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HK power utilities prepare for competition

Domestic players fret over permitted rate of returns and environmental targets as the city looks to open up its electricity market.

In response to a public consultation on the future of Hong Kong’s electricity market launched on March 31 by the energy regulator, Michael Kadoorie, chairman of domestic utility CLP, warned the public that competition was “not a panacea for all problems”.

Under the current Scheme of Control Agreement (SCA), the permitted rate of return on average net fixed assets other than for renewable energy fixed assets – for which the permitted return is 11 percent – is 9.99 percent. According to analysts, however, the new government plans would target permitted rate of returns on average net fixed assets for non-renewables to 8 percent, posing the question of who will have to bare the weight of subsequent decrease in earnings.

“The infrastructure required to ensure reliable and timely delivery to customers takes time to plan and build – often a decade or more – and requires huge capital outlays, before adding that regulatory certainty and reasonable returns on investment are critical in ensuring sufficient funds for the delivery of high quality, safe, reliable and environmental electricity supply,” Kadoorie said.

CLP endorsed the government’s plans to introduce more competition in the long run all the while stressing the low tariff performance it had achieved over the past 50 years, which it said beat most of its peers in developed countries. It estimated, for instance, that its rates were 24 percent lower than those of Singapore, 42 percent lower than London, and 56 percent lower than New York.

“Living in the world’s freest economy, HK people know that competition is good for business and consumers. But […] in the case of the highly complex and capital intensive energy industry, we need to clearly define what problems we need to fix before rushing in to find new solutions. Overseas examples suggest that there is no one size fits all solution in the electricity market,” said Kadoorie.

According to CLP data published in its December 2014 annual report, the energy rate of consumption in Hong Kong has been growing between 2 to 3 percent annually. Richard Kendall Lancaster, the group’s chief executive, warned against levels of rates of returns that would hinder necessary levels of investments in the long term. ”The capital intensive industry of electricity imply that the investments we need to make have to be made over a very long period of time, up to 60 years in some cases. So when considering an appropriate rate of return, we need to secure investment levels that are adequate in order to avoid scaling back.”

Lancaster added that the Hong Kong people had expressed a preference toward building capacity in Hong Kong rather than importing power from China. CLP in its 2014 annual report announced plans to further explore business development opportunities in Southern China.

“It should be clear to all of us that, in the wider context, closer integration between Hong Kong and southern China is inevitable. We are well positioned as we are confident that our long-term partnership with key industry players in southern China such as China Southern Power Grid and China General Nuclear Power Corporation will give us the competitive edge to further explore opportunities in southern China in the long run,” said Kadoorie in his chairman’s statement.

However, when asked whether the firm believed these plans needed reconciliation with the will of the people, a firm spokesperson replied the firm’s strategy did not contradict Hong Kong people’s preference as more business in the mainland did not equate more reliance from Hong Kong on importing power from China, adding that China was one of CLP’s growth markets where it intends to expand its presence. 

A potential challenge for CLP lied in the government’s suggestion that the company should meet a carbon target by 2018. “The way that this would be achieved is by increasing our gas capacity so that we can shift more from coal to gas. We are only beginning our environmental impact assessments and evaluating the new capacity needed to meet the government’s plan,” explained Lancaster.

“We need to increase our natural gas to 50 percent levels. In 2013, the government had permitted us to have some funds for our advanced study which includes a feasibility study, commissioned for 2020. The increase in power supply needs government approval first,” added Betty Yuen, vice chairman of CLP.