Biodiesel is great. It's a clean-burning fuel made from renewable resources. It has no petroleum, but can be blended at any level with conventional diesel. It can be used in diesel engines with no major modifications. So why not make it in Hawai'i and sell it to heavy users like utility companies and the maritime community?

MAUI HAS ONLY BIODIESEL PLANT

The new HECO power plant in Campbell Industrial Park is set to open late next year. It's supposed to run on biodiesel. To supply the plant, Imperium Renewables of Seattle was supposed to build a biodiesel processing facility at Kalaeloa, but Imperium has had financing problems and that facility isn't happening. HECO hopes to "stay the course" with Imperium, but last week Imperium closed its Honolulu office, and that hope may not be realized.

Where else can HECO get biodiesel? It won't come from the excess that BlueEarth Biofuels expects after supplying the Maui Electric plant in Ma'alaea — that's two to three years away. Although there are 171 biodiesel processing facilities on the Mainland, right now the only biodiesel produced in Hawai'i is from Pacific Biodiesel on Maui, which generates only modest amounts mostly from waste restaurant oils, not nearly enough to supply heavy users.

If we want to provide biodiesel on a large scale, we will need to build large-scale biodiesel production facilities here, including those that grow the crops and those that process them into biodiesel. Such facilities are expensive and require hundreds of millions of dollars for the necessary land, technology, staff and equipment.

Algae, one of the highest-yielding biodiesel crops, could be our special sauce. Heidi Kuehnle of Kuehnle AgroSystems says "the promise of algae is imminent for biodiesel in Hawai'i. We know we can grow it here, and we've pretty sure we can scale it up for commercial use. It's only a question of allowing people to see it as a renewable with attractive possibilities throughout the state."

Given the current scarcity of investment capital, however, developing biodiesel facilities is difficult. And the recession also makes financing hard to get. "Where an entrepreneur could get a loan for 90 percent of value before, now he can only get a loan for 50 percent of value," says Landis Maez, managing partner of BlueEarth. Things may improve with yields and oil prices, but the key is finding a guaranteed market.

MARITIME INDUSTRY A POTENTIAL MARKET

We have a maritime community full of diesel ships that can be converted overnight to biodiesel. If we can develop the maritime community as a guaranteed market for biodiesel fuel, that could go a long way to developing a biodiesel industry in Hawai'i.

The Coast Guard uses biodiesel in its ships. Lt. John Titchen reports that the Coast Guard is transitioning to unblended biodiesel first for utility craft on the West Coast then in Hawai'i starting in 2011. The larger ships will follow. Semper Paratus.

Hawaiian Tug and Barge could also be a big biodiesel customer. Vice president Mark Houghton reports that HTB was on the brink of a deal to buy biodiesel from Imperium when Imperium lost its financing. Doug Won, area manager for Sauss Brothers, also had discussions with Imperium. Both are still willing to take a look at biodiesel, but right now, no one is producing biodiesel in Hawai'i.

IMPLEMENTING THE ENERGY INITIATIVE

This year the administration has called for an energy initiative. Let's think of how it can be implemented for biodiesel.

If you want to develop an industry in your state, incentivize it. Since biodiesel developers have had capital and financing problems, we should make it easier for them. For one thing, let's renew the Act 221 tech tax credit, otherwise expiring in 2010. That's a no-brainer — and in fact, a great many of today's new Act 221 companies are into renewable energy.

Let's give these developers land to develop their algae and other biodiesel crops, at say $1 per year for a limited period, just as Idaho is giving land to our own Hoku Scientific. Hawai'i has lots of arable land, much of it fallow — if we want to incentivize this industry, why don't we do what Idaho did?

LESSONS FROM ETHANOL

And although the state will probably have to leave the heavy lifting of loan guarantees for biodiesel developers to the federal government, the state can adopt a biodiesel blending mandate along the lines of the existing ethanol blending mandate. Could that be the ticket?

Hawai'i's ethanol blending mandate has not attracted sufficient capital or financing for local ethanol production, in large part because it allows gasoline companies to buy the required ethanol from other places, which is exactly what they do. That's the hole in the boat, and that's why the ethanol blending mandate isn't working and ethanol is not yet being produced in Hawai'i.

HECO's sustainability policy gives preference to Hawai'i-grown or processed biodiesel. A state biodiesel blending mandate could likewise include a preference for locally produced biodiesel. Landis Maez says that "this would require the use of local biodiesel in Hawai'i's transportation sector and encourage local and out-of-state developers to produce biodiesel in Hawai'i rather than ship it in from somewhere else."

He's right. We should have blending mandates for both ethanol and biodiesel and require locally produced ethanol and biodiesel for the blending. We'll have to find a way to do this so it doesn't violate the Interstate Commerce Clause.

If that results in a premium for Hawai'i-made biodiesel, it's OK. I don't think people will object to paying a little more to create new green industries, jobs and exports for Hawai'i.

THE RACE IS ON

On April 1, Arizona's PetroSun opened the first commercial algae-to-biofuel facility in Rio Hondo, Texas. It says this will produce 4 million gallons of algal oil and 100 million pounds of biomass per year in 1,100 acres of saltwater ponds. Twenty acres will be used for testing renewable JP8 jet fuel. These are ambitious claims, and we'll see what happens.

To achieve leadership in the new energy agriculture, we need biodiesel production right away. The 2009 session of the Legislature is coming soon, and hopefully the administration will suggest an effective bill. Just as we have depended on fossil fuel, with biodiesel incentives, we can go to fossil-free. A natural for Hawai'i — where there was sugar cane and pineapple, now there can be biodiesel. What a perfect transition.

Jay Fidell is a business lawyer practicing in Honolulu. He has followed tech and tech policy closely and is a founder of ThinkTech Hawaii. Check out his blog at www.HonoluluAdvertiser.com/Blogs.