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Rising fuel costs and cleaner energy force up power charges

South China Morning Post — 15 Dec. 2010

Hong Kong’s power charges will rise by about 2.8 per cent next year, spurred by a double-digit rise in fuel costs this year, an expected similar increase next year and moves by the two power companies to burn more clean fuel.

On January 1, the price per kilowatt hour of electricity will go up from 91.5 to 94.1 cents for CLP Power (SEHK: 0002) customers and from 119.9 to 123.3 cents for Hongkong Electric (SEHK: 0006) users.

It is CLP Power’s second increase and Hongkong Electric’s first since a revamp of their profit scheme in 2009 that led to tariff cuts of 3 and 5.9 per cent respectively. Last year CLP Power imposed a 2.6 per cent rise, while Hongkong Electric froze charges.

Both still regard their charges as among the lowest in the world but are cautious about the outlook as they forecast gas and coal prices will continue to rise. Further uncertainties are created by the move to use more gas and possibly more imported nuclear energy in the next decade.

Lawmakers asked why the two firms, which have been making huge profits, could not have avoided the increase to ease the inflationary pressures facing the public.

But government economists estimate that the increase will have only a negligible impact on inflation and business costs, pushing up the composite consumer price index by just 0.005 of a point in the next year.

Secretary for the Environment Edward Yau Tang-wah said the increase had been “suppressed” to the lowest possible level.

“The original proposed tariff increases were far higher than what we have now,” he said without disclosing the levels.

Coal prices surged by 30 per cent this year and gas prices showed a double digit growth, the firms said.

They said the increase, in response to higher fuel costs, would have no effect on their profits. But both said they looked set to grab the maximum return of 9.99 per cent on their net fixed assets in the next year.

While the tariff gap between CLP Power and Hongkong Electric largely remains at 30 per cent after adjustment, the latter will next year cut the basic tariff rate – reflecting the capital expenditure on power generation and transmission – by 1.4 cents per kilowatt.

“This is done to mitigate the impact of the fuel price increase,” said Tso Kai-sum, group managing director of Hongkong Electric, who pointed out that the company had just doubled its gas use to 30 per cent of the fuel mix this year.

CLP Power managing director Richard Lancaster said the company could not afford such a cut, as it had many investments to make on power infrastructure, such as new railway lines and the Kai Tak development, which falls within its supply area of Kowloon and the New Territories.

The two executives also briefly touched on the proposed expansion of nuclear energy imported from the mainland. Lancaster said nuclear energy was relatively stable in cost and that to satisfy half of the power needs with nuclear energy, as proposed by the government’s climate change action strategy for 2020, at least two 1,000 megawatt generating units would have to be built. A quarter of the city’s power comes from the Daya Bay nuclear plant, which is partly controlled by CLP Power.

Tso also indicated an interest in nuclear energy imports but said more studies were needed to assess the impact on tariffs and how the electricity could be transmitted.

Greenpeace said that expanding nuclear energy intake would make redundant expensive investments needed to cut pollution from coal-fired generation units.

Friends of the Earth urged the government to address the “systemic” problem in the firms’ regulatory regime that discouraged them and the public from saving energy.

The firms can earn more by making bigger capital investments, thus boosting the net assets upon which their returns are based

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