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The Honolulu Advertiser
Posted on: Sunday, January 15, 2006

State's ethanol plans fall short

 •  PDF: State pamphlet on the new ethanol law

By Sean Hao
Advertiser Staff Writer


• Starting in April, most gasoline sold in Hawai'i will contain 10 percent ethanol, a grain-based alcohol fuel.

• Because of tax credits, ethanol could reduce the cost of gasoline by about 10 cents a gallon, but that depends on whether dealers pass on the savings to consumers.

• Ethanol is about 3 percent less fuel-efficient than gasoline, so cars won’t go quite as far on a gallon of ethanol-blended gasoline, according to a Stillwater Associates study.

• Using ethanol in gasoline has no significant effect on engine wear, says the AAA travel club of California, where a blend of gasoline with up to 10 percent ethanol is sold, similar to what will be sold in Hawaiηi.

• Autos built since the mid-1970s should run on gasoline containing ethanol without problems, though older vehicles may experience fuel-line and fuel-filter problems, according to AAA.

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The state's push to promote a local ethanol industry — including millions of dollars in tax credits — has failed to result in any Hawai'i production this year and will force gasoline companies to import the fuel.

There will be no locally produced ethanol available on April 2, when the state requires most gasoline to contain 10 percent of the alternative fuel.

The ethanol mandate was supposed to reduce Hawai'i's dependence on imported oil and create an alternate market for struggling sugar cane growers. Instead, consumers will be forced to buy 3 million gallons a month of ethanol from out-of-state and possibly foreign companies.

"The whole argument was (ethanol) production locally would prop up the sugar industry and keep money in the state," said Lowell Kalapa, president of the nonprofit Tax Foundation of Hawaii. "None of that is happening. We're going to send our money out to buy this fuel."

In spite of millions of dollars in state tax credits and a year-and-a-half lead time, local ethanol companies are not ready. In 2004, they said their plants could be up and running by the April deadline, but engineering challenges as well as delays in finding financing and land made that impossible.

Now, it seems that ethanol makers will miss the deadline by a year or more.

Still, some Hawai'i residents support starting the ethanol program in April.

"If it burns cleaner and it costs more or less the same, and it reduces our dependence on foreign oil, I'm all for it," said Jonathan Labor, a plumber from Mililani.

State officials say requiring the use of ethanol without the availability of local sources was not the plan but will still prove worthwhile.

"It's not ideal. Our preference, of course, is to have local production," said Maurice Kaya, chief technology officer for the state Department of Business, Economic Development and Tourism, which is implementing the ethanol mandate. "We're disappointed that they've been delayed, but we're optimistic. We still believe in the long run it (the ethanol mandate) is in the best interest of the state."

Ethanol, an alcohol-based fuel, can be made from sugar cane, which was one of its chief attractions for Hawai'i. Its use should help the sugar industry amid stagnant prices and increasing foreign competition.

Without a local supply, the ethanol mandate may be a bigger financial benefit to farmers outside Hawai'i.

"That's always been one of our concerns — that there would be no local production," said Albert Chee, spokesman for Chevron Corp., which has opposed the ethanol mandate. "We knew we would have to import at least in the beginning. Whether we will have to import during the whole life of the program remains to be seen."

Supporters of ethanol, including Rep. Hermina Morita, D-14th (Kapa'a, Hanalei), chairwoman of the House Committee on Energy & Environmental Protection, said there is no need to extend the April deadline.

Using ethanol makes Hawai'i less reliant on fossil fuels, which is a step in the right direction, said Morita.

"We're still seeing progress toward that goal (of local ethanol production)," Morita said. "We have to make a commitment. We have to start moving forward."

Ethanol companies say postponing the April deadline could cause investors to question the state's sincerity in supporting the alternative fuel and further delay construction of plants.

"A delay would put doubt on the veracity of the mandate," said William Maloney, president for Maui Ethanol LLC. "That puts doubt in the investors' mind."

Maui Ethanol plans to build one of about a half-dozen ethanol production facilities under consideration in Hawai'i to meet a projected consumption of 40 million gallons a year. Maui Ethanol had planned to produce ethanol at a $40 million plant in Pu'unene starting in April. However, engineering and financing issues have delayed that date until the second or third quarter of 2007.

Hawai'i will benefit from ethanol use even without local production, said Dan KenKnight, an executive with Ethanol Research and Oahu Ethanol — two local ethanol-related companies.

"The overall benefits aren't lost," he said. "Stuff happens, but we're all staying the course and we're all staying the path. There is going to be local production."

Oahu Ethanol planned to begin ethanol production in the second quarter of this year. That has been delayed until the first quarter of 2007 because of difficulty securing land, among other things, KenKnight said.

Just how the ethanol requirement will affect Hawai'i gasoline prices remains to be seen. Ethanol can be shipped into Hawai'i at a price that's comparable to or lower than the current price of gasoline — after a 51-cents-a-gallon federal tax credit, according to experts.

In addition, all sales of ethanol-blended gasoline through December 2006 are exempt from the state's general excise tax, which tacks on about 8 cents a gallon to the cost of regular gasoline on O'ahu. That and other tax incentives could lower the cost of gasoline for consumers by about 11 cents a gallon — if the oil industry passes on the savings, according to figures from the Department of Business, Economic Development and Tourism.

The other side of those savings is that the tax credits will result in a loss of potential revenue for the state. The general excise tax exemption could cost the state an estimated $28 million from April of this year to January 2007. That exemption, which was enacted in 1980, expires at the end of this year.

The general excise tax credit is one of several tax breaks passed by state lawmakers that benefit ethanol producers, investors and users. They weren't sure that requiring the use of ethanol would be enough to attract manufacturing plants. As a result, some ethanol producers and their investors can claim up to $2 in tax credits and rebates for every $1 spent to build an ethanol plant.

Companies building ethanol plants can claim a maximum of $12 million a year in state ethanol production tax credits.

"Who pays for the credits?" asked Kalapa of the Tax Foundation. "Indirectly, we pay more. It's money forgone, so (the state) can't lower taxes for the rest of us."

Proponents say the tax breaks will benefit residents by reducing the state's dependence on crude oil, and will create the potential for a cleaner, more competitive fuel industry. They also cite a state study that estimates local ethanol production will result in $104 million of new investment in manufacturing plants, 84 direct jobs and 601 indirect jobs.

Because ethanol is about 3 percent less efficient than gasoline, cars will get slightly fewer miles per gallon. That will equate to about $20 million a year in added gasoline costs for consumers statewide, according to a draft report by Irvine, Calif.-based Stillwater Associates.

Ethanol converts, including George Nitta, owner of Nitta's Auto Repair in Kalihi, said ethanol is more fuel-efficient than gasoline. Nitta, who drives a 1974 Pantera on 100 percent ethanol, said a switch to ethanol is overdue.

"It's cleaner-burning," Nitta said. "Ethanol is great. We should have done this 10 years ago."

Reach Sean Hao at shao@honoluluadvertiser.com.