LIHU'E, Kaua'i — A new agreement between Pacific West Energy LLC and Kaua'i Island Utility Co-op should advance plans for a sugar-ethanol plant on Kaua'i.

Pacific West wants to retrofit Gay & Robinson's Kaumakani sugar mill to produce 15 million gallons a year of ethanol and 30 megawatts of power by burning bagasse.

It would be the first sugar-ethanol plant on U.S. soil and could provide jobs for more than 200 Gay & Robinson workers who will lose their jobs as the company leaves the sugar business over the next two years.

Financing for the project has proved difficult, as its price has grown to $125 million and the cost of importing ethanol has remained low.

But a collaborative relationship with KIUC could improve the outlook, PacWest chief executive officer William Maloney said.

In the present economic climate, "a project like this is not going to happen unless the parties are working together to make it happen," Maloney said, rather than operating in the "traditional, confrontational-type mode."

In September, Gay & Robinson withdrew from active partnership in the project, leaving it in PacWest's hands. Although the kama'aina company stopped planting sugar this year and will stop harvesting sugar in 2010, it remains interested in leasing its Kaumakani plant to PacWest, Gay & Robinson president Alan Kennett said.

About 30 Gay & Robinson employees have been laid off since the September announcement.

Having KIUC formally express interest in buying the power is a key element to the multifaceted deal, Maloney said.

The Vancouver, Wash.-based PacWest hopes to line up the other elements of its plan during the first quarter of 2009, Maloney said.

PacWest must have access to 12,000 to 15,000 acres of land for growing sugar cane and get financing in a tough market, Kennett said.

Gay & Robinson will not directly lease any of its 7,500 acres of land now in sugar to PacWest, but would allow subleasing for that purpose, Kennett said.

Maloney, who is one of just three PacWest employees, said he is pursuing other land leases on Kaua'i. The company hopes eventually to hire more than 200 former Gay & Robinson sugar workers, plus about 100 more employees, he said.

The bagasse-burning power plant would help the utility reach its goal of generating half its electricity with renewable sources by 2023, KIUC president Randy Hee said.

"Both parties have recognized that a biomass power unit is really good for Kaua'i," Maloney said. "It's very important from a renewable fuels and reliability standpoint."

Because the electric co-op serves a rural area, the project could get financing assistance from a section of the U.S. Department of Agriculture, Maloney said.

PacWest is also talking with a Germany-based international bank, Maloney said.

"I think we'll know in early 2009 whether it's possible," Hee said. "Obviously they (PacWest) need to make some money in the deal and KIUC needs to negotiate something beneficial for its members," he said. "With those two drivers in mind, we're going to be open about what our costs and their comparative costs are."

The proposed quantity of ethanol would supply about 35 percent of Hawai'i's current use, said Maria Tome, of the state Department of Business, Economic Development and Tour-ism.

In a move to encourage local ethanol production, Hawai'i since 2006 has required that gasoline sold in the state include 10 percent ethanol. Despite acres of vacant former sugar fields in the state, no Island ethanol plant has been built.

A Hawai'i tax credit of 30 cents per gallon of ethanol produced could yield $4.5 million a year for up to eight years, Maloney said. Additional federal tax credits expire in 2010, but are expected to be extended, he said.

State and federal programs to encourage alternative energy production will help, Maloney said. But financiers want the cash flow to pencil out without the government aid, he said.

Meanwhile, the privately held Gay & Robinson, which owns 51,000 acres on Kaua'i, is pondering its own alternative energy projects: a hydroelectric dam, possible biodiesel crops and solar projects, Kennett said.