CLP tariff warning puts C.Y. Leung on the spot over his energy policy

Just months after the painful wrangling with the government over the new electricity tariffs, CLP appears to be in a warring mood again. The power company warns that energy bills will be “materially” higher by 2015 due to a 40 per cent increase in fuel costs. Chairman Michael Kadoorie also fired a rare broadside against government’s inefficiency in projects like the arts hub and Kai Tak redevelopment, saying there might be complete darkness in the city if CLP’s management and operation met those standards. Not surprisingly, people felt provoked and even threatened by the remarks. Different theories have been offered as to why CLP chose to make itself an enemy of the public when the next tariff adjustment is not due until the end of the year. Some say it was still aggrieved by the political pressure to cut back this year’s increase from the proposed 9.2 per cent to 4.9 per cent. Others believed the power giant was acting tough in a political gesture to incoming chief executive Leung Chun-ying, and possibly a new environment minister in charge of the energy portfolio.

Objectively speaking, CLP is just being frank about the difficult years ahead. It is true that clean energy comes at a price. Under the user-pays principle, customers should be prepared to pay more for a better environment. But it is not going to help if the public felt they were intimidated to pay more. A provocative approach is hardly the right way forward.

Arguably, a listed company like CLP is duty bound to defend shareholders’ interest and try to maximise profits. Under the so-called scheme of control, which runs until 2018, the two power companies have been guaranteed a near 10 per cent rate of return annually on their investments until 2018. It seems too sweet a deal in a society where calls for government monitoring and intervention in public utilities have become increasingly vocal. The scheme may have served Hong Kong well in the past when there was a need to increase energy supply to meet a booming economy, but a guaranteed-profit agreement should be history now. A better mechanism is needed to ensure public utilities are commercially viable while socially responsible at the same time.

The public outcry shows any tariff adjustment should be handled with great sensitivity, especially when the two power suppliers are protected by a profit scheme that puts consumers in a vulnerable situation. How to tackle the problem will be a major test for the new chief executive. So far Leung has been vague about his policy on the energy market. He should not shy away from adopting a tougher stance if needed. Until the scheme of control can be abolished, there should be better ways to handle the annual adjustment.

The controversy has renewed momentum for a thorough debate in the community on the way forward. This includes whether the market should be opened up to new players to enhance competition.

CLP’s price scare is just so much gas

“The era of cheap gas is over, [CLP chief executive Andrew] Brandler said.
SCMP, May 9

I have time for China Light (the old name still rings better than CLP). It runs an excellent power service, it has kept its tariffs well below those of Hongkong Electric (SEHK: 0006) and I think its people are genuine in their commitment to the community.

I also think it has unfairly been getting the short end of the stick from the government in the last few years in matters ranging from pollution control to independence of operations and, most significantly, in pressure recently to set tariffs at levels below those earlier agreed with the authorities.

In fact, it seems to me that our government wants a dominant power supplier in Hong Kong more Chinese in origin than China Light with its founding Kadoorie family. Our bureaucrats may tell me I’m wrong about this, but it’s my guess that they are waiting for a chance to give the franchise to a mainland power supplier … and won’t negotiate the terms too strenuously.

Thus I can fully understand why the firm should be busy diversifying itself abroad as much as possible, even to the regrettable extent of changing its name.

But at the same time I have to say that the way Andrew Brandler (CLP’s CEO) and his colleagues were harrumphing on Tuesday about higher fuel prices driving up power bills amounts to just so much scaremongering, and they ought to know it.

Look at the chart of the difference that has now opened up in the United States between oil and natural gas prices. It is unprecedented. The new technology of fracking – extracting gas under pressure from graphite – is now rapidly changing the dynamics of energy pricing.

And before anyone protests that we are not located in the US, let me point out that only two days ago the Singapore government’s investment vehicle, Temasek, took a 19 per cent state in Cheniere Energy, a Texas-based gas distributor. The gas will now flow the other way. It’s coming to Asia.

It inevitably would do so anyway. The number of liquefied natural gas terminals built across the world is rising rapidly and traditional producers of gas are already finding themselves under pressure to reduce their prices in line with the revolution in gas extraction.

In fact, Brandler may soon find reason to congratulate himself that China Light’s proposal for an LNG receiving terminal on the Soko Islands was rejected a few years ago. The firm did not after all find itself signing a 20-year supply deal with Malaysian producers on terms that would now be very costly to escape.

The spot price for gas increasingly determines contract prices these days. It has become a buyer’s market. Those costly long-term supply contracts with China are now unlikely to prove either so costly or so long-term as the firm’s scaremongering would lead us to believe.

Bear in mind that gas-powered generation plants are not only much cleaner but much more fuel efficient than coal-burning plants. Instead of grinding the coal to burn the coal dust to make the steam to turn the turbine to crank the generator, you skip the grinder and the furnace and burn the fuel directly in the turbine. This can raise the energy conversion ratio of fuel to electricity to well over 50 per cent, much better than any coal plant can do.

But coal prices now also show signs of crumbling under the assault of the abundance of gas flowing from the new wells. Put it all together and what you have is a suddenly brightened picture for power-generation firms the world over, just when it seemed gloom would prevail because of heightened fears about nuclear power.

There is no way that Brandler could be unaware of these developments and, if he claims so, he should step down as not being up to speed on his job.

I say it again. It’s just scaremongering to talk doom talk on gas prices with the fracking revolution under way.

jake.vanderkamp@scmp.com