For green, clean power, the choice is gas or coal

PUBLISHED : Wednesday, 01 April, 1998, 12:00am
UPDATED : Wednesday, 01 April, 1998, 12:00am

For environmentalists Hong Kong is at a cross roads. Hopes of a sustainable energy policy are vested in a Government review of both power generating firms' operating mandates. Under public scrutiny officials know fresh alternatives must get a proper sounding.

The fault line is shaping up as the proposed extension to Hong Kong Electric's (HKE) Lamma power station. Lobby groups have argued against the scheme of control, allowing power stations to be built with no apparent reference to real electricity demand. They are likely to be disappointed.

Radical overhaul of the system looks to be off the agenda as arguments centre on the type of power station to be built. In reality it looks to be the gas industry that is in play. HKE wants to build another coal burning station, but government pressure is for a gas alternative.

The issue is about Hong Kong's place in a wider energy nexus, being dictated by Guangdong province. HKE has mooted plans to import gas from overseas. According to a recent report this may involve capital expenditure of more than $20 billion.

The implication for the gas market is intriguing. Should the Li Ka-shing controlled firm start importing gas he will want to make it worth his while. That is not the kind of news Hong Kong and China Gas (HKCG), the effective monopoly supplier of Towngas, wants to hear.

The reason is the still poorly defined concept of a common carrier system. This envisages a new standard where operators use HKCG's pipe network to pump natural gas at the most competitive price. Rather like telecoms liberalisation, new operators would get instant access to its network.

The effect would be two-fold; competition forcing unit prices lower and huge write-offs on past capital expenditure. It is no surprise that HKCG last year revalued its pipe network at $19.4 billion - compensation for ending the monopoly would be based around this figure.

Then again, HKCG is not your regular monopoly. Unlike China Light & Power (CLP) or HKE it never received an exclusive franchise. Executives have long argued anybody can sell piped gas in Hong Kong - they just need to build the pipes.

Maybe, but with the Government seeing natural gas as a strategic imperative they will probably be forced to the table. An emerging regional market in natural gas leaves Hong Kong oddly importing crates of naphtha-based Towngas from Singapore.

And this is where the issue gets really tricky. Imagine a market such as the United States where households buy gas from a trunk network with local operators as little more than marketing agents. The result is a national standard and cheap prices.

Under such a scenario Hong Kong would have to modify all gas appliances to comply with natural gas specifications. Who will pay? HKCG will argue, with some justification, that it is not their problem. Any new gas deal demands multi-party consent on this issue.

Then there is the market leader. CLP runs a 1,000-kilometre pipeline supplying its Black Point power plant from Shekou. Why does HKE not simply strike a deal with its bigger competitor to buy its excess gas? After all, the last two units of Black Point have been scrapped leaving CLP with plenty to spare.

Quite simply HKE will demand guaranteed supply for at least 20 years. CLP's growing mainland commitments and a potential completion of Black Point some years hence make it unable to offer that assurance. Instead, HKE will become the conduit for cheap Asian gas from Malaysia, Indonesia or the Philippines.

Consumers will be promised cheaper cooking bills and a cleaner source of electricity. HKE may prefer a coal power station but with the scheme of control unchanged will probably not complain too much about its capital expenditure earnings.

HKCG major shareholder Lee Shau-kee is unlikely to roll over without a fight and will no doubt seek mainland gas contracts as compensation.

Environmentalists will have to try hard not to lose their belief in radical change.