG
could potentially end up costing more than the petroleum fuels currently being used.
HECO also addressed containerized LNG in their PSIP Section I in part as follows:
Based on confidential information received via the Containerized LNG RFP process, we
believe that an LNG delivery commencement date in the latter part of 2017 remains
viable if the following five key milestones are realized by their noted deadlines.
Upon achievement of these milestones, we will make the investments necessary to
construct, assemble and aggregate the various pieces of the supply chain needed to
deliver LNG to Hawaii in 2017. It nevertheless must be recognized that these milestones
are challenging, some of which are beyond our control and they will only be realized if
no significant legal, environmental, or social obstacles encumber the process.
If HECO can solve the supply chain challenges, which by their own description seems
problematic, containerized LNG could solve their emissions problem and allow them to comply
with the new EPA MATS regulations coming into force in J anuary 2016 albeit approximately 2
years late. The higher fuel costs likely to result from containerized LNG would be paid for by
the ratepayers, again through the fuel adjustment portion on their bill.
HECO states in respect of their prospective liquefaction contractor for their containerized LNG
Fortis BC of Canada which operates a facility in the Vancouver area -- the following:
In addition, because FortisBC is in British Columbia, Canada, they are not subject to the
J ones Act and, therefore, can provide substantial marine transport savings to Hawaiian
Electric through the use of international shipping assets.
While it is true the J ones Act does not apply to the movement of cargo directly between Canada
and Hawaii, to accommodate the regular movement of ISO containers loaded with LNG a
dedicated containership or ship with container capability would be required. Presently there is
no containership service between Vancouver and Honolulu, and HECO would have to induce
service, which could substantially increase unit freight costs. Alternatively, HECOs LNG
containers could be routed via Seattle, Washington, but that would necessitate use of a J ones Act
carrier. Matson offers weekly service from Seattle to Honolulu.
Conclusion
It doesnt appear HECO can implement bulk LNG and lower energy costs for Hawaii State rate
payers in the near to medium term because of: infrastructure requirements in Hawaii; the
development of efficient LNG supply sources on the West Coast of North America and Alaska;
the J ones Act; and, other issues. The development of an efficient bulk LNG supply for Hawaii is
probably more than ten years away, providing the process is currently underway and will
continue to be pursued in a serious way.
HECOs container LNG alternative would seem to incur high handling costs and not offer any
real savings in comparison to the current use of low sulfur fuel oil, diesel and naphtha for power
generation, and may well cost ratepayers more. This alternative is not estimated by HECO to be
available until two years after the EPA MATS regulations go in to effect for HECO, requiring
interim measures. There are many issues regarding the containerized LNG supply chain that need
to be sorted out, and in our opinion, this option is likely to face major logistical bottlenecks
possibly making it unfeasible in the final analysis.
The recent amendment to HECOs contract with Chevron to supply ULSD beginning in J anuary
2016 indicates this will be HECOs near term solution to meet the EPAs MATS regulations,
which come in to effect in J anuary 2016. This ULSD alternative would seem to solve HECOs
MATS emissions compliance issues in a timely fashion. However, it would also pass the higher
cost of ULSD to the rate payers through the fuel adjustment rate mechanism.
Furthermore, it would seem that ULSD could easily become HECOs longer term solution in
view of the issues facing implementation of LNG in either the bulk or containerized mode. If
USLD in fact becomes HECOs longer term solution to the EPAs MATS regulations, HECO
will have failed to capitalize on the low cost of natural gas in North America and continue to
expose their ratepayers to the volatility of petroleum on international commodity markets and
strategic risks of serious disruptions in this market place.

B. HECOSCONTAINERIZEDLNGSHIPPINGOPTIONS,HAWAIISHIPPERSCOUNCIL
Haw ai i Shi pper s Counc i l
HECOs Containerized LNG Shipping Options
By Michael N. Hansen, President, October 6, 2014
After investigating three possible scenarios for the importation of Liquefied Natural Gas (LNG)
in bulk to Hawaii since early 2012 and encountering obstacles preventing short to medium term
development of those options, the Hawaiian Electric Company Inc. (HECO) turned in early 2014
to the intermediate solution of shipping LNG in the containerized mode.
As of the date of this paper, HECO has been actively developing and arranging contracts for a
containerized LNG program for approximately seven months. During that time, HECO has made
several changes to their contracting schedule and approaches for implementing a containerized
LNG program.
It appears that HECOs efforts to develop a containerized LNG program will reach its critical
stage early during the first half of 2015 when a complete application with definitive contractor
agreements would likely be filed with the Hawaii State Public Utilities Commission (PUC) for
approval.
With respect to the supply of LNG, HECO seems to have settled on a liquefaction plant just
outside of Vancouver, British Columbia, Canada, as the supply point for both interim
containerized and long term bulk LNG.
From an outside perspective, there are several aspects of their containerized LNG program that
can be expected to continue troubling HECO and may hinder and delay completion of their PUC
application.
This paper examines the various aspects of HECOs containerized LNG program from a
shipping and logistics point of view.
Request for Proposals (RPFP): Containerized LNG Supply
The change in approach from bulk to containerized LNG was first noticed publically on March
11, 2014, when HECO issued a Request for Proposals (RFP No. 031114-01) entitled
Containerized LNG Supply.
The RFP is seeking delivery of up to 800,000 metric tons (MT) of LNG per year to eight power
generating plants on five islands for a term of up to 15 years commencing in late 2016 or early
2017.
In its document, HECO states the purpose of the RFP is to determine for the 2016 to 2022 time
period whether containerized LNG is: (i) not viable and HECO should pursue bulk instead; (ii)
workable as a transition to bulk but not for the long term; or, (iii) competitive with bulk and is a
long term solution.
According to the RFPs schedule, HECO was to: (i) select its preferred bidder by the end of May
2014; (ii) finalize definitive agreements with the preferred bidder by August 2014; and, (iii)
thereafter submit an application covering the agreements to the PUC. These milestones have not
been met.
HECO offered the RFP in two parts: (i) LNG Supply to include sourcing of natural gas, delivery
to liquefaction plant, and loading containers; and, (ii) LNG Logistics to include providing the
containers, trucking of containers, container maintenance and ocean transportation.
HECO stated that they would prefer to have a single contractor responsible for both RFP parts,
but would accept two contractors with adequate guarantees. It appears HECO has already had to
step in and make direct contractual arrangements for individual elements of the supply chain, and
this is likely to disrupt the contracting process as envisioned in the RFP.
Earnings Conference Call (08-11-2014): Liquefaction Contract
The first public announcement that HECO was beginning to enter direct arrangements for
containerized LNG was made during an earnings conference call on August 11, 2014 by
Constance Lau, President and CEO, Hawaiian Electric Industries Inc. (HEI). HECO is owned by
HEI, which is a holding company. Mrs. Lau said during the earnings conference call:
Next on LNG, liquefaction is a critical element of our plan to bring natural gas to Hawaii
in order to comply with upcoming air quality regulations and to reduce cost to our
customers. Recently, we acted quickly to secure a source of natural gas liquefaction
signing an agreement subject to PUC approval with FortisBC for liquefaction capacity.
We were also pleased with a response to our RFP for container LNG and are in the
process of evaluating those RFPs and were targeting LNG delivering in 2017.
This announcement that HECO entered into a direct contact with a liquefaction contractor,
instead of looking to a LNG Supplier to provide that service together with the other related
services, indicates that their original contracting approach may not prevail.
Outline of HECO Containerized LNG Program
Two weeks after the earnings conference call, HECO filed three separate Power Supply
Improvement Plans (PSIP)s and Distributed Generation Interconnection Plan (DGIP)s with the
PUC. They were filed on August 26, 2014, one for each of HECOs three utility companies on
Oahu, Maui (including Molokai and Lanai) and Hawaii Islands. These HECO plans were in
response to the PUCs four orders of April 29, 2014.
All three HECO PSIPs contain the same Section I entitled LNG to Hawaii (See HECO PSIP,
Section I, Pages I-1 through I-4) and make several points regarding their plans to import
containerized LNG, which can be summarized as follows:
PursuecontainerizedLNGinshortandmediumtermandlooktobulkLNGinlongterm
PlantofileformalapplicationwiththePUCforcontainerizedLNGinlate2014orearly2015
AnticipatefinalPUCapprovalofHECOscontainerizedLNGprogrambyJuly1,2015
Begin(afterPUCapproval)assemblingthecontainerizedLNGsupplychainassetsand
arrangementsforcompletionenvisagedbyendof2017
SignedliquefactionagreementwithFortisBCEnergyInc.onAugust8,2014subjecttoPUC
approval(PresumablythePUCwillwanttoseeadetaileddescriptionoftheentiresupplychain
andcostingbeforeapprovinganysinglepieceofthechain.)
ProvidecontainerizedLNGtopowerplantsonOahuandHawaiiIslands(thescopenolonger
includesMauiCountysthreeislandsaspreviouslyindicatedbyHECOscontainerizedLNGRFP)
ProposedanamortizationperiodforallcontainerizedLNGassetsandstartupexpensestobe5
yearssototransitiontopossiblebulkLNGalternativewithoutleavingstrandedcosts
EstimatefuturedeliveryofbulkLNGintheyear2022fromtheFortisBCliquefactionplant
throughaFloatingStorageandRegasificationUnit(FSRU)terminalsomewhereonOahuat
$12.73perMMBTU(MillionBritishThermalUnits).
Interestingly, HECO did not include an estimated costing for containerized LNG delivered to
Hawaii in the PSIP. This despite HECOs immediate proposal is for containerized LNG and
they plan to file their formal application for that mode with the PUC within six months or so of
having filed the PSIP.
HECO Bulk LNG Import Options
A detailed description of HECOs bulk LNG import options is contained in Appendix N to
HECOs 2013 Integrated Resource Planning Report filed with the PUC on J une 28, 2013.
The contents of Appendix N: LNG Imports to Hawaii Study is a report commissioned by
HECO, produced by Galway Energy Advisors LLC, and entitled LNG Imports to Hawaii:
Commercial and Economic Viability Study, dated October 5, 2012.
While the Galway report covers many aspects of sourcing bulk LNG for Hawaii, the most
important single consideration is probably the nature and location of a bulk LNG receiving
terminal in Hawaii. That determination would establish many of the parameters of a bulk LNG
operation. Essentially, the terminal would have to be installed on or offshore the island of Oahu
where the most of the natural gas consumption would occur.
Galway identified three basic bulk LNG import terminal alternatives.
Inner Harbor Shore-side Terminal. Galway identified the State-owned Kalaeloa Barbers Point
Harbor (KBPH) as the only probable location for a shore-side bulk LNG terminal at the
undeveloped site boarded by proposed Piers 9 and 10. Galway stated in regards to KBPH:
Single tank standard scale onshore LNG terminal A site of over 100 acres is adjacent to
the existing pier and could accommodate a single tank of 160,000 to 180,000 cubic
meters, regasification equipment and other infrastructure such as buildings, utilities, etc.
It will be necessary to dredge the harbor in order to accommodate LNG ships as the
current depth is not sufficient to accommodate them (38 feet vs. required 42 feet). The
existing pier is also likely to be too busy and not long enough to accommodate both coal
deliveries and LNG deliveries (assuming that two berths must be maintained for the coal
terminal). Therefore a new berth will also need to be added.
The Hawaii State Harbors Division in their Kalaeloa Barbers Point Harbor Fuel Pier and Harbor
Improvements, Environmental Impact Statement Preparation Notice (EISPN), Revised
September 2014, stated regarding a shore-side terminal (see page 12):
Section 2.4.3 Bulk Liquefied Natural Gas (LNG)
The potential for bulk LNG import to KBPH has been intensively studied by
industry representatives. By some estimates, it would take at least seven years to
complete supply agreements, planning, environmental studies, Federal Energy
Regulatory Commission (FERC) permitting, and infrastructure development.
There are a multitude of options for on-shore and offshore locations for bulk LNG
transfer and storage on Oahu. Due to the uncertainty of facility siting, scale, and
long lead times for permitting and development, LNG at KBPH is not reasonably
foreseeable at this time.
Contrary to the Galway statement that there is 38 feet available in KBPH, the current Harbor
Masters Notice indicates maximum allowable draft at KBPH Piers 5 & 6 (which are currently
used as a tanker berth) is 36 feet at mean low water. Galway is correct in saying construction of
a new pier and associated infrastructure would be required at KBPH to accommodate a shore-
side bulk LNG receiving terminal there.
Offshore FSRU Buoy Mooring. Galway describes several scenarios for a possible buoy mooring
offshore Barbers Point or Kahe Point, Leeward Oahu. They mentioned two different kinds of
mooring arrangements: one a conventional floating single point mooring (SPM) and the other a
specialized Excelerate Energy LP submarine mooring. They also describe a double Excelerate
buoy mooring with two Excelerate FSRUs employed to perform transportation in addition to
storage and re-gasification while on the buoy. To be workable, this later option would require
shorter voyages to a bulk LNG source on the West Coast of North America, which doesnt exist
at this time.
Employing a single offshore buoy mooring would necessitate ship to ship (STS) transfer of LNG
cargo from the LNG carrier ship to the LNG FSRU moored on the buoy for continuous
availability of natural gas. Based upon existing meteorological and oceanographic (met-ocean)
data, Galway concluded regarding a single offshore buoy mooring:
In a single buoy configuration, reloading the FSRU while at a buoy using STS is very
unlikely. LNG suppliers are yet to accept this process and met-ocean conditions offshore.
Barbers Point or Kahe Point appear to be unsuitable for STS.
Inner Harbor Double Berth Mooring. This has become the standard arrangement for an FSRU
installation with a jetty-like mooring whereby the FSRU is permanently moored on one side, the
LNG carrier berths on the other and loading arms are installed on the mooring to facilitate cargo
transfer. Galway identified KBPH and Pearl Harbor as the only viable sites as follows:
All currently operating baseload floating LNG terminals have been built near shore in
calm and protected waters using one or two berths. This generally provides the most
reliable solution in terms of availability and, so far, is the only configurations accepted by
the traditional LNG suppliers. There are limited suitable locations in Oahu to
accommodate berth based solutions. For berth-based floating terminal solutions,
Kalaeloa Harbor and Pearl Harbor may be the only viable sites.
HECO did pursue an FSRU double berth installation in the Middle Loch of Pearl Harbor,
publically announcing a preliminary understanding with the U.S. Navy in early February 2014.
However, since then, HECO has switched its attention to containerized LNG and there are
indications that the U.S. Navy may have issues with installation of the mooring in Middle Loch
and the movement of LNG carrier ships within Pearl Harbor.
Liquefaction Contractor: FortisBC Energy Inc.
On August 8, 2014, HECO signed a natural gas liquefaction agreement with FortisBC Energy
Inc., a regulated natural gas utility operating in British Columbia, Canada.
FortisBC Energy Inc. (formerly Terasen Gas Inc.) together with its sister company, FortisBC
Inc., an electrical utility, deliver more than 20% of British Columbias total energy requirements.
The companies are both regulated by the British Columbia Utility Commission (BCUC) and
subsidiaries of Fortis Inc. of Newfoundland which has annual revenues of CAN $1.44 billion.
Fortis BC operates their Tilbury LNG Plant located on Tilbury Island, in Delta, British
Columbia, which is situated on the Fraser River near metropolitan Vancouver. The Tilbury
Island facility built in 1971 is primarily a peak shaving plant which allows FortisBC as a gas
utility operator to meet short-term surges in customer demands with minimal infrastructure.
Surplus gas is liquefied and stored for peaks in demand, which are handled by drawing gas from
LNG storage.
Tilbury also supplies LNG as a fuel for use in remote communities and as a transportation fuel in
British Columbia. LNG for these other purposes is shipped from Tilbury by road truck and ISO
(International Organization for Standards) shipping container on chassis.
Tilburys current liquefaction capacity is approximately 120,000 cubic meters of natural gas per
day (producing about 200 cubic meters or 91 metric tons of LNG) and has 28,000 cubic meters
of LNG storage in their cryogenic tank to meet peak utility demand.
The capacity of the Tilbury plant is to be expanded by a $400 million project with the addition of
one storage tank and associated liquefaction equipment, which is scheduled to be completed by
late 2016. The expansion is expected to add 654 metric tons of LNG per day, which together
with existing production would be approximately 755 metric tons per day.
In their containerized LNG RFP of March 11, 2014, HECO stated their LNG requirements would
begin at around 800,000 metric tons per annum and gradually reduce to 500,000 metric tons as
renewable sources of energy come online. This would be the equivalent of 2,191 to 1,370 metric
tons per day correspondingly.
In other words, once the Tilbury expansion is completed, the plant would be able to provide
approximately 34% of HECOs higher initial requirements if the all the plants production were
to be dedicated to Hawaii, which of course cant be done because of FortisBCs other
commitments especially to their utility customers.
HECOs arrangement with FortisBC is for liquefaction, and as such the Tilbury Island plant will
operate as a tolling facility in respect of HECO. This means FortisBC will charge HECO a fixed
rate per unit of natural gas passing through the facility, liquefied and stored for shipment.
The Tilbury facility tolling charges will be assessed on the basis of FortisBC Energy Inc., Rate
Schedule No. 46, Liquefied Natural Gas sales, Dispensing and Transportation Service, December
12, 2013, as approved by the BCUC.
The charges will include LNG Facility Charge, Electricity Surcharge, and Process Fuel Charge at
a fixed rate based upon the amount of LNG delivered. The Process Fuel Charge is for the natural
gas consumed in the liquefaction process and charged at the local cost of natural gas.
These three FortisBC / Tilbury Island Plant charges are reflected as elements in HECOs PSIP
costing for bulk LNG to be delivered to Hawaii beginning in 2022.
As the FortisBC Tilbury Island Plant is currently loading out road trucks and ISO containers, it
would appear that they can provide that kind of loading capability for HECO containerized LNG
requirements. The issue would be whether or not the current facility would be able to handle the
volume required for HECO. Perhaps additional truck and container load out facilities necessary
to supply HECOs requirements are to be constructed with the expansion project.
Proposed Tilbury Island LNG Marine Terminal: WesPac Midstream Vancouver LLC (WPMV)
HECOs PSIP costing for bulk LNG delivered to Hawaii in the year 2022 indicates the LNG
would be shipped from FortisBC FOB (free on board) at a nearby marine terminal on Tilbury
Island.
Presumably that marine terminal is the one currently being planned by WesPac MidStream
Vancouver LLC (WPMV) adjacent to FortisBCs Tilbury LNG Plant.
WPMV is currently applying with the National Energy Board of Canada for a license to export
LNG sourced from the Tilbury LNG Plant. The application would cover regional exports to
small power plants and bunkering (providing fuel typically by barge to) international shipping in
the Strait of Georgia and Puget Sound areas.
WPMVs proposed marine terminal on the Fraser River would be a jetty structure providing a
single berth for one barge or small ship, and will be located on the site of an abandoned marine
terminal in previously dredged waters.
WPMV reports that it is currently conducting engineering and related shipping studies to prepare
for various applications to government agencies, but doesnt mention a possible completion date.
Although the current WPMV plans are for regional supply of LNG utilizing barges and small
ships, the Fraser River can accommodate deep draft oceangoing ships up to Westminster on a
draft of up to 11.5 meters (37 feet). (See Fraser River Tanker Traffic Study, DNV, J une 6,
2012.)
As such, in the future, it would be possible to bring a smaller LNG carrier to the proposed
WPMV berth with a draft that would be suitable for the existing depths in the West Loch of Pearl
Harbor and KBPH.
Natural Gas Procurement
Given their tolling arrangement with FortisBC liquefaction plant on Tilbury Island, HECO will
need to separately procure the natural gas and pipeline capacity to deliver the gas to the plant.
Typically these acquisitions would be arranged through a gas merchant who buy and sell natural
gas through the pipeline system. The charge for this service would appear to be shown as
Marketer Fee (Fixed) on HECOs PSIP costing for bulk LNG to be delivered to Hawaii
beginning in 2022. This activity has been described by Slavaprabu Nadarajah et. al.
Pipeline systems give merchants the ability to trade natural gas across time and
geographical markets. That is, these systems embed two types of assets that merchants
manage as real options: storage and transport. Storage assets allow merchants to trade
natural gas over time by buying natural gas and injecting it into a storage facility and
withdrawing previously injected natural gas from the storage facility and selling it.
Transport assets allow merchants to trade natural gas across different geographical
locations by contemporaneously transporting natural gas along pipelines connecting
multiple geographical markets. Merchants acquire storage and transport assets by
purchasing from pipeline companies contracts on their capacity. (J oint Merchant
Management of Natural Gas Storage and Transport Assets, Tepper School of Business,
Carnegie Mellon University, August 2013)
The role of a gas merchant should have been included in the LNG Supply contract side of the
HECO containerized LNG RFP. However, now that HECO has stepped in to make a direct
arrangement with FortisBC for liquefaction, it would seem quite possible that supply will be
unbundled and HECO will have multiple contractors on that side to coordinate.
A key costing question will be which pricing point reference will be used for the natural gas
purchased on behalf of HECO and feed to the FortisBC Tilbury Plant for liquefaction.
The natural gas pricing point for the region and the one used by FortisBC in establishing their
process fuel gas price is Sumas Huntington Interchange at the U.S./Canadian border. The
interchange handles gas deliveries from the Canadian Westcoast Energy Pipeline into the U.S.
Northwest Pipeline at the Sumas, Washington / Huntington, British Columbia border crossing.
Prices at the Sumas Huntington Interchange are listed in US Dollars per MMBTU.
It is likely that HECO would purchase natural gas in British Columbia at the Sumas Huntington
pricing point to feed FortisBCs Tilbury Island Plant for liquefaction.
The best known natural gas pricing point in North America is Henry Hub, which is the important
gas pipeline interchange at Erath, Louisiana. Gas transactions at Henry Hub are the pricing point
for natural gas futures on the New York Mercantile Exchange (NTMEX) and the index for many
U.S. natural gas contracts.
LNG Containers & Other Equipment
According to the terms of HECOs containerized LNG RFP, it will be the responsibility of the
LNG Logistics contractor to arrange all aspects of the transportation including acquisition of the
necessary fleet of LNG containers. HECO specified 40 foot LNG containers with a capacity of
approximately 10,000 gallons each.
Although not mentioned in the RFP, given the potential number of containers involved and the
shortage of road chassis at most Pacific Coast ports and in Hawaii upon which to place the
containers, it is likely the logistics contractor would have to acquire a fleet of chassis too.
The kind of containers required for the ocean transportation of LNG are highly specialized
cryogenic units meeting ISO criteria. These LNG containers are essentially like a very large
thermos bottle and not refrigerated. The LNG containers are able to maintain LNG cargo at
minus 260 Fahrenheit for what is known as the hold time typically from 50 to 65 days. This is
sufficient time to allow for the ocean transit time and shore handling.
The LNG containers do vent through a design feature very small amounts of what are known as
boil off gas as the LNG in the container slowly warms and a minuscule fraction becomes
gaseous. Venting is necessary to avoid build-up pressure in the container. Although the loss of
gas is not great as a result of the boil off and venting, this does prevent the LNG containers from
being carried under deck on board ship and must be deck loaded.
The best known manufacturer of LNG containers today is a German company Chart Ferox
GmbH and the applicable unit would be their Chart 40 foot Intermodal unit (TVAC Pressure
Transfer). The pricing for these units range from U.S. $175,000.00 to 200,000.00 each
depending on the number ordered and any special specifications. Presumably with a large order
that might be required for HECOs requirements, better pricing could be negotiated and perhaps
by arranging manufacturing in China.
Given HECOs stated LNG requirements for 800,000 metric tons per annum and load factor of
10,000 U.S. gallons per 40 ISO container, delivering that quantify of LNG would require 47,059
container loads per annum or 905 container loads per week.
The number of units needed in the container fleet would be a function of number of loads to be
delivered per ship arrival, the frequency of the ship arrivals and the turnaround time on each
container (i.e., the complete cycle from loading at liquefaction plant to subsequent reloading).
Assuming weekly shipments, 902 loads arriving per week and 6 week turnaround time, that
would require 5,412 containers 40. At a cost of $175,000 per container that is very close to a
billion dollars (actually U.S. $947.1 million). Presumably for such a large order, this price could
be brought down somewhat.
The chassis requirements would be approximately 2,000 units split evenly with a 1,000 units at
each the load and discharge ports. At a cost of approximately $20,000 each delivered to the
operating locations that would be approximately $40 million.
These are very large numbers in terms of the existing LNG container manufacturing capacity, the
cost of equipment, the scope of the logistics operation, ship capacity requirements (especially as
the LNG containers cannot be carried under deck), and container yard areas at the load and
discharge ports to marshal the cargo.
At the end of the day, FortisBC doesnt have the capacity now or even after completion of their
expansion project at the end of 2016 supply this quantity of LNG, which makes this all seem like
a hypothetical exercise.
Ocean Shipping
There are several issues in respect of organizing ocean shipping for HECOs proposed
containerized LNG program involving 800,000 metric tons per annum.
There is no existing regular container shipping service between British Columbia and Hawaii. If,
as HECO states in their PSIP, they wish to take advantage of foreign flag / international freight
rates, HECO would have to provide an inducement for a ship operator to provide such a service.
Cargo movements between Canada and Hawaii are international and as such exempt from U.S.
cabotage commonly known as the J ones Act.
There is no container facility on Tilbury Island where the FortisBC liquefaction plant is located.
The Fraser River Port, which handles approximately 95,000 TEU (twenty-foot equivalent units)
per annum is located several miles away and would be the closest container port facility. The
Fraser River Ports current container throughput would be the equivalent of 47,500 FEU (Forty-
foot Equivalent Units) per annum or approximately HECOs stated annual requirements.
Alternatively, it would be possible to truck the LNG containers to the Metro Vancouver Port
where there are much more extensive container handling facilities. The potential advantage at
the larger Vancouver port might be the HECO LNG container cargo could be combined with
other traffic, easing the economics. However, with no existing direct service this prospect may
prove elusive.
In order to maintain a dedicated weekly service between Honolulu and Vancouver (or Fraser
River Port) it would probably be necessary to employ three containerships with a capacity of
approximately 1,000 FEU (or 2,000 TEU) each. A conventional 2,000 TEU capacity
containership is not a large ship, is considered a feeder ship in the current market and
approximately the size of containerships calling at Honolulu today.
There would, however, be a problem with the stowage on board due to the venting of boil off gas
from the LNG containers, which will prevent the LNG containers from being stowed under deck.
Perhaps a larger ship with a greater container capacity on deck could be considered, but loading
all 1,000 FEU on deck while maintaining the ships stability would be problematic. Also,
providing the stability issues could be solved, a partially laden ship essentially empty under
deck would significantly increase the unit cost for each of the LNG containers carried on deck
and making this approach infeasible.
In Hawaii, the existing container yards on Sand Island in Honolulu Harbor would be hard
pressed to handle an additional 1,000 FEU (or 2,000 TEU) per week of container traffic. This
probably would mean utilizing the existing yard at KBPH, which is closer to the power plants
but where there are no shore-side container gantry cranes. This would require installing shore-
side cranes or employing geared containerships. (Geared containerships are those fitted with
shipboard cargo cranes that are inherently less efficient than shore gantry cranes.)
After investigating the possible methodologies, there doesnt appear to be any good solutions to
moving 800,000 metric tons of LNG per year in the container mode from the Fraser River to
Hawaii.
Model LNG Container Shipping Project
Its very probable that HECO could successfully operate a model LNG shipping project
supplying a single power plant on Oahu Island such as Kalaeloa Partners LP facility in Campbell
Industrial Park.
The Kalaeloa plant consumption would amount to approximately 615 metric tons per day of
LNG, which is nearly all the capacity of the FortisBCs Tilbury Plant expansion scheduled for
completion in late 2016.
The shipping volume would be approximately 36 FEU LNG containers per day or 252 FEU units
per week, which is probably insufficient to justify a dedicated container shipping service
between the Fraser River Port and KBPH.
The ocean shipping alternative would be Matson Inc.s domestic J ones Act containership service
from Seattle, Washington State, which operates on a weekly basis. Currently the service is being
operated with two smaller and older containerships (each are 36 years of age) on the port rotation
Honolulu, Seattle, Oakland and Honolulu.
There is unlikely to be sufficient excess deck capacity on these Matson containerships to carry an
average of 252 FEU per weekly voyage as the ships have limited overall container capacity. The
MANOA has a capacity of 2,824 TEU (1,412 FEU) and the MAUI 1,626 TEUs (813 FEUs)
including deck and under deck stowage.
These two ships are scheduled to be replaced in the third and fourth quarters of 2018 by two new
builds from Aker Philadelphia Shipyard with 3,600 TEU (1,800 FEU) capacity, which would
probably offer sufficient deck capacity. Given the projected delivery dates in late 2018, it would
be necessary to look at firm availability for these ships beginning in early 2019.
Coincidently, these two newbuilds will be dual fuel (LNG and Low Sulfur Fuel Oil) and will
likely take LNG bunkers (load LNG fuel) in Seattle from FortisBC and WPMV.
Alternatively, Matson could add a third ship to their current Pacific Northwest service and
possibly even call at Vancouver, B.C. in conjunction with U.S. West Coast ports. However, its
doubtful Matson could successfully add a third ship to the service and maintain profitability,
unless HECO agrees to pay a very high freight rate.
Following from this scenario, the LNG containers would necessarily be discharged at Honolulu
Harbor and trucked to Campbell Industrial Park putting 500 additional movements per week on
Oahus highways. (The Matson containerships are gearless and could not discharge at KBPH.)
On the West Coast, the LNG containers would also have to be trucked from Tilbury Island to
Matsons container yard in Seattle, and the empties returned to Tilbury by road truck. This will
involve a customs interface at the U.S.-Canadian border and a relatively long road haul.
Given the logistics, a fleet of approximately 2,000 FEU LNG containers would probably be
needed assuming a turnaround time of 8 weeks due to the longer trucking on both ends but
especially on the continental side.
It would also be necessary to operate a fleet of approximately 1,000 x 40 chassis split 500 on
each end.
The LNG containers would have to be handled at the power plant site where the container units
would have to be received, held and discharged by re-gasification to supply the plant.
HECO is proposing a container handling yard and re-gasification facility to be constructed in a
vacant lot adjacent to the Kalaeloa plant. Presumably the yard would be operated by a logistic
contractor, who would staff the yard on a continuous basis with container handling equipment,
re-gasification facility, a gate function and security.
Although this model containerized LNG project is probably doable, it would not be available
until after FortisBC has completed their expansion projected in late 2016 and in it may have to
await Matsons newbuilds entering service in early 2019.
Not only would be approximately several years in the future before a model program could be
implemented, there seems little point in doing so because it would be all but impossible to scale
up to the intended requirements of 800,000 metric tons per annum using the containerized mode.
Conclusion
To answer the strategic questions HECO posed at the beginning of their containerized LNG RFP,
it doesnt appear the containerized LNG approach prove workable in the short to medium term
nor the long term. Although it is probably possible to successfully operate a model containerized
LNG project, because it cannot be scaled to provide for HECOs larger requirements, it wouldnt
seem to make any sense to pursue it.

C. ECONOMICSOFMETHANOLFORPOWERGENERATIONINHAWAII
ECONOMICSOFMETHANOLFORPOWERPRODUCTIONINHAWAII
October1,2014
ByArthurNislick
MethanolisanidealfuelforpowergenerationinHawaii.Itisacommerciallyprovenfuelasevidenced
bytheexcellentperformanceofIsraelElectricCorporations50MWmethanolfueledgeneratingfacility
inEilat,Israel.Itcanbeavailableinlessthan2yearsandrequiresonlymodestcapitalexpendituresto
existinginfrastructureforreceiving,storageanddeliverybylocalpipelinetothegeneratingplantsat
Kalaeloa(KPP),CampbellandKahe.Itcanbetransshippedinproducttankersorbargestothe
neighboringislandsusingthesamesupplychainandequipmentthatisusedtodeliverpetroleum
products.Methanolcanbeacomplementarycleanfueltobridgethe5to7yeargapbetween
petroleumbasedfuelsandLNGandaccommodatetheincreasedpenetrationofrenewableindigenous
affordableenergyresources.Thegreatestopportunityforachievingneartermratepayerbenefitsisto
converttheKPPcombinedcyclepowerplant.TheimprovedeconomicsatKPPcanbringnearterm
ratepayersavingsofapproximately$50millionperyearstartingin2016.
Methanolisacommoditychemicalandacleanburningliquidfuel.Itismadefromnaturalgasand
manufacturedinmultiplelocationsthroughouttheworld.Globaltradeinmethanolisnearly70million
metrictonsperyear.Methanolisshippedinconventionalproducttankersandstoredindiked,floating
roofcarbonsteeltanks.TherefineriesinHawaiihaveexistingtankagethatcanreadilybeadaptedfor
methanoldeliveryandstorage.Iftherefineriesdeclinetohandlemethanol,AlohaPetroleumhas
expressedinterestinbuildingthenecessarystorageontheirexistingproperty.
Methanex,theworldslargestproducer,publishesamonthly,undiscountedpricesheetformethanol
deliveredbyoceantankerandunloadedintostorage.SeptemberpostedpriceapplicabletoHawaii
(ASIA)is$420permetricton($19.36permillionBTUs).Forlargevolumecustomers,thepostedprices
aregenerallydiscountedby10to15%.Typicalcontractperiodsare1to2years;butspotcargoesare
availableaswell.Pricesforchemicalmethanolfluctuatewithsupplyanddemandinthemarket.
Whenconvertedtomethanol,KPPoperatingincyclingmodeat60%averagecapacityfactorwould
require435,000metrictonsofmethanolannually,aquantitywhichwouldmeritasignificantprice
discount;probablyaround13%.Thiswouldbringthepricedownto$370permetricton($17.14per
millionBTU)
AtleastoneUSproducerSouthernLouisianaMethanolLP,ispreparedtoprovidemethanolundera5
year(orlonger)takeorpaycontracttoHawaiibasedonapricingformulathatisdirectlyindexedto
naturalgasatHenryHub.Thepricingelementsareshownbelow.
HenryHubgasprice
Naturalgastransportationtomethanolplant
Naturalgasconversiontomethanolcost
OceanfreighttoHawaiiandunloadingintostorageatKalaeloaHarbor.
Storage,handling,andlocalpipelinedeliverytoKalaeloa,CIP1andKahe
Fororientationpurposes,theestimateddeliveredcostofmethanolattheKPPpowerplantburnertip
basedonSeptembernaturalgaspriceswouldbeapproximately$17.70permillionBTUs.TheKPP
generatingplantwhenconvertedtodualfuelcapabilityandoperatingonmethanolwouldhaveafuel
costofabout15centsperKWHwhichiscompetitivewithrenewableenergyand38%belowHECOsfuel
costof24.4centsperkwhwhenusinga60%/40%blendofLSFOanddiesel(tomeetEPAregulations).
IncomparisontoHECOsKahesteamunits,KPPwhenfueledwithmethanolwillreducegreenhousegas
emissionsbyabout35%,reducesulfurby100%andreduceNOxlevelsbymorethan80%.Greenhouse
gasemissionswiththe60:40%blendedfueloilatHECOsKahefacilitywillnotimproveexceptfora30%
reductioninsulfur.
Toillustratethesupplychaineconomicsofmethanol,Table1depictstheelementsofproductioncostin
aworldscalemethanolplanthavinganannualcapacityof1.8millionmetrictonsperyear.Thisisa
typicalsizeforrecentlargescalemethanolplantsandtakesadvantageoftheeconomicsofscale.
Table 1 - Methanol Production Economics
Greenfield Capital cost $1,500,000,000
Plant Capacity 1,800,000 MT
Annual Production 1,800,000 MT
Natural Gas @ $4.00/mm BTU $126.40 /MT
Operation & Maintenance $60.00 /MT
Cash Cost of Production $186.40 /MT
Capital Charges @ 15%-25 yrs $128.92 /MT
Price fob gate loaded on ship $315.32 /MT
Ocean Freight to HI $55.00 /MT
Receiving, storage & Handling $10.00 /MT
Methanol Delivered to KPP $380.32 /MT
Methanol Delivered to KPP $17.53 /MMBTU HHV
TheactualcontractpriceformethanolwouldbeobtainedbyissuinganRFPtosuppliers.Threesuch
suppliershavealreadyexpressedinterestinservingtheHawaiianmarket.TheyareSouthernLouisiana
MethanolLP,MethanexCorporationandOCIBeaumontLP.Thesesuppliershaveacombinedcapacity
ofmorethan6milliontonsperyearofmethanollocatedintheUSGulfCoast.Methanexhasmultiple
plantsinChile,Trinidad,NewZealand,andCanadathatcanshipmethanoltoHawaii.Inaddition,there
areadditionalpotentialsuppliersinAsia.
Table2illustratestheestimatedgeneratingcostsoftheKPPplantatBarbersPointandcompares
currentoperationonLSFOwithconversiontomethanol;andwiththesameannualenergyoutputat
KAHEwhenburninga60:40%blendofLSFOanddieselandcontainerizedLNG.
WebelievethedeliveredcostofcontainerizedLNGhasbeenunderestimated;weestimatethedelivered
costofLNGwillbeatleast$16/MMBTUwhenallfactorshavebeenconsidered.TheLNGcostcouldbe
asmuchas$20/MMBTUwhenalltheinformationisin.TheLNGcontaineroptionwillrequiremore
than3,000ISOcontainerstosupplythequantitiesspecifiedbyHECOfrom2017until2023which
representsaverylargecapitalinvestment.
Table 2. Comparative Economics of Kalaeloa LP vs HECO- KAHE
KPP KPP HECO-Kahe HECO Kahe
Fuel LSFO Methanol LSFO Blend LNG-Containerized
Fuel Price $/MM BTU 21 17.5 22 16
Thermal Efficiency 44% 45% 32% 32%
Heat Rate BTU/KWH HHV 8,400 8,631 11,080 11,473
Energy Cost $/KWH 0.178 0.151 0.244 0.184
Capacity GW 208 208
Load Factor 75% 75%
Annual Production GWH 1366 1366 1366 1,366
Annual Fuel Cost $M 243 206 333 251
Energy Cost Savings $M/Year NA $37 $127 $44
Emissions 1,000 MT/Year
CO2 854 744 1126 831
SO2 5.84 - 5.08 -
NOx 2.33 0.294 3.08 0.654
Particulates 0.437 - 0.577 -
Mercury 0.00004 - 0.00005 -
TOTAL 862 744 1135 833

Emission reduction NA 119 391 89
TheKPPplantfueledwithmethanolproduces391,000fewermetrictonsstackgasemissionsthanthe
equivalentenergyoutputatKaheand88,700metrictonsfewerthanKahewhenKaheisconvertedto
LNG.
ThecostofcontainerizedLNGintheneighboringislandswillbehigherthanthecostinOahu;perhapsby
$3to$5/MMBtu.Deliveriesofmethanoltotheislandscanbemadeviacurrentlyusedtransportation
methods.Methanolcanfulfilltheneedsofthesteamplantsandcombustionturbinefacilitiesatlower
costthanpetroleumandcontainerizedLNG.IsraelElectricCorporationhascommercialexperience
convertingsteamboilersandcombustionturbinestoduelfuelcapabilitywithmethanolastheprimary
fuel.ThisexpertisecanbemadeavailabletoHECO.
KPPsannualfuelcostwouldbereducedby$37millioncomparedtopresentoperationonLSFOand
wouldreduceHawaiisoilconsumptionbyalmost2millionbarrelsperyear.KPPsfuelcostwouldbe
$127millionlowerthanKahewhenproducingthesameenergyoutput(i.e.1366GWH/year).Thesefuel
costsavingscanbepassedontotheratepayerstartingin2016andextendingthroughthe7yearperiod
endingin2023whenLNGinbulksupplyarrivesinHawaii.
Thenetpresentvalueoftheannualsavingsinfuelcostfrom2016to2023betweenKPPscurrent
operationwithLSFOandmethanolwouldbearound$200million.ThenetpresentvalueofKPPs
operationsonmethanolvsthesameoutputatKahewouldbearound$700million.
Whiletheabovefiguresareindicative,acommercialtestatKPPwithmethanolwillfirmupthe
operatingcostassumptionsandanRFPformethanolsupplieswillestablishrealpricesformethanolat
KPP.
Clearly,methanolcanbeacomplementarycleanfuelatCIP1,severalboilersatKaheandfuelsupplyto
theneighborislands.Hawaiiwouldnotbelockedintoalongtermcontractonmethanolandcould
switchtoanalternatefuelifeconomicconditionswarrant.
Actionrequiredtomoveforwardareasfollows:
ApproveatestofmethanolatKPPtoverifyoperatingconditionsandestablishthebasisfor
contractnegotiationstoextendthePPAwithHECOandfirmupthepurchaseofmethanol.
ObtainnecessaryapprovalsfromEPA,DOH,USCoastGuardtorepermitKPPforoperationwith
dualfuel(methanolanddieselorbiodieselbackup)
Arrangereceiving,storageandlocalpipelineinterconnectioninBarbersPointfrompierto
powerplant.
ConvertKPPtodualfuel;newfuelsupplyskid,newburnernozzles,firesafetyprovisions,etc.
Commercialoperationstocommenceinmidtolate2016.
Itisclearthatmethanoloffersanotherviablecleanfueloptionthatcanreducecoststoratepayersand
improvetheenvironment.Noexpensiveinfrastructureisrequiredtoreceiveandusemethanol.With
theexceptionofsomedieselenginegenerators,virtuallyanyliquidfueledgeneratingplantinHawaii
canusemethanol.In2023,LNGinbulkwhichmayofferfuelcostsavingscanbeadoptedasconditions
warrant;withoutpayingforanystrandedassets.Intheinterim,methanolatKPPcanprovidenearterm
savingsforratepayers.Thereducedairemissionsfrommethanolcanbecreditedtosomeamountof
equivalentrenewableenergysoastobeneficiallyaffecttheenvironment.
RespectfullySubmitted,ArthurNislick
ArthurNislickisformerCEOofthenonregulatedenergysubsidiaryofPublicServiceEnterpriseGroupwhichisthe
50%ownerandmanagingpartnerofKalaeloaCogenerationPartnersLP.HeisaprincipalinEastwindPower
Partners,Ltdthathasproposedtheuseofmethanolasaclean,reliableandaffordablenonpetroleumfuelfor
powergenerationinHawaii.

D. PROPOSALFORMETHANOLFUELTESTTOHECO
E. PROPOSALFORMETHANOLFUELTESTTOKALAELOAPOWERPARTNERS,LP
EastwindPowerAssociatesLtd.,September20,2014
TestContainer
Thepurposeofthisproposedtestisto
demonstratetheviabilityofandestablishthe
performanceforanimmediatelyavailableclean
fuelforpowergenerationinHawaii.
Deliveryby40ISOcontainerfromNewZealand
toHonolulu/Supplier:Methanex
Utilizeexistinginternationalcontainership
servicesfromNewZealandtoHonolulu
(monthly)
13x40ISOconventionaltankcontainers
(capacity9,000gals/ea)leasedforoneway
movement
Totaltestrequirementapproximately350
metrictons(MT)(@336galsmethanol/MT)
OEMConsultationforspecifications/Israel
ElectricCorp.technicalassistance
NeedHECOsupporttoorganizeandconduct
test
TemporaryconversioncostatKalaeloafortest
approximately$1.0million(tobeverified)
Temporaryconversionfortestapproximately6
months(tobeverified)
CostofmethanolfortestdeliveredtoKalaeloa
plantapprox.$200,000.00(basis$500.00/MT)
Kalaeloainvestigatingtemporaryconversion
requirementsKalaeloaadviseswillprovide
definitiveanswerbyendOctober2014Early
November
PUCapprovaloftestcostnecessaryiftobe
passedalong
StateDOHapprovalforemissionspurposes(as
methanoliscleanerburningthancurrentfuels.
approvalshouldbeperfunctory).
OperationBulk
SourcesofMethanolU.S.Gulf,Trinidad,N.Z.,
Brunei,Malaysia&MidEast
ShippingInbulkonconventionalchemical
tankersofapproximately.37,500MTondraftof
38
RequirementsApproximately475,000MT
Methanolperyearbasiscurrentplantload
factortranslatestoapproximately1tanker
shiploadpermonth.
DischargePortKalaeloaBarbersPointHarbor
Piers5&6Existingrisersonpierapronand
pipelinestoexistingshorestoragetanksall
compatiblewithmethanol
TerminalAlohaPetroleumLtd.sufficient
storagetoreceiveKalaeloaspotentialmonthly
Methanolrequirementsaccesstopipelines
sendouttoKalaeloa
KalaeloaPlant
CurrentfuelsupplyfromPARPetroleum
/HawaiianIndependentEnergyInc.(HIE)in
question
IssueswithSOx,NOx,CO2compliancewith
currentfuelLSFOneedtoreduceby20to
25%whichiscanbeaccomplishedwith
Methanol
Lookingforfuelsupplyoptions:
ChevronLSFO/ULSD
HawaiiGasLNGinbulkviaFloatingStorage
andRegasificationUnit(FSRU)onmooring
offshoreBarbersPoint(Kalaeloa)
HawaiiGasLPG(propane&butanes)inbulk
(probablynotsuitableforgasturbine)
HECOcontainerizedLNGHECOtoprovide
containeryardandgasificationunitnext
doortoKalaeloawithdeliveryofgasvia
pipelinesometimeinfuture
EastwindtosupplyMethanolinbulkby
conventionalchemicaltankertorisersat
Piers5/6KalaeloaHarboralmost
immediately

F. REPORTONEILATPLANTMETHANOLCONVERSION,ISRAELELECTRICCOMPANY
G. LETTEROFSUPPORTFORMETHANOLTEST,KALAELOAPARTNERSLP
H. LETTEROFSUPPORTFORTERMINALINGANDLOGISTICS,ALOHAPETROLEUM
I. LETTEROFSUPPORTFORMETHANOLTESTINGANDCONVERSION,ISRAELELECTRIC
ANDDORCHEMICALS
J. LETTEROFSUPPORTFORMETHANOLSUPPLY,METHANEXCORPORATION
K. LETTEROFSUPPORTFORMETHANOLSUPPLY,ZEEPINCORPORATED
L. EXCERPTSFROMHAWAIIINTEGRATEDBIOFUELSRESEARCHPROGRAMPHASEI
FINALREPORT

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