KAHULUI, Maui — A $61 million biodiesel refining plant is being planned to turn imported palm oil into fuel to run Maui Electric Co. generators.

In making the announcement yesterday, MECO President Ed Reinhardt said the project will be a first step toward eliminating use of imported petroleum-based fuel at the utility's 215-megawatt Ma'alaea Power Plant, which supplies about 85 percent of the island's electrical capacity.

MECO consumed 72.1 million gallons of imported diesel in 2005, and officials are examining what it will take to convert the Ma'alaea generators to biodiesel, Reinhardt said. The company already uses biodiesel to start up and shut down some of the Ma'alaea units because it burns more cleanly during those processes.

The new biodiesel plant will be owned by BlueEarth Maui Biodiesel LLC, a partnership between BlueEarth Biofuels LLC and a new nonregulated subsidiary of Hawaiian Electric Co., parent company of MECO. BlueEarth Biofuels, based in Texas and Arizona, is a developer of power and renewable-energy projects in the western United States.

The plant, which is expected to provide at least 40 jobs, will be constructed on 15 acres at MECO's Waena Generating Station site on Pulehu Road, across from the Central Maui Landfill. The land is zoned for renewable-energy use.

The refinery is scheduled to be in service by 2009, producing 40 million gallons per year of biodiesel from palm oil imported from plantations around the Pacific Rim and South America, said Landis Maez, a managing partner in BlueEarth Biofuels, which will operate the plant.

Planned second and third phases will bring annual production to 120 million gallons per year by 2011, he said.

BlueEarth officials said they hope eventually to use Hawai'i-grown crops that might include palm, kukui nut, coconut or other oil-rich plants.

A state Department of Agriculture report released in November that studied biodiesel crop implementation in the Islands said Hawai'i could produce enough biodiesel fuel to reduce imported diesel by 20 percent. The report also said it could take five to 10 years for researchers to determine the best crops and locations for crop production.

Aside from the MECO power plants, other potential markets for the made-on-Maui biodiesel include military and marine interests, and a new generating plant scheduled to open in 2009 in Campbell Industrial Park. HECO officials are still deciding whether to use biodiesel or ethanol to power that O'ahu project.

HECO President and Chief Executive Officer Mike May said the Maui utility's switch to biodiesel will help stabilize energy prices on the Valley Isle and, if local crops are used, provide the island with greater energy security.

"A stronger agriculture industry and more green, open fields" are additional benefits, May said.

Use of biodiesel at the MECO plants also will help the company meet a state mandate that 20 percent of its electricity production come from renewable sources by 2020.

BlueEarth Maui LLC has asked the Legislature to authorize a special purpose revenue bond for refinery construction that will allow the company to use the state's strong credit rating to get better loan rates and terms at no cost to taxpayers.

Senate Bill 1718, which authorizes the bond, said the project is in the public's interest because it will help meet the state's renewable-energy goals, reduce greenhouse gas emissions via a renewable closed-loop carbon system, and cut harmful emissions from the burning of petroleum diesel.

Other benefits mentioned in the bill include encouraging local agricultural research and cultivation of crops used for renewable-energy operations and returning former farm lands to production.

May said that profits realized by the HECO subsidiary that is a partner in the plant will go into a newly created Hawai'i Biofuels Public Trust to fund development of bio-energy infrastructure such as research at the University of Hawai'i and support for local farmers who grow crops to feed the refinery.

The project will lease land from MECO at fair-market value, with proceeds going to offset consumers' power bills. The land lease and the pricing agreement by which MECO would buy the fuel are subject to review by the Public Utilities Commission.

Newly elected Maui Mayor Charmaine Tavares yesterday welcomed the project, saying her campaign platform included diversification of the island's economy though sustainable technologies and agriculture.

Reach Christie Wilson at cwilson@honoluluadvertiser.com.