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Power Agreement A Good Move For HK

Updated on Aug 30, 2008 – SCMP

The gas and power deal signed with the mainland draws Hong Kong into the framework of the national energy policy for the first time. The agreement, kept under wraps until its announcement on Thursday, will bring benefits. It guarantees our city a long-term supply of clean energy, rather than leaving sourcing to the city’s two electricity companies. This should help reduce emissions that contribute to the region’s air pollution. And with Hong Kong and Guangdong on the same energy platform, greater co-operation can be expected in fighting pollution.

Under the deal with the National Development and Reform Commission, state-owned China National Offshore Oil Corp (CNOOC) will continue to supply Hong Kong with natural gas for a further 20 years; China Guangdong Nuclear Power Holding Company will renew its supply agreement for 20 years; and, in about five years, the city will also get access to natural gas from Central Asia via the second west-east pipeline to the Pearl River Delta.

The deal holds out the prospect of cleaner air – through reducing the reliance on coal, which is used to generate 60 per cent of our electricity – and of cheaper power in the future. The guarantee of natural gas supplies appears to derail CLP Power’s plans to build a HK$10 billion liquefied natural gas terminal on the Soko Islands, off Lantau. There is no longer a need to worry about supplies from CNOOC running out. With the local electricity companies’ returns linked to the value of their investment in fixed assets, building the terminal could have inflated power bills for CLP’s customers.

On the face of it, the deal is a winner for the environment and for consumers. Whether it lives up to Chief Executive Donald Tsang Yam-kuen’s description as “extremely good news” depends on how the details unfold. Nonetheless, it was a welcome development for a leader facing his worst opinion poll results since taking up his post in 2005. The timing will do no harm either to the chances of pro-government candidates in next weekend’s Legislative Council election. It was not good news for blue-chip CLP shares, which were hammered yesterday while the market rose overall, with analysts cutting forward earnings forecasts and target price.

The government took the market by surprise with its announcement of the deal not long before a decision was expected on the Soko Islands terminal and ahead of the start of new schemes of control for the two electricity suppliers in October. The extent of any economic benefits depends on several factors. Pricing will be determined by commercial principles. It could be affected if CNOOC needs to tap alternative sources of gas to guarantee supply. CLP will need to build only a short pipeline to connect its Black Point plant at Tuen Mun with an LNG terminal planned by PetroChina for Dachan Bay in Shenzhen in 2011. But both CLP and Hongkong Electric could jointly face future investment in an LNG terminal in Shenzhen.

The schemes of control that regulate the marketing of electricity have served Hong Kong well over the years by encouraging investment in new generators and networks to supply growing demand. But they have been criticised for encouraging over-investment in fixed assets, which was reflected in electricity tariffs.

In this case the government’s intervention in the market makes sense. Integration with mainland energy policy guarantees supply of clean energy sources to our electricity suppliers, with the promise of cheaper power and clearer air. Given the cost of an LNG terminal on the Soko Islands and environmental concerns, the government has made a politically wise choice.

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