The state Public Utilities Commission on Monday approved a power purchase agreement for the first grid-scale solar and battery energy storage project on Molokai that will lower power costs for customers and comprise more than 45 percent of the island’s renewable energy production, the decision and order said.

The 2.64 megawatt project, which includes a 3 MW battery energy storage system, will be owned and operated by Moloka’i New Energy Partners, a Chicago-based Half Moon Ventures company that will sell power to Maui Electric Co., a utility news release Wednesday said.

The facility will be located on vacant industrial land owned by Moloka’i Ranch and leased by MNEP. It will be adjacent to MECO’s Pala’au Power Plant.

The solar and battery project is expected to be in service by the end of 2019, MECO said. The power purchase agreement is for 22 years with the pact possibly continuing beyond that time by mutual agreement.

Molokai customers pay more for their power than Maui customers, about 37 cents per kWh, MECO said in February. A residential customer consuming an average 400 kWh of electricity pays $147.78 a month.

The MNEP project is expected to lower a typical monthly bill by $4.63 cents next year and by $35.92 in 2024, the decision and order said. The utility has 3,200 customers on the island.

MECO will pay the equivalent of 18 cents a kWh, which is a little more than the 17 cents a kWh the utility paid for fossil fuel production in June, a MECO filing with the PUC said. MECO makes no mark-up and takes no profit on electricity purchased from independent power producers like MNEP.

The payments are broken down into three components — solar power produced in real time, “time shifted” power draws from the batteries and a service payment for the battery. The service payment will be $101,000 a month for the first year and increase from there for a total of $34.6 million over the 22 years per the agreement.

MNEP conceded that costs are higher than other solar/battery projects in Hawaii but said that they are “reasonable” because the project provides grid services not needed in other projects, MNEP has assumed more risk than other projects and small scale projects, like the one on Molokai with low-energy demand, are more expensive.

Among the more costly pieces are inverters that will provide grid stabilization through the battery system. MECO noted wide variations in power usage from 5.95 MW at 6:15 p.m. Nov. 1 to 1.55 MW at 1:43 p.m. March 10. This gap in usage leaves the grid susceptible to events that can cause an outage before a circuit breaker or other protection system can isolate the fault.

The battery system provides for fast frequency response, regulating reserves, power factor correction and black start capability, the decision and order said.

MNEP also noted that future projects may cost more because future developers will no longer be able to take advantage of the 30 percent investment tax credit. The federal New Market Tax Credits are provided to the project through Punawai ‘O Pu’uhonua, a Hawai’i-based community development organization.

In fact, MECO and MNEP requested a decision by the PUC by Tuesday to have the necessary time to take advantage of the tax credits.

“We are grateful to have the New Market Tax Credit resources that can support the economic feasibility of a Molokai project,” said Pono Shim, manager of Punawai ‘O Pu’uhonua. He shared a story of a young father, who said at a meeting that the project was for his daughters, “for the current children.”

While most of the residents who submitted testimony praised the project for lower power costs and reduced fossil fuel use, Sustainable Molokai, a local grass-roots organization, opposed the project. It said the project provides “no solid community benefits, offers insufficient savings for Molokai ratepayers and provides little potential for community ownership, job creation or other ways of more deeply engaging the community in the island’s energy transition.”

In an apparent nod to Sustainable Molokai, the agreement includes a clause that would allow “good faith consideration” for the purchase of the project after five years of operation by a community-controlled nonprofit corporation or similar entity.

PUC Chairman Randy Iwase and Commissioner James Griffin voted for the agreement. Commissioner Jennifer Potter did too, but she warned that MECO power purchases likely will cost more than the 18 cents per kWh and had reservations about the project not being subject to competitive bidding.

“As this solar and battery project moves forward, we recognize there is still much to be done in our efforts to reach 100 percent renewable energy on Molokai,” said Sharon Suzuki, president of Maui Electric, referring to the goal to be reached by 2020. “We’ll be seeking more affordable renewables to power the island and look forward to continue working with the Molokai community, policymakers and renewable energy developers to achieve this ambitious goal.”

* Lee Imada can be reached at leeimada@mauinews.com.