Image source: Getty Images.

One of the most significant proposed utility mergers of the last decade is officially off, and regulators appear to have won in a battle against big power generators. The deal I'm talking about is NextEra Energy's (NEE 1.74%) proposed $2.6 billion buyout of Hawaiian Electric Industries (HE -4.66%), the state of Hawaii's largest electricity provider. 

In a state where sunshine is prevalent and imported oil to run power plants is expensive, the utilities didn't show enough commitment to renewable energy for regulators to give the go-ahead. And now Hawaii faces further questions about its own energy future. 

Image source: Getty Images.

How NextEra lost Hawaiian Electric

When NextEra Energy agreed to buy Hawaiian Electric the deal immediately came under fire. Hawaiian Electric had recently been lambasted by regulators for dragging its feet on connecting rooftop solar systems to the grid, while NextEra Energy owns Florida Power & Light, which has fought solar in the sunshine state.

I should note that NextEra Energy and NextEra Energy Partners (NEP 4.33%) are the biggest owners of renewable energy assets in the U.S. -- but owning a renewable energy plant with a long-term contract to sell energy to a utility and allowing your own utility customers to create their own energy with solar are two very different things. NextEra Energy loves renewable energy when it serves its own profit goals, but not when it gives customers more choice. And that's what Hawaii really wants. Hajime Alabonza of the Hawaii Solar Energy Association put it this way:

Instead of envisioning a 21st century grid that enables customer options like rooftop solar, NextEra wanted to double-down on its 'build more, pay more' monopoly business. The commission understood this isn't the right direction for Hawaii's customers.

Hawaii wants to create a next generation utility with 100% renewables by 2045, and with 16% of customers already using rooftop solar, it's on its way. But the old Hawaiian Electric wasn't making enough progress in building the grid of the future, and regulators didn't feel NextEra Energy was going to be a step in the right direction. 

Where does Hawaii go from here?

For a year and a half, Hawaiian Electric has been going through this buyout process, while regulators have been examining the deal. Now that it's called off, both parties have to get down to the business of creating the utility of the future in Hawaii. We know that regulators want more renewable energy, but we don't know how they'll get the utility to build a reliable grid that's 100% renewable in the next 30 years.

It's a challenge, but with solar energy and energy storage costs coming down rapidly, Hawaii has a chance to build the grid of the future before any other state. It'll be a proving ground for energy, and that makes it worth watching for investors.