Hawaiian Electric Co. is moving closer to operating its new $137 million generating plant after suffering a setback when a renewable biodiesel supply contract was rejected by regulators as possibly being too costly and risky for the utility.

HECOannounced yesterday that it had contracted with another biodiesel provider for enough supply to conduct testing and permitting work at the Campbell Industrial Park generating unit.

If all goes well, the utility will secure the permits and contract for more biodiesel and have the unit in operation early next year.

"We're pretty optimistic we'll be at regular operating mode early in 2010," said spokesman Peter Rosegg.

The 110-megawatt combustion turbine generator has been built to help HECO during peak electrical use periods and for emergencies. It has been designated to burn fuel from renewable sources and will help increase the reliability of HECO's system.

It also will be environmentally friendly compared to conventional plants burning fuel oil, with HECO estimating the biodiesel having lower carbon dioxide emissions.

But the startup of the plant was dealt a setback earlier this year because of financial problems and other issues with Imperium Renewables, a Seattle-based company that originally had been contracted to provide renewable fuel.

In August, the state Public Utilities Commission ruled HECO's contract with Imperium carried too many risks and possible costs to be carried by the utility's customers. The contract had been negotiated at a time when biodiesel costs were higher than they are now and when Imperium was still hoping to build a $91 million biodiesel refinery on Oahu.

Those plans fell apart, and after the PUC ruling, HECO put out for bid a contract for 400,000 gallons of biodiesel to be used during the plant's test phase. It also is working on selecting a supplier for 3 million to 7 million gallons that will be used in regular operations.

HECO said the initial contract was won by a subsidiary of the Renewable Energy Group, an Iowa-based company that will supply biodiesel made from waste animal fats.

The contract has been submitted for review by the PUC.

Rosegg would not disclose what HECO is paying for the fuel, saying the terms were proprietary information.

He said the fuel should be delivered here in December with another one or two months of tests to gauge emissions for a state Health Department air quality permit and other approvals needed before the plant can start regular operations.

Hawaiian Electric said it also expects the biodiesel made from pre- and post-consumer animal waste and cooking oil will meet an environmental policy agreed to with the Natural Resources Defense Council. The policy had called for buying biodiesel made from palm oil and locally grown feedstocks.

HECO said it expects the resources council has indicated using biodiesel from waste product is likely to represent a positive environmental approach.