Time to pull the plug?

The prospect of bigger electricity bills saw an angry crowd lay siege to the headquarters of electricity supplier CLP Power last Wednesday.

Slogans were yelled and banners brandished at the building in Argyle Street, Mong Kok, in protest at CLP chairman Michael Kadoorie's warning the day before, at his company's annual general meeting, of a 'material' rise in tariffs over the next three years for customers in Kowloon, the New Territories and Lantau.

In other words, 80 per cent of the city's population were going to see their electricity bills soar.

Kadoorie claimed the increases were the 'inevitable' consequence of the government's clean-energy policy, which would require the company to import more gas from the mainland and pay more for it.

The chairman's warning that the 40 per cent increase in CLP's fuel bill would 'materially' affect prices of electricity for its customers not only infuriated the protesters, it raised concerns among legislators, academics and green groups and resurrected calls for the government to break up the duopoly of CLP and Hongkong Electric that has supplied all of Hong Kong's electricity for more than a century.

CLP chief executive Andrew Brandler countered that it was the clean-energy policy forcing the companies' hands and called on the government to properly explain the new rules to the public, and their consequences.

'We were told by the government to source gas from the mainland and double the use of it by 2015, but we have been blamed for higher tariffs,' Brandler said. 'The mainland is not going to sell cheap gas to Hong Kong.'

CLP said the gas contract with the mainland's oil firms, including PetroChina, would be 40 per cent higher than the rates paid for the current mainland gas supply. That comes from Yacheng, off Hainan, but it is depleting and is expected to run out within the next couple of years. The price of Yacheng gas (see table) was set 20 years ago, according to a contract between Capco, a CLP joint venture, and China National Offshore Oil Corp, at a price around only one third of what other importers pay.

According to an agreement between the Hong Kong and central governments, PetroChina will import gas from Turkmenistan for export to Hong Kong at prices which Brandler said would be linked to international levels.

Meanwhile, by 2015, CLP and Hongkong Electric are required to cut their emissions by up to 64 per cent from 2010 levels.

By 2020, a proposed climate-change strategy will require a change in the sources of power, with 50 per cent of energy to be derived from nuclear, up from 22 per cent in 2010; 40 per cent will have to come from gas, up from 31 per cent; and less than 10 per cent from coal, down sharply from 47 per cent at present; plus about three per cent in renewable sources.

One option to resolve the tariff dispute is to readjust the emission reduction targets, according to Dr Ngan Hon-wah, from the Department of Electrical Engineering of Hong Kong Polytechnic University, who specialises in reforms of the power market.

'The dilemma we are facing now is about clean energy and power bills. It is like you are requesting to ride a Rolls-Royce but wanting to pay only the price for a Toyota. This is impractical,' he said.

Ngan said there was little the consumers or power firms could do about the increasing fuel costs, and the prices were rising all over the world. However, the government could still control how much or at what pace the emissions target should be met.

He also conceded that lowering the target was not compatible with the political climate, given concerns over the city's air quality, which fall well short of World Health Organisation guidelines.

Increasing the proportion of electricity generated by nuclear power, which has a relatively steady price and is cheaper than gas, would be another option, but the public would have to accept its risks and economic issues.

Dr William Yu Yuen-ping, head of the climate programme at WWF Hong Kong, said a successful energy-saving campaign, as pledged by chief executive-elect Leung Chun-ying, could prove the most effective way to lower costs and keep emissions down. An estimate WWF Hong Kong made in 2004 found that a 10 per cent reduction in energy consumption by about 3,000 businesses could lead to a three per cent overall cut of the city's total electricity consumption.

Yu said Hong Kong was lagging behind Singapore in energy-saving measures - the city state has ruled that from next year all large energy users must employ an energy manager to monitor consumption and implement improvement plans.

He also said the Hong Kong government should modify the regulatory framework in a way that power firms could be rewarded for their efforts in energy conservation and minimising capital investments.

Under the existing framework that will expire in 2018, the power companies' profits are tied with their spending on assets at a 9.99 per cent return, which critics say encourages them to 'gold-plate' their assets and inflate them as much as possible.

In the five-year plan running from September 2008 to the end of next year, CLP was approved with maximum spending of HK$39.9 billion and Hongkong Electric HK$12.3 billion. This current spending plan expires at the end of next year.

Slashing the maximum rate of return on fixed assets, as some politicians suggest, could discourage excessive capital investment but it would have no impact on the fuel price rise, Yu said, calling for strengthened monitoring of the power companies' fuel procurement.

As a longer term option, Edmund Leung Kwong-ho, chairman of the Energy Advisory Committee which advises the Hong Kong government over energy policies, said the government should introduce competition into the market by opening the power grids to third parties.

'The Government must stick with the priority of maintaining reliable, safe and environmentally-friendly supply at a reasonable price,' he added.

He said one feasible option was integrating the city's power grids with that of Guangdong.

A source close to the incoming administration said the Environment Bureau would look to open the power market to other suppliers.

'The government should at least pave the way for the opening if it cannot achieve it in the next five years,' the source said.

'It will eventually allow users to opt for a more environment-friendly supplier.'

An Environment Bureau spokesman said a study of the future regulatory framework for power companies had been carried out, with further integration of CLP and Hongkong Electric's power grids one of the considerations.

31%

The current amount of gas-fired electricity generation in the city, using mainland gas bought in a cut-price deal that is about to end