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January, 2008:

Incinerator The Best Option For Hong Kong Rubbish

Incinerator The Best Option For HK’s Rubbish

Updated on Jan 30, 2008 – SCMP Leader

The government has done what it should have done a decade ago and announced potential sites for a waste incinerator. Tsang Tsui in Tuen Mun and Shek Kwu Chau, south of Lantau Island, have been identified as suitable sites. There are objections from environmentalists or residents to both.

Such is the way with waste disposal – no one wants anything to do with rubbish once it is put out for collection. This is why we need an incinerator urgently. Our three landfills will be full within eight years.

Tuen Mun residents have long complained of their district being used to dump Hong Kong’s waste – and are now complaining again. The inclusion of Shek Kwu Chau as an alternative raises other issues. It is near fish-breeding grounds and the home of the pink dolphin. Some might even see it as a smart tactical move by the government. The idea of placing an incinerator there will, no doubt, prompt a strong backlash from the green lobby and Lantau activists, making it easier for the government to sell Tsang Tsui to the public as a more acceptable alternative. A fair assessment of both options is needed.

We cannot however ignore the fact that municipalities the world over have adopted burning garbage as the best option.

Technology greatly reduces emissions, and enough electricity to power thousands of homes can be generated. Incineration is only effective if it is coupled with recycling, however. Experience elsewhere is that an incinerator can take 10 years to build. Apart from construction, environmental impact studies have to be conducted and objections dealt with. Some form of compensation will be needed, whichever site is chosen. If it’s Tuen Mun, perceptions that the district is a dumping ground must be overcome.

Providing better sports and leisure facilities in the area would help. In Japan, parks, swimming pools and sports centres have been built next to incinerators, turning them into attractions.

Incineration is not a perfect solution, although it is the best approach in a city with limited land, like ours. The heart of the scheme, however, must be to create a society that is more responsible about garbage. The 17,000 tonnes we produce each day – up 30 per cent from 10 years ago – shows that we are not.

Delta Factories Face More Curbs On Production

Denise Tsang – SCMP – Jan 30, 2008

The Ministry of Commerce is set to unveil a new round of measures to discourage energy-gulping and polluting industries in the Pearl River Delta by placing restrictions on 1,000 types of products. The Federation of Hong Kong Industries said the restrictions would add to the troubles already being faced by tens of thousands of manufacturers across the border, including new labour laws, higher interest rates and a stronger yuan.

Under the plan, the government will soon slash or cancel value-added tax refunds on as many as 1,000 types of products, according to the trade body’s deputy chairman, Stanley Lau Chin-ho. That follows restrictions placed on about 590 types of products last month and about 2,600 in June.

Although not specified, the products are expected to be low-cost items that consume a lot of energy and are labour-intensive to make.

Beijing is attempting to discourage low-end manufacturing to cut pollution, save resources and get the country to climb the technology ladder.

“The new rule is expected to hit after the Lunar New Year,” Mr Lau said. “Pressure is mounting on manufacturers, who have been hit by one problem after another.”

Of the more than 90,000 export processing firms on the mainland, almost 70,000 are based in Guangdong and 57,500 are invested in by Hong Kong firms. They employ 9.6 million workers, according to National Bureau of Statistics data.

Restriction on these manufacturers combined with new taxation, a new labour law, higher lending costs and tighter pollution controls had led to the demise of more than 1,000 shoe manufacturers and 1,000 toy producers in the Pearl River Delta.

Simon Shi Kai-biu, president of the 1,000-member Hong Kong Small and Medium Business Association, said more than 10,000 Hong Kong-owned processing exporters were on the verge of collapse, particularly in the lead-up to the Lunar New Year.

Mr Shi said employers and workers must sign employment contracts by January 31, specifying benefits and obligations of both parties.

“This is a critical time for manufacturers,” he said. “They are being chased by suppliers and bankers to settle payments before the Lunar New Year while locked in disputes with workers over labour contracts.”

Workers were demanding employers settle compensation levels before signing labour contracts but many employers had refused to do so, said Eddie Lam, a Hong Kong-based shoe manufacturer.

“In many cases, employers and workers do not know who is right or wrong because no detailed interpretation of the law from the government is available yet,” Mr Lam said.

A poll of 400 foreign firms in Guangdong by the Hong Kong Professionals and Executives Association showed 70 per cent of businesses said the new law would force them to close operations or withdraw investment.

China Welcomes Us To Our Future Armageddon

By David DuByne – Posted Thursday, 17 January 2008 – On Line Opinion

I present to you a vision of the future: China has already leapfrogged to where we in the West will be within a decade, using coal to power our economies and cities as conventional worldwide oil production continues to decline. The pollution is the sight and smell of economic growth.

There are only 270 days left until the opening ceremony at the Beijing Olympics. Between now and the time when the torch is lit and the “Green” games start, 38 new pulverised-coal fired power plants will open.

Statement after statement about how this Olympiad will be environmentally friendly, and the amazing lengths China is going to regarding alternative energy power generation in Beijing, is plastered around the news media daily. That is the truth – well, half of it. Media releases seem to conveniently leave out the other half of the information: While there is tremendous focus on this single city in Green development, the remainder of the country is left behind in a haze of contaminants and smokestack particulates settling on nearly every square centimetre of land except a few isolated pockets in remote mountainous areas.

On one hand, China claims to the world it is going green to help us all against climate change and pollution control. But reading the newspapers – for example, “Nation not a Threat to World Energy” in the China Daily – paints a different picture. That article boldly claims that coal accounts for 70 per cent of the country’s energy needs and with proven reserves of one trillion tons, these reserves can satisfy Chinese demand for the next 100 years.

We need to look deeper into the mind set of Chinese society to understand why this is happening and why coal use is set to intensify as our planet experiences a further drop in conventional crude oil production.

Making face

Chinese society is complex in ways Westerners overlook or do not understand. “Mianzi” or “face”, for example, is the biggest stumbling block to our understanding consumption patterns of commodities and electricity usage in modern China. “Mianzi” is best explained as reputation, social standing or how others see you in their eyes. The Chinese are pre-occupied with “mianzi” to the point that decisions made in life are all about appearance. This includes government and business decisions. In order to continue with a roaring economy that pollutes along the way, China has to “make face” with Western governments showing they are committed to help solve their own pollution problems from within.

This is their front face, what lies behind is the true face. There are always two faces to everything in China.

Construction of hundreds more pulverised-coal-fired power plants assures coal will likely remain the fuel of choice for many decades in China. Despite the economic, social, and environmental problems coal creates, it is the fuel that will allow the Chinese energy sector to continue expanding along with coal affiliated mega-corporations involved in power generation, utilities, railroads, mining – and all the jobs in between – listed on the Hong Kong, Shenzhen and Shanghai stock markets.

Unemployment is the biggest concern for the central government at the moment using an economic growth policy focused on creating as many jobs as possible supersedes environmental protection every day of the week.

Renewable energy

China’s national renewable-energy law went into effect in January 2006, offering financial incentives for renewable energy development. Chinese authorities want to generate 16 per cent of their energy needs from renewables by 2020; this includes small and large scale hydropower, wind, biomass, and solar power. Gargantuan expansions of nuclear power and coal to liquids projects are on the books as well.

Forecast coal output is expected to reach 2.7 billion tons in 2010. In the first half of 2007, China generated 1,122 billion kilowatt hours (kw/h) of electricity, up 13 per cent from last year. During the six-month period, hydro-electric generators provided a total of 156 billion kw/h, increasing 22 per cent year on year; thermal-electric generators provided 940 billion kw/h, up 12 per cent; nuclear generators provided 26 billion kw/h, up 15 per cent, according to the China Electricity Council (CEC). Even at 16 percent renewable energy generation by 2020 the enormity of coal consumed to generate over 6 billion kW will increase total coal usage exponentially compared with today.

Predictions for substitution levels of hundreds of millions of kilowatt hours to be reached are “mianzi” driven and notoriously uncertain, if not overstated, to “gain face” on the international stage. Feasibility studies of these projections are in question especially with severe water shortages plaguing the country. Talk of the country being able to reduce its reliance on coal is disheartening when one looks at the increases in coal mining, usage and importation in the last two years, which were at the highest levels ever.
Lies, damned lies and statistics

Half-truths are so common in China that there is no negative stigma attached to lying, especially if it is to “save face” for your family, self or country. For example, six months ago China forbade ethanol production using human consumption grain crops because droughts and floods were set to decrease the season’s harvest. Two months ago, with food prices becoming too high, the government sold stored grain at auction onto the market to bring down prices.

Amazingly, just a few days ago I read that this year’s crop harvest was a bumper harvest and grain production had increased year upon year from 2004. This is considered “saving face” by telling a half-truth. The Chinese government wouldn’t want anyone to think negatively about them since they weren’t able to grow a record harvest, so by the loosest possible definitions of “harvest”, using released stored grain figures added to this year’s harvest, the numbers came up as a bumper year.

Rural electrification is mainly where the use of renewables will be concentrated. Base metals and commodities prices make it un-economical to run electric lines into the countryside throughout the nation. For China this is a win-win situation, first by “gaining face” internationally and, second, by saving money and commodities in the process. The downside is once installed, these devices are non-job creating: they are self functioning.

You can see the “mianzi” card being played with China joining the AP6, the Asia Pacific Partnership on Clean Development and Climate. Commencing in January 2006, the AP6 brings together China, the United States, Australia, India, Japan, and the Republic of Korea in an agreement based on clean energy technology co-operation regarding coal and carbon capture and storage (CCS) technologies. Personally I feel China is unlikely to invest in CCS systems for coal plants or heavy industry in the next decade or two due to the cost and using CCS at the new Coal-to-Liquids (CTL) projects would slow down production, but the partnership strengthens their reputation globally.
Seeking a balance

Within China there has been a public call for a balance between economic growth and environmental protection. One political manoeuvre is to move polluting industries and antiquated factories out of urban areas. This is coded language for moving the polluters to the countryside, where sulphur dioxide, nitrogen dioxide, plus other contaminants can diffuse more quickly: but a side effect is that it coats the food producing areas, on which most cities rely for food production, with particulate.

Meanwhile, when industry pollution is moved out of town to clean the air it is replaced with vehicle exhaust fumes from the 16,000 new cars which hit the roads every day.

Conservation has not been mentioned once in the Five-Year Plans of the central government. Conservation = non-consumption. The number one agenda is job creation to keep social stability, so conservation is not considered an option; it is not talked about and it will never be discussed. Some of my students who argue in favour of conservation, when asked about the possibility of turning off all of the neon lights around the city firmly said it just wouldn’t be China without the lights. They are part of Chinese culture.

It has been suggested that the Chinese are waiting for world political pressure and trade sanctions before addressing this problem in a meaningful way. It would then appear that by responding to this pressure they were conceding to world demands. My response to this is a resounding “Not likely!” This is because it would involve “losing face” by backing down and doing something at the behest of Western governments.

Instead, China makes pre-emptive decisions that appear to be doing something to help solve the problem with renewable energy, when in reality they are doing the opposite: increasing their reliance on coal for primary electricity generation. Coal is also used for source heat in smelting and the heavy-manufacturing industries. It is a primary resource for home heat in the country side. Many Chinese also use it for cooking.

Life-giving force

Coal is by no means the sole cause of China’s pollution. Many other industrial pollutants add to the mix. According to a New York Times article, “Only 1 per cent of China’s 560 million city dwellers breathe air considered safe by the European Union, according to a World Bank study of Chinese pollution published in 2007”. I am obviously living in the bad air 99 per cent. The energy and life-giving force from the sun is literally blocked out by polluted skies for weeks on end.

Electricity consumption continues to skyrocket even though nearly every resident in China knows there is a problem. Again “mianzi” is at play. Displays of wealth and glitz are considered “face gainers”, showing off the new $500 mobile phone or driving the latest 7 Series black Mercedes are at the top of the list for individuals. Rapid expansion of the economy means taller buildings being built in the cities, which need more elaborate light displays after dark consuming even more electricity. New freeways crisscrossing the country are lined with triple-sided billboards displaying endless consumer goods every 500 meters that light the night sky.

“Mianzi” is its own feedback loop. Development needs to be ever bigger and more ostentatious to show progress. This in turn drives the need to build more power plants to satisfy demand for a wealthier population. Take note: the wealth generation is in its infancy and credit cards are still considered a new thing.

I sometimes hear the argument that China could effectively leapfrog over the West in developing sustainable energy and growth if its citizens get hooked on renewable power before they join the middle classes, and if its existing middle classes can learn to conserve energy before they can afford two cars. This doesn’t take “mianzi” into account. Money and physical possession are deeply ingrained in culture and religion.

Romance, China-style

I will agree with the leapfrog jump, though. As oil reserves worldwide are depleted and as economic hardship sets in, coal will be used as liberally elsewhere as it is here in China. Coal is plan B for our world economy, not solar, not wind, but a resource that is plentiful, that requires no new invention or technological breakthrough that will allow a continuation of economic growth.

We are all in the fix together. We purchase products manufactured in China every day, and I don’t know of any joint venture or production facility that would be established if it was only to be powered with wind or solar. Industry requires a constant, reliable power source and will settle for nothing less. Coal takes the lion’s share in the Land of Dragons, and it will continue to do so.

Everything you have heard about the high levels of pollution is true and becoming worse by the day.

Electricity demand is insatiable; the construction industry is barely able to keep up with demand; and pollution levels are expected to double or possibly triple by 2015. This is truly an un-believable statement: if it is true than there will be nothing left living in this part of the world.

As peak oil starts to affect our planet’s economy, what I see here, right now, is what the future holds for us worldwide. No government will let their country crash and burn economically if there is a viable alternative.

I present to you a vision of the future: China has already leapfrogged to where we in the West will be within a decade, using coal to power our economies and cities as conventional worldwide oil production continues to decline. The pollution is the sight and smell of economic growth.

Looking at the future in front of me, gazing from my downtown balcony holding my girlfriend’s hand, I think to myself, “Construction crane silhouettes in the smog at sunset. How romantic.”

First published as “A Shell Game of Coal Dust and Green Olympics” at 321 Energy on January 12, 2008.

David DuByne teaches business English in Chongqing, China while keeping an eye on energy, commodities and bio-fuel production in Asia. His website – Dave’s ESL biofuel – is devoted to bio-fuel and oil depletion.

Blue-Sky Generators

CHRISTINE LOH – Jan 17, 2008

Is there a quick fix for the polluting emissions from the tens of thousands of factories in the Pearl River Delta that are contributing to the heavy, grey-yellow smog that too often blankets the whole region? Yes, there is. One source of emissions – the one that is hardest to deal with – is the factories that have to run private generators for electricity because they cannot get enough power from the grid. This is the case for most of the factories in the region; to avoid frequent “brownouts”, they buy their own generators to provide alternative power.

Factories are notified in advance of when they will not receive power from the grid, so they know when they will need to turn on their generators. There is an overall power supply shortage in the region. This can only be fixed when the supply structure of power generation and distribution is greatly expanded.

These private generators can be very large, and can cost millions of dollars. To work properly, they need to be regularly maintained and serviced.

Factory managers also have to source fuel for the generators. Research by Civic Exchange and the University of Science and Technology in 2006 found that the quality of that fuel varies greatly. In some cases, the diesel fuel purchased was of a very low quality and burning it resulted in a much higher level of pollution than if the fuel had been relatively clean. There were also cases where the fuel bought was contaminated with other types of fuel, and even water. It seems that people who sell fuel for generators often mix fuels, to lower costs.

Some factory managers complained that, by using low-quality fuel, they had to spend more time and money maintaining the generating equipment, which was not designed to run on such contaminated, low-grade fuel.

Thus, the use of poor-quality fuel is far from a good solution. Yet, managers have no other choice, since they need to provide supplementary power for their factories.

It is not easy to estimate the total air-pollution impact from all these factories in the Delta, but no one denies that it is large. The quick fix is, of course, to supply only cleaner fuel to run the tens of thousands of chugging generators. A cleaner fuel going in means less-polluting emissions coming out. This is not a long-term substitute for expanding and upgrading Guangdong’s power supply structure, but there is a reason to consider the quick fix in the coming two years.

In November next year, Hong Kong will host the East Asian Games and, in November 2010, Guangzhou will host the much bigger 16th Asian Games. Air pollution records over the past several years tell us that the month of November has seen very high levels of pollution throughout the entire Delta region.

We are currently witnessing the urgent efforts by authorities in Beijing to do everything possible to reduce air pollution for the summer Olympics in August. There is, in fact, no time for Hong Kong and Guangzhou to waste.

A clear lesson from Beijing is that the entire neighbourhood needs to pitch in. Just as Beijing needs the co-operation of many sectors from several provinces to reduce pollution, we, too, will need all the counties in the Delta region to contribute.

A quick short-term fix would be for cleaner fuels to be supplied to the region for an extended period before, and during, the two Games. Is it conceivable for ultra-low sulphur diesel to be supplied, so that the generators, and also vehicles, will all use a much cleaner fuel? If the answer is “yes”, what kind of emissions reduction could be expected, and how much would it all cost? Are there other ideas?

The Guangdong and Hong Kong authorities should get on with exploring ideas expeditiously, otherwise there could be embarrassing consequences. It will take time to organise the supply of cleaner fuel for the region. Much more needs to be done in the long term, but a quick fix for generators is the first step.

Christine Loh Kung-wai is chief executive of the think-tank Civic Exchange

Cutting Pollution For Profit

International Herald Tribune – Posted by Daniel Altman in High energy

Could power generators cut pollution if it helps them to make money? From Hong Kong, Keith Bradsher descibes a new scheme agreed by the government and two electricity providers. It looks like a fairly marginal proposition, but, if it works, it could lead to big changes around the world.

The generators in Hong Kong will be allowed to set their rates to earn a fixed return. But if they pollute more than the law permits, then they’ll be forced to lower their rates. If they pollute less, they’ll be allowed to charge more. The differences here aren’t big; the maximum bonus is 0.1 percentage points added to a fixed return of 9.99 percent, and the maximum penalty is 0.4 percentage points.

This system is definitely a work in progress, if a very interesting one. Until a couple of years go by, it will be hard to say whether Hong Kong’s government has set the incentives correctly to make a difference. The generators may even find that it’s profitable to pollute more! And that’s where a potential moral objection comes in: Should you be able to pay to harm the environment? I doubt that objection will get in the way, though – it applies equally to emissions trading programs, and they’re not going away any time soon.

Hong Kong Power Regulations Based in Part on Emissions

The New York Times
Published: January 8, 2008

HONG KONG — The two electric power companies here agreed Monday to a new regulatory system that sets their annual rate of return, based in part on how much pollution they emit, a carrot-and-stick approach that could some day be a model for mainland China’s giant power industries.

The 10-year agreement between the Hong Kong government and the territory’s two companies — Hong Kong Electric and CLP — authorizes the companies to charge electricity rates that will give them a 9.99 percent return on assets.

If either company exceeds regulatory limits for any pollutant, however, it would be required to charge customers less, reducing its allowed rate of return by 0.2 to 0.4 percentage point.

If the companies manage to cut their pollution more than required, then they are allowed to raise prices to the point where they effectively earn bonuses of 0.05 to 0.1 percentage point on their rate of return.

A complicated formula also allows them to charge slightly more for electricity as they exploit renewable energy sources.

Western regulators increasingly provide complex environmental incentives and impose penalties on power companies. But regulators in mainland China and Hong Kong have tended to rely mainly on fines if companies fail to meet basic requirements.

Particularly on the mainland, though, fines are seldom assessed, and violations are rampant, according to environmental critics.

Mainland power companies also have limited incentives and flexibility to choose fuels that are more environmentally friendly than coal. For instance, only a few provinces allow wind-turbine operators to charge significantly more than coal-fired plant operators for the electricity they sell to the grid. And the rate subsidy for burning agricultural waste to generate electricity is not high enough to make it economical in many areas.

Instead, the regulatory system on the mainland has focused on keeping electricity rates as low as possible, with little regard for the pressure this puts on power companies to choose cheap but highly polluting coal-fired power plants.

Melissa Brown, a specialist in Hong Kong power regulation, who is executive director of the Association for Sustainable and Responsible Investment in Asia, a research group, said the new system in Hong Kong sets a useful precedent for the mainland.

“Anything that is a bonus-and-penalty scheme is a positive,” she said.

But Ms. Brown cautioned that regulators there were unlikely to follow the example soon.

She also noted that the government released too few details on Monday on future allowable levels of specific pollutants to make it possible to calculate the actual effect of the new agreement on air pollution here.

Smog has become a chronic problem in the city. CLP and Hong Kong Electric have denied that they are the main sources of pollutants, hinting that nearby factories and power plants on the mainland are to blame.

Exxon Mobil owns 60 percent of a power-generating joint venture with CLP, and CLP owns the rest plus all of the distribution grid, which serves three-quarters of Hong Kong’s nearly seven million people.

Two officials at the State Electricity Regulatory Commission in Beijing said on Tuesday morning that while the mainland and Hong Kong maintain separate regulatory regimes, the mainland is looking at ways to make power companies more responsive to environmental concerns by encouraging the use of alternatives to coal, notably by allowing generating companies to charge distribution companies extra for electricity from renewable sources.

Edward Yau, Hong Kong’s secretary for the environment, said that the government had set the new regulated rate of return at 9.99 percent after deciding that public opinion strongly favored a rate below 10 percent.

The previous rate, under a 15-year agreement expiring at the end of 2008, was 13.5 percent to 15 percent, and was widely criticized as excessively generous to the politically influential power companies. The new rate of return is still well above the prime rate of 6.75 percent that the dominant local bank, HSBC, charges for loans to companies with strong credit ratings.

Emissions Caps Could Be Costly For Power Firms

SCMP – Cheung Chi-fai
Jan 08, 2008

Power companies may earn up to a combined HK$476 million a year less under new schemes of control that tie the emission of pollutants to returns, the Environment Bureau has said.

The companies which exceeded the emission cap of any single pollutant by between 10 and 30 per cent would have their rate of return cut by 0.2 per cent, the bureau said yesterday.

If emissions go beyond the caps by more than 30 per cent, the rates of return will be cut by 0.4 per cent. Based on 2006 assets figures, this means CLP Power (SEHK: 0002) may earn HK$290 million less and Hongkong Electric (SEHK: 0006) HK$186 million less.

Conversely, if the power companies achieve emission reductions of between 10 and 30 per cent below the caps, they will receive extra returns equalling 0.05 per cent.

If emission cuts go below the caps by more than 30 per cent, the companies will get extra returns of 0.1 per cent. That would amount to HK$73 million and HK$47 million for CLP Power and Hongkong Electric respectively. Hahn Chu Hon-keung of Friends of the Earth said it was difficult to assess if the penalty would be a sufficient deterrent.

He said little was known about 2010 or post-2010 emission caps and the limits already given were too lenient. Hong Kong has an agreement with Guangdong to cut emissions by 2010.

“The caps are quite lenient and there seems to be little difficulty for the power companies to meet them,” Mr Chu said. “It is almost guaranteed that they will get extra returns.”

Based on the 2006 emission figures of CLP’s Castle Peak power station and Hongkong Electric’s Lamma power station, the firms had already met the caps for last year, except for particulate pollutants.

Man Chi-sum, chief executive officer of Green Power, welcomed the link between emissions and returns but said the government should set out future caps clearly, especially those for after 2010.

“The precondition for its success is to gradually tighten the caps in the long term,” Dr Man said. “So it is time for us to consider the caps for beyond 2010.”

He said it would be difficult for the power companies to exceed the caps by 30 per cent. But Dr Man agreed that power companies might opt for the emission trading scheme with the mainland in case they faced a serious shortfall in the targets. He said the cost of buying credits from mainland power plants might be lower than the penalties imposed.

Apart from the penalties on exceeding emission caps, the new schemes will require the two power companies to carry out a combined 200 energy audits for clients and encourage them to adopt energy-saving measures.

They will also set up a loan fund totalling nearly HK$190 million for potential applicants to implement these measures.

If 18 million kWh could be cut, the two firms would get an extra 0.02 per cent in returns, which would equal HK$23.8 million.

But Mr Chu said the saving targets meant almost nothing as they accounted for only 0.0004 per cent of Hong Kong’s electricity consumption in 2006.

He said another scheme implemented since 2000 alone had achieved a reduction of 172 million kW.

Power Agreement To Be Welcomed

Leader Jan 08 2008

Under the new schemes of control to begin in September, CLP Power and Hongkong Electric have accepted smaller profits. As a result, the consumer will pay a lower basic tariff. The firms also face a cut in their rate of return if they exceed any pollution emissions caps, but will be entitled to a slightly higher rate if they do not.

They will be allowed to make a 9.99 per cent profit on the value of their investment in fixed assets, compared with 13.5 to 15 per cent at present. Analysts calculate their average return over the past 10 years at 14.4 per cent. The new deal therefore represents a 30 per cent cut in core profit, a remarkable concession in Hong Kong. To make up for it, they will have to source more of their earnings offshore, a strategy they have already employed with success. ”

But they will not find a better rate of return. The reduced rate remains superior to the single-digit returns obtainable in the heavily regulated electricity markets of Australia, where they are both significant players, or of Britain. On balance, that is a good deal in a stable market where customers have a name for paying their bills.

And they have driven a tough bargain. The government has achieved its aim of reducing the rate of return to a single digit, but only by a face-saving 0.01 per cent. The 0.2 to 0.4-point cuts in the rate of return for exceeding any of the emissions caps are also derisory in terms of deterrent value. And there may be a devil in the details of the caps and cuts. A more effective incentive to cut emissions will be to avoid provoking critical scrutiny of their privileged market position.

The government says consumers, who will soon face power bill increases of up to 6 per cent, stand to benefit from cuts in the basic tariff that could reach double digits. However, the saving could easily be eroded by further increases in fuel costs, which are passed on.

That said, the new agreements are to be welcomed. The existing scheme served the city well because it encouraged investment in new generators and power networks to supply the demands of a growing population and industry. Now that population growth has slowed and industry has largely moved elsewhere, there is no longer any reason for virtual monopolies to be allowed to milk their customers according to that formula.

A higher rate of return – 11 per cent – on investment in renewable energy reflects the higher costs and the case for environmentally friendly measures. However, this is a reminder that over the decades the existing schemes were criticised for encouraging overinvestment in fixed assets. Officials should exercise discretion in the public interest in pre-approving new capital works, such as CLP’s plan to build a terminal for liquefied natural gas.

The agreements are for 10 years instead of the existing 15, as the government mulls models and regulatory frameworks for opening up the market to other players. The duopoly has made a pretty safe gesture in accepting it. If there is to be any competition, it is likely to be introduced in an orderly way. The government will be mindful of the imperative of stability in power supplies in an overwhelmingly high-rise working and living environment, and is unlikely to refuse to renew the agreements. Hong Kong has only two power suppliers, from generator to front door. They and the city need each other.

Power Plays

Published in the SCMP on the 8th of January 2008:

  • Two companies’ permitted rate of return reduced from between 13.5 per cent and 15 per cent to 9.9%
  • Based on 2006 figures, total reduction in electricity payments by residential and commercial customers to amount to HK$5b per year
  • If power companies exceed emissions cap for any pollutants, rate of return will be reduced by 0.2-0.4 percentage points
  • If emissions of all pollutants remain below specified caps, companies will be entitled to an increase in permitted return of 0.05 to 0.1 percentage points
  • Tenure of agreement will be reduced from existing 15 years to 10 years
  • Government will consider rediness for open market in deciding whether to extend tenure for another 5 years

Cut in Core Earnings of Power Companies

Electricity bills may not drop as much as companies’ cut in earnings

SCMP – Denise Tsang
Jan 08, 2008

Hong Kong’s electricity duopoly are bracing for a 30 per cent cut in core earnings as early as October, but a lower return rate does not necessarily mean consumers’ bills will drop accordingly.

CLP Holdings (SEHK: 0002) and Hongkong Electric (SEHK: 0006) Holdings will have the return of their earnings on electricity supply slashed to 9.99 per cent from 13.5-15 per cent return on net fixed assets in use, forgoing HK$5 billion in profits between them based on their 2006 audited profits, the government says.

As part of the new regulatory regime on the power utilities, the new return means their core earnings will be cut by 30 per cent from the 14.4 per cent return the two firms have earned on average in the past 10 years.

The government trumpeted that the new regime accomplished its three main missions – slashing the utilities’ return to a single digit, lowering emissions and paving the way for an open market.

CLP and Hongkong Electric also accept that their contract period will be shortened to 10 years from 15. The conclusion of 18 months of negotiations means a U-turn of the power firms’ ferocious opposition. “The deal is as good as they can get compared to what they are earning in developed countries like Australia and the UK,” said an analyst of a European brokerage who expected future returns to be 10 per cent.

“A 10 per cent return is perceived as very attractive in these countries, and the two companies obviously know this very well because they invest there,” he said.

Many analysts believe the deal is reasonable for the two electricity companies and clears up regulatory uncertainty. But academics and analysts believe power bills will not necessarily be reduced at the same rate, as the new regime continues to peg the utilities’ core earnings to capital investment in power generation, transmission and distribution.

One pointed out that the prevailing higher cost of fuel could offset a cut in the basic tariff, as consumers must pay for the cost of production despite the government’s forecast of a “double-digit” reduction next year.

CLP, which serves Kowloon, the New Territories and Lantau, will embark on the new regime in October and Hongkong Electric, which lights up Hong Kong and Lamma islands, in January next year.