The mandate issued by the state nearly two years ago was ambitious yet realistic: Reduce Hawai'i's dependence on imported oil by requiring gasoline to be blended with ethanol, an alternative fuel that that could be produced locally from sugar cane or one of its byproducts.

Local gasoline producers dutifully revamped their blending operations to meet the 10 percent ethanol requirement, and when the law kicked in April 1, motorists began filling their tanks with the new, cleaner-burning fuel blend.

However, the goal of weaning Hawai'i from imported energy is still just that. None of the five companies that pledged to build ethanol plants have even broken ground. Local production of ethanol isn't expected to begin until late next year at the earliest as prospective producers wrestle with permitting requirements and critical questions such as whether to use locally grown sugar cane or import other ethanol "feed stocks," such as molasses or corn.

The ethanol being used by local gasoline producers — more than 11 million gallons since April, has been imported from El Salvador, according to federal records.

The failure to grow a local ethanol industry comes even though Hawai'i has the most generous ethanol tax incentives in the country. Those include a 100 percent tax credit for plant construction costs. That allows companies to write off all or most of their construction costs against state taxes owed or to be reimbursed by the state if costs exceed what they owe in state taxes.

"I've never heard of a 100 percent tax credit," said Matt Hartwig, a spokesman for the Renewable Fuels Association. "It sounds like more compared to what other states have done. Hawai'i is doing the right things to spur production."

Other states are racing to jump on the ethanol production bandwagon, with 32 refineries now under construction on the Mainland, according to the Renewable Fuels Association. Money is being pumped into the industry at a time when ethanol supplies are tight and prices are soaring. Wholesale spot market ethanol prices have more than doubled in the past year to more than $3.50 a gallon.

Based on the amount of gasoline burned by Hawai'i motorists, there is demand locally for about 40 million gallons of ethanol annually. On top of that, Hawaiian Electric Co. recently announced that it wants to use ethanol in a planned power plant at Campbell Industrial Park, which would generate local demand for another 7 million gallons of ethanol annually starting in 2009.

"I'm not so sure I would say it's a slam dunk, (but) it seems to be an attractive opportunity and a lucrative opportunity with all these incentives in place," said Maurice Kaya, chief technology officer for the Department of Business, Economic Development and Tourism. "I'm not sure what else we can do" to spur the ethanol industry.

Ethanol, an alcohol-based fuel, can be made from sugar cane, which was one of its chief attractions for Hawai'i. Companies that could benefit from the shift to ethanol include Hawai'i's two remaining sugar producers, which have operations on Maui and Kaua'i. Ethanol production represents a new market for sugar, but it won't necessarily result in new sugar cane processing plants or jobs in the near future.

Nonetheless, the new demand could keep the ailing sugar industry from contracting further amid stagnant prices and increasing foreign imports.

For Kaua'i sugar grower Gay & Robinson, ethanol is a chance to earn a better return on its molasses byproduct and create more demand for sugar cane, and it fits into a broader plan to switch production to value-added sugars.

"We've been concerned about the future of being in the raw sugar market, because there's no future as a commodity producer," said Alan Kennett, general manager for Gay & Robinson, which is partnering with Maui Ethanol to build a 12-million-gallon-a-year ethanol plant on Kaua'i. Producing ethanol "strengthens our position going forward. It is a no-brainer at these prices."

Meanwhile, Hawaiian Commercial & Sugar Co. on Maui remains undecided about whether to manufacture ethanol. HC&S is concerned about disposal of plant waste and competition from low-cost foreign ethanol producers such a Brazil.

"The waste part of it is a large part of it, but it has to be economically sustainable," said Lee Jakeway, the company's director for energy development and planning. "It has to be able to stand on its own."

HC&S plans to decide whether to produce ethanol by year's end. "We're still trying to see if we can make a go of it," Jakeway said.

One thing that prospective producers have no problem finding is willing investors. In 2004, ethanol proponents said their plants could be up and running by April 2005. However, engineering challenges as well as delays in finding financing and land made that impossible. Today, industry proponents said, money is not a problem.

"There's a lot of money being funneled into ethanol right now," said William Maloney, president of Maui Ethanol. "At this point I don't think access to capital is a hurdle to any of these projects.

"I think it's realistic that if everybody gains momentum, within two years we could be (ethanol) self-sufficient."

In the absence of local production, Hawai'i's oil companies are importing ethanol with most coming from South America via Central America. That's because ethanol imported from El Salvador is exempt from the 54-cent-a-gallon import tariff that's imposed on ethanol imported from Brazil.

The failure so far to reduce Hawai'i's dependency on imported energy hasn't been lost on the state's two oil refiners, Chevron Corp. and Tesoro Hawaii.

"I guess you could say there's some irony in that," said Al Chee, a spokesman for Chevron.

Tesoro officials have noted that the reliance on imported ethanol adds another variable that makes Hawai'i motorists more vulnerable to supply disruptions. Local refiners are now producing gasoline with a lower octane rating to offset the higher-octane rating of the ethanol with which it is mixed. If a shipment of ethanol failed to arrive, refiners could not sell the lower-octane gasoline.

Reach Sean Hao at shao@honoluluadvertiser.com.