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Hongkong Electric

Gas unit to cut Lamma smog

Hongkong Electric will replace older generating units at Lamma Power Station with a new gas-fired combined cycle turbine unit in 2020 to reduce emissions.

Hongkong Electric will replace older generating units at Lamma Power Station with a new gas-fired combined cycle turbine unit in 2020 to reduce emissions.

The more efficient L10 unit will help HK Electric meet the stringent emission requirements set by the government to increase the proportion of natural gas generation to 50 percent by 2020.

It has signed an agreement with Mitsubishi Corporation to commission the construction of L10, which is expected to cost HK$3 billion.

Managing director Wan Chi-tin, who signed the agreement with Mitsubishi in Tokyo, said the L10 will enable a cleaner power supply while maintaining reliability.

“When L10 is commissioned in 2020, it will enable HK Electric to further reduce our carbon footprint and other emissions while maintaining power supply reliability,” he said yesterday.

L10 is cleaner and more efficient after adopting combined cycle generation technology.

The company says the technology “is one of the cleanest, most popular and efficient ways to generate electricity by fossil fuels in the world.”

It also has greater fuel efficiency through generating additional power from its steam turbine, which uses the high- temperature exhaust gas from the gas turbine.

Gas generation produces fewer emissions than other fossil fuels, reducing its environmental impact.

Meanwhile, Secretary for Environment Wong Kam-sing said the government is working to reduce the maximum return ratio of the territory’s two electric companies.

Under the Scheme of Control Agreement with the government, each of the power companies is allowed to make a capped rate of return of 9.99 percent after tax on its average net fixed assets. It will expire in 2018.

On a radio program yesterday, Wong said the government wants to increase the use of renewable energy.

He said a public consultation last year found citizens they want to reduce the return rate to between six and eight percent.

“We should not aim at the lowest ratio possible, but a balanced one,” Wong said.

Hong Kong’s two electricity suppliers can afford to be more generous with tariff cuts

Fuel prices have plunged in the past year, yet CLP and HK Electric are only reluctantly offering a 1 per cent cut in power bills

Millions of households and businesses are understandably dismayed by the announcement on Tuesday that the city’s electricity suppliers, CLP and HK Electric, will cut tariffs by a miserly 1 per cent despite the dramatic fall in fuel prices over the past year. With the two power companies still making billions of dollars in profits each year, the tariff reductions are little more than a drop in the ocean.

Equally disappointing is the government’s failure to defend consumers’ interests. Speaking at the Legislative Council economic development panel on Tuesday, Secretary for the Environment Wong Kam-sing revealed that the two companies originally only intended to freeze their tariffs. The reductions, 0.9 per cent for CLP customers and 1.1 per cent for HK Electric clients, only came after the government intervened. It is regrettable that Wong considered the outcome acceptable. He let down those who legitimately expected steeper concessions.

To those who have become used to ever-increasing energy bills in recent years, the cuts, albeit modest, are a small step in the right direction. According to the companies, the tariff levels are expected to be frozen in 2017 if fuel prices stabilise.

But whether the cuts are deep enough is open to discussion. Lawmakers from across the political spectrum have rightly questioned whether there was still room for further reductions. The actual savings for most CLP and HK Electric customers come to only HK$4.40 and HK$7.50 a month, respectively. Given fuel prices have dropped significantly and that the power giants made HK$10 billion and HK$3.2 billion in profits last year, respectively, the public is entitled to ask why the cuts cannot be deeper.

The criticisms levelled at the government are justified. Under the scheme of control agreement with the two power firms, each of them is entitled to 9.99 per cent return on investment. The guaranteed profits means officials can only seek to influence tariff adjustments. Officials did not try hard enough to push for more concessions. The cuts fall short of the expectations of lawmakers and the community.

It is difficult to see how the scheme of control can continue in its present form. The lack of competition and guarantee of handsome returns have put customers in a disadvantaged position. A public consultation on the energy market has opened the door for changes when the scheme expires in 2018. Officials should seize the opportunity to put in place a better regime.

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Electricity bills in Hong Kong to see 1 per cent cut, but lawmakers want more

Households and businesses across the territory will see their cost of electricity reduced by about 1 per cent next year, driven by lower fuel clause charges as global energy prices continue to slide.

But lawmakers slammed the city’s two power suppliers for playing a “numbers game” believing there was massive room for further reductions given huge guaranteed profits and surpluses in what they’ve set aside to procure fuel.

Environment secretary Wong Kam-sing claimed the initial plan from the duo was to freeze rates but that he had pressed for them to be lowered. This is the first rate cut for both companies since 2009.

CLP Power, which supplies two million accounts across Kowloon, New Territories and Lantau, told the Legislative Council economic development panel yesterday that average net tariff rates would be reduced from 114.2 cents per kilowatt hour to 113.2 cents beginning January.

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“Because of a significant drop in fuel prices, the impact of the fuel cost increase has been contained, enabling us to reduce our tariff for 2016.” said CLP boss Paul Poon Wai-yin. The rate could be kept in 2017 if energy prices remained as low, he said.

HK Electric, which serves 570,000 users on Hong Kong and Lamma islands, will reduce average net tariffs from 134.9 cents per kilowatt hour to 133.4 cents. Managing director Wan Chi-tin said the utility had gone a further step to reduce tariffs despite pledging to freeze them for five years in 2013.

For a Kowloon resident who consumes between 400 and 800 units of electricity a month, the reductions would lower their bills by up to HK$4.4. For most residents on the island side who use 500 units a month, monthly bills could be lowered by about HK$7.5. High energy-consuming businesses will enjoy bigger rate reductions due to regressive charging rates.

Civic Party’s Kwok Ka-ki said once fuel prices went up, the companies would immediately increase the net rates. “Basic tariff rates went up for both HK Electric and CLP. Don’t play number games.”

Industrial sector lawmaker Lam Tai-fai said he was “dissapointed” that secretary could only negotiate such an “unreasonably” small reduction given the huge slide in global oil and coal prices. “Oil is at a seven year low, coal is at a nine year low. You certainly paid a lot less for fuel this year,” Lam said.

Labour’s Lee Cheuk-yan said: “It’s obvious there can be further downward adjustment because the fuel cost account has risen so sharply.” Both companies still have surpluses of some HK$2 billion each in their fuel clause accounts.

World Green Organisation chief executive Dr William Yu Yuen-ping believed the rates cuts were made to manufacture a “friendly atmosphere” ahead of the two company’s upcoming negotiations over the scheme of control regulatory framework, which expires in 2018. The scheme currently guarantees it return of 9.99 per cent on its fixed assets.

Wong said his bureau had consulted their experts and felt the tariff proposals were acceptable.

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Power companies have gathered nearly HK$5.7 billion by overcharging – report

CLP Power Hong Kong Limited (CLP) and The Hong Kong Electric Company Limited have overcharged for electricity and fuel costs to the tune of nearly HK$5.7 billion, Apple Daily reported.

Excluding CLP’s special rebate of more than HK$1.2 billion in August this year, the two power companies still have more than HK$4.43 billion in Fuel Clause Recovery Accounts and Tariff Stabilization Funds – with Hong Kong Electric accounting for HK$2.1 billion and CLP for HK$2.3 billion. The surpluses could allow 320,000 Island customers and 420,000 Kowloon households to be supplied with free electricity for a year.

Tariffs paid by customers are composed of the basic tariff based on a standard cost of fuel required for electricity supply, and a fuel cost adjustment to cover any fuel costs above or below the standard cost already included in the basic tariff. Fuel cost adjustments are proposed every year. If the power company overestimates the fuel cost and hence overcharges its customers, the surplus will automatically go into the Fuel Clause Recovery Account (FCA). For instance, CLP charges its customers 27 cents per unit this year. However, the actual fuel price was 24.6 cents in October. In other words, customers paid a surplus of 2.4 cents per unit.

Paul Poon Wai-yin, Managing Director of CLP Power, said in July that the FCA was designed to “mitigate the cost impact of significant fuel cost fluctuations” and “has served its purpose to stabilise tariffs” for customers.

Prentice Koo, Assistant Manager in Climate Policy and People of the World Wide Fund For Nature Hong Kong, told Apple Daily, “For every payment made per unit of energy, customers are actually contributing to the FCA.”

CLP has been overestimating the fuel cost since 2013. The FCA balance of CLP has HK$1.60 billion while that of Hong Kong Electric had HK$1.41 billion in June – highest in ten years.

Electricity in Hong Kong is supplied by two investor-owned companies – CLP and The Hongkong Electric Company Limited. The two power companies are currently regulated through Scheme of Control Agreements, giving neither of them any exclusive rights over the supply of electricity. The agreements will expire in 2018.

According to the agreements, the permitted rate of return of the power companies is 9.99% of their average net fixed assets. Any excess of revenue over the rate is transferred to a Tariff Stabilization Fund. Therefore, the fund serves as a buffer for the company’s return.

Hong Kong Electric had HK$678 million in its Tariff Stabilization Fund in June this year, while CLP had $HK$749 million.

Koo said, “For power companies, it is best if there is money in the fund. This is because when companies underestimate the fuel_ cost, money can be withdrawn to compensate for inadequate profits.” He also said that for Hong Kong Electric, the sum of money in both the FCA and Stabilization Fund is HK$2.08 billion in total. If each household consumes 400 units of energy a month, the sum of money is enough to pay for 320,000 households’ tariffs for a year.

CLP told Apple Daily that fuel costs are difficult to estimate as international fuel prices are volatile, and even if there was a positive balance in its FCA, CLP would not make a profit from it.

Last month, the Hong Kong and Kowloon Trades Union Council submitted a petition calling for more competition and suggested the government review the profit scheme in the electricity market.


Hong Kong’s CLP, HK Electric could be victims of Norwegian fund sell-off

Power companies CLP and HK Electric could be the innocent victims of a decision by Norway’s parliament to sell off coal investments in the country’s US$880 billion sovereign wealth fund.

According to new rules approved by the Norwegian parliament’s finance committee on Friday, the Government Pension Fund Global – also known as the oil fund because of its funding from oil and gas production – will sell stakes in companies that get at least 30 per cent of their revenue from coal mining or burning fossil fuels or ongoing projects that surpass the 30 per cent threshold.

The measures are to be implemented by January 1, 2016.

The move was welcomed by the country’s lawmakers and environmental groups who estimate the fund’s investments in coal could be more than US$11 billion. It was not immediately known how much of these investments would be affected.

Climate change is one of three themes that Norges Bank Investment Management, which manages the pension fund’s assets, adopts in its investment outlook.

“Coal is by far the biggest source of greenhouse gases, so this is a big victory for the climate,” said committee member Torstein Tvedt Solberg of the opposition Labour party.

The fund has divested from 114 companies in the past three years, including 14 companies in the coal mining sector last year. The fund’s coal mining assets totalled 493 million kroner (HK$486 million) at the end of the first quarter, down from 805 million in December, according to its first-quarter report.

Environmental group Greenpeace expects four companies in Hong Kong and 12 mainland firms to be among 122 enterprises the Norwegian fund might sell its stakes in, potentially raising a combined HK$3.72 billion for the oil fund.

The impact from selling its coal-related investments in Chinese companies should be minimal to Hong Kong’s stock market, given the relatively small stakes involved. The fund’s holdings in Chinese stocks represents a paltry 1.86 per cent of April’s average daily turnover of HK$200 billion.

According to the non-governmental organisation’s estimate, the fund owns CLP shares worth about HK$1.4 billion. Its coal-fired plants represent 66 per cent of its overall power generating capacity.

The fund owns HK Electric shares worth HK$16 million. Its coal-fired plants account for 67 per cent of generation capacity.

Among the 12 mainland companies, the largest investments are in state-owned power producer China Resources Power Holdings and coal miner Shenhua Energy Group.

HK Electric, CLP Power face cut in earnings and prospect of competition in longer term

Government aims to cut 9.9 per cent return the city’s two electricity suppliers currently enjoy and hopes to introduce competition in longer term

The government wants to slash the permitted return of the city’s electricity suppliers to as low as 6 per cent and tighten the process of approving tariffs as it aims to reform the regulatory regime.

Rolling out a public consultation on the development of the electricity market yesterday, environment chief Wong Kam-sing said CLP Power and HK Electric faced a cut in annual returns from the existing 9.99 per cent on their net fixed assets under the 10-year scheme of control agreement, which expires in 2018.

And the controversial idea of importing power from the mainland has been shelved for now.

However, the utilities – both natural monopolies in their own service areas – will be spared competition, at least in the near future. The government will hold discussions with the two firms and conduct joint studies on grid access arrangements after 2018.

“It is unlikely that we would have any new suppliers of sizeable scale either from the mainland or locally in the near term,” said Wong.

“To pave the way for Hong Kong to introduce competition in the longer term, we plan to conduct the necessary preparatory work … such that new suppliers, when available, may participate in the electricity supply market.”

This is the second time in about a decade that the government has taken steps to overhaul the market, which has been dominated by the two suppliers, from power generation to distribution, for more than a century.

CLP serves customers in Kowloon, the New Territories and Lantau; HK Electric caters to Hong Kong Island and Lamma. Their profitability is tied to their spending on electricity assets. They are allowed to earn a 9.99 per cent return on net average fixed assets in the decade to 2018.

Wong said the scheme had worked well, but it could be enhanced in numerous ways, such as by lowering the return rate to as low as 6 per cent and boosting performance through improved incentives and penalties.

Both suppliers said they would co-operate with the government.

CLP said the industry was “hugely capital-intensive and requires long-term investment” and “reasonable return and certainty in the regulatory regime” were key to attracting “sufficient investment to meet the needs of the economy”.

HK Electric said: “We must guard against changing the scheme of control for the sake of change, including the critical success factors like the rate of return and the incentive and penalty scheme.”

The government said it would “not rule out” legislative changes if consensus was not reached with the utilities.

Dr William Chung Siu-wai, an expert in energy policy at City University, expressed disappointment at the decision not to put a priority on breaking the utilities’ dominance.

Democratic Party lawmaker Wu Chi-wai, a member of the Legislative Council’s environmental affairs panel, said the new document was “a refry” of the public consultation in 2005.

The chairman of the Consumer Council, Professor Wong Yuk-shan, said the report failed to provide forward-looking development for the electricity market. He urged the government to raise the proportion of renewables in the mix and step up research on small-scale power generation.


After 2018:

· Cut CLP Power and HK Electric’s permitted annual return to 6pc from 9.9pc now

· Tighten tariff approval process

· Improve incentives/penalties to boost performance

· Study with CLP Power and HK Electric third-party access to their grids, interconnections of grids and segregation of generation, and distribution businesses

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Time to debate a fairer energy market

10 December, 2014

SCMP Editorial

Hong Kong is often hailed as one of the freest economies in the world, with free competition and market access for everyone. But the truth is that certain sectors are still off limits to new players. The energy market is an example. All households and businesses are customers of either CLP Power or Hongkong Electric under a long-standing duopoly system. The companies’ profits are further guaranteed by a rigid scheme of control. There is neither competition nor choices.

The problems have been put into perspective in a comprehensive study commissioned by the Consumer Council. It noted that while the business agreements ensure reliability and growth, the companies can also transfer fuel cost increases to consumers and make high risk-free profits. The scheme lacked transparency and put consumers in an unfair situation, it said.

The watchdog rightly called for breaking up the dominance of the power giants in a gradual reform. This includes liberalising the power generation market, importing more electricity from the mainland and developing regional gas-fired stations. It also called for better protection for low-income users. But the council is not in favour of introducing more competition at the retail level, saying consumers may not necessarily benefit because of high switching costs; and that market players can get around the issue through reconsolidation, as in the case of Britain.

The recommendations follow an 18-month long study by three prominent experts from overseas, taking into account the special circumstances in Hong Kong and foreign experience. Technical as they are, the issues are crucial to the development of a fair and sustainable regime. As the watchdog admitted, the energy sector is one that deals with conflicting goals, such as consumer’s interest, commercial gains, green environment and economic competitiveness. No single model can perfectly address all the issues involved.

But that does not mean the current regime should be left untouched. With the scheme of control expiring by 2018, the government is to consult the public on the way forward next year. Credit goes to the council and the experts for tabling a 170-page report on an industry that has so big an impact on people’s livelihood and economic vitality. The study has set the stage for an informed debate on the way ahead.

Hong Kong must break firms’ tight grip on electricity market to help consumers, says study

04 December, 2014

Denise Tsang and Ernest Kao

Expert report calls on government to overhaul its regulation of power suppliers, branding it unfair to consumers and lacking transparency

The Hong Kong government should break up the dominance of electricity suppliers CLP Power and Hongkong Electric and revamp its regulatory framework, which is “unfair” to consumers, a study has concluded.

The Consumer Council report also calls for the development of renewable energy, the importation of electricity and more nuclear power from Guangdong, and greater use of natural gas to meet the government’s goal of supplying reliable, safe, sustainable and affordable energy.

Compiled over 18 months by three overseas experts, the study effectively sets the agenda for a public consultation next year on the post-2018 regulatory road map and the mix of fuels in the city’s electricity market.

“The goals are conflicting,” said Consumer Council chief executive Gilly Wong Fung-han. “But the reform can be done step by step.”

The 170-page report comes as CLP and Hongkong Electric prepare to reveal next year’s planned tariffs. CLP is reported to be considering a rise of 5 to 6 per cent, while Hongkong Electric may retain current charges.

For over a century, CLP has served households in Kowloon, the New Territories and Lantau, while Hongkong Electric provides power on Hong Kong Island and Lamma.

The council said the scheme of control agreements which allows CLP and Hongkong Electric to tie their earnings with investments in power assets and requires them to meet certain emission reduction obligations, was unfair to consumers.

It criticised the existing regulatory mechanism for allowing power firms to pass business risks on to consumers and lacking transparency.

The scheme of control agreements permits CLP and Hongkong Electric to earn a 9.99 per cent return annually on their average net fixed assets in use in the 10 years to 2018 – cut from 13.5-15 per cent before 2008. The scheme has triggered controversy in recent years, with the government under public pressure for a review to avoid a monopoly.

The Environment Bureau said next year’s public consultation would consider public expectations on having the power companies make returns that are commensurate with business risks in the power market.

CLP said it was “open-minded” on any future talks on market reform, but warned that “any effective discussions should be based on clear objectives, and future development should be based on a thorough understanding of the subject matter and relevant issues”.

Hongkong Electric declined to comment until it had read the council’s study.

Citigroup analyst Pierre Lau said the renewal of the scheme of control agreements with “high returns” could be politically sensitive and he did not expect any renewal to happen before the chief executive election in 2017.

The Consumer Council said the Hong Kong government should create competition in power generation by encouraging investors to invest in small-scale, gas-fired electricity generators in a commercial or a residential district to feed local needs.

Any excess supply could be sold to CLP or Hongkong Electric.

However, this would be viable only if the pair were willing to allow third parties access to their power grids.

World Green Organisation chief executive William Yu Yuen-ping said small-scale, gas-fired generation facilities were worth considering.

“The worldwide trend is the decentralisation of distribution,” he said, adding that it would be more ideal for large buildings or complexes to have their own waste-to-energy facilities.

Call to empower public over electricity supply

The public should get a greater say in where the city draws its power from and how the electricity is generated, the consumer watchdog says.

Energy-efficiency measures should also be targeted at those in the lower strata of society to alleviate the effects of rising power bills, advisers to the Consumer Council said.

The council saw the need for a regulator over the power sector, one that would be an independent institution open to public participation.

Such a regulating body could promote greater transparency and consumer representation, Thomas Cheng Kin-hon, chairman of the council’s competition policy committee, said.

“We believe this regulator needs to have a critical mass in order to match the resources of the two electricity companies,” Cheng said.

“The regulatory system must also be improved to allow greater public participation and a more direct reflection of consumer interests.”

The council report, released yesterday, sets the stage for debate next year when the government is due to gauge public views on how to reform the post-2018 regulatory regime of the city’s electricity market.

A 10-year contractual agreement, known as a scheme of control, lays down rules governing operations, from tariffs to development, of the two power suppliers, CLP Power and HK Electric. The agreement expires in 2018.

The report criticised the scheme as being unfair to consumers as the duopoly was allowed to earn high risk-free profits while passing on business risks to users to an “undue degree”.

At issue was how to protect low-income users, such as subdivided-flat dwellers, from “fuel poverty” – the state of being priced out by rising power bills.

Robin Simpson, a contributor to the report, noted an “in-built tension between environmental policy … which envisages people paying a cost recovery price for energy”. He raised the question “of how consumers, particularly the broader consumers, can afford to pay [these] higher prices”.

An Environment Bureau spokesman said the scheme had been improved over the years to “incrementally improve its operation, promote transparency and ensure consumers’ interests are addressed”.

Shock as power pair slammed

Hilary Wong

December 05, 2014

CLP Power and Hongkong Electric have been operating like a duopoly for years, unfairly overburdening consumers with price rises while being allowed to earn risk-free profits, the Consumer Council said.

The consumer watchdog said the existing method of regulation through the Scheme of Control Agreements, which expire in 2018, needs to be reformed.

It also proposed an energy commission that may meet the future challenge of a reform policy.

In its 170-page report released yesterday, the council said the existing regulations will not be flexible enough to adapt to the new environmental policy supporting emission reduction over the next 30 years.

Chief trade practices officer Victor Hung Tin-yau said under the current scheme, “the two power companies are allowed to earn a high risk-free profit while passing on business risks to consumers to an undue degree.” The scheme has “low transparency and lack the engagement of consumers.”

Competition policy committee head Thomas Cheng Kin-hon said reform should take place “incrementally” to ensure the merits of the existing system and meet new objectives.

The study was undertaken with the advice of an expert international group formed to look into the experience of electricity regulatory reform in the mainland, Britain, Australia, Germany and France.

Cheng said liberalizing the retail electricity market “presents no sound solution” since overseas experience has found that it spurs residential users to face higher bills and commercial users to pay less than before.

The report also suggests using diversified energy resources such as power station fuel, natural gas, renewables, nuclear and biomass, which can reduce emissions of greenhouse gas.

As to the cost-effectiveness of having renewables, one of the experts, Stephen Thomas a professor of energy policy and director of research in the Business School of the University of Greenwich in London said it depends on local resources.

“For example, Britain is windy, so wind power is more cost effective. Similarly since Britain is not a sunny country, solar power will be more expensive, so it has to look at the local condition and local resources,” he said. “Hong Kong has its own resources some are good and some are not so good.”

Standard: Return stays at 9.9pc for power firms

from Kelly Ip for the Standard:

Power suppliers CLP and Hongkong Electric will continue to enjoy the 9.99 percent permitted return on capital investment.

The decision – following a just- completed mid-term review of the Scheme of Control Agreements between the government and power companies – was expected, said an Energy Advisory Committee member.

During the review, the two firms agreed to set up an energy efficiency fund from shareholders’ earnings to provide subsidies on a matching basis to owners of non- commercial buildings so they can make their structures more energy efficient.

The scheme is expected to be launched in the first half of next year.

According to previous records, the two companies are expected to invest HK$100 million into the fund, with HK$70 million coming from CLP and spread over four years.

CLP and Hongkong Electric also agreed to raise performance thresholds for both incentive payments and penalties with regard to supply reliability, operational efficiency and customer services.

They also reached a consensus on lowering the cap on the Tariff Stabilisation Fund balance, from 8 percent to 5 percent of annual total revenues from sales of electricity to local consumers, to ensure the balance of the fund can be used to alleviate the impact of tariff increases on customers.

To promote transparency, both firms will set up dedicated websites to show information relating to financial and operating data. The current Scheme of Control Agreements run for a term of 10 years and will expire in 2018.

Energy Advisory Committee member William Yu Yuen-ping said the energy efficiency fund is a breakthrough to help buildings save power.

“Since the fund is from shareholders’ earnings, it will not be included in operational costs and should not affect tariffs,” he said.

An Environment Bureau spokesman said electricity consumers can expect some benefits from the modifications.

Conservation group World Green Organization predicted CLP will increase electricity charges by 4 to 5 percent and Hongkong Electric by up to 1 percent.

22 Nov 2013