Static electricity

Electricity is something we take for granted. It powers our computers and mobile phones. It transports us up and down and across town. It keeps our food fresh, our drinks cold and it keeps the concrete boxes we live in warm in winter and cool in summer. Without it, even for a short time, life in the city grinds to a halt, and soon becomes untenable.

Such was the case in the United States on August 14, 2003, when some trees interfered with some power lines in Ohio, triggering a power failure that cascaded throughout the eastern North American grid.

More than 50 million people in the US and Canada were affected as entire cities, including New York, were blacked out, in some cases for up to four days. Initial losses were said to be in excess of US$6 billion. Major events like this are few and far between, but they are illustrative of the reliance we have developed for this commodity. So it is not surprising then that when it comes to tinkering with the way electricity is generated and supplied in this most modern of cities, the government is fairly cautious.

Hong Kong has one of the most dependable electricity supplies in the world - within spitting distance of 100 per cent reliability. The government is now reviewing if, and by how much, the arrangements that helped bring this about should be changed.

Stage one of the public consultation ends this month.

Those arrangements, cemented through what are known as scheme of control agreements have been in place for 40 years and have seen the city's two power companies - CLP Power in Kowloon and the New Territories and Hongkong Electric on Hong Kong Island - develop their electricity network capacities along with the ever increasing demands of the city.

The scheme of control agreements are 15-year deals that require the utilities to provide power at reasonable cost to consumers. To enable them to build capacity to accomplish this, the government allows them a maximum 15 per cent return on fixed assets.

Tariffs and technical and financial performance are reviewed annually and there are allowances for periodic reviews of the agreement every five years.

The current agreement expires in 2008, and what shape the market will take after that is a topic of hot debate. Should it stay the same? Should the terms of the agreements be shortened to allow more flexibility? Can the market be opened up to competition? If so, how many players will be needed? Should Hong Kong join southern China's electricity market?

'We're here, we're doing very well so far. But in the future, if there is a need to change, then what are we going to change to?' asks Felix Wu, of the University of Hong Kong's Centre for Electrical Energy Systems. 'If you don't do it right, then you can end up in a situation that is even worse.'

The general rationale for opening a market to competition is that more players means more choice, better service and lower prices for consumers. But experience has shown that when electricity markets are opened up, these outcomes are by no means guaranteed.

While opening the market to new entrants may well lead to lower prices, the utilities and the government argue that lower prices mean smaller margins for producers and that means less money for investment in new or upgraded generation and transmission equipment.

Conversely, guaranteeing returns based on asset value can lead to overinvestment, which can lead to the price skyrocketing as consumers pay for equipment built to satisfy non-existent demand.

'The risks are significant either way, because we don't know the future,' Professor Wu said. 'If you maintain the status quo and if a few years down the line you find this is not working out, then consumers get screwed. If you change, there's a risk that things won't go right.'

The 2003 North American blackout - caused by a deregulated environment that failed to encourage modernisation of the transmission network - and rolling blackouts and brownouts in California during 2000 and 2001 - caused by a shortage of generation capacity and a regime that forced utilities to import power at highly volatile spot prices - are the most high-profile examples of what happens when deregulation doesn't go right.

'The issue is if there is anything to be gained by having an open market in Hong Kong,' Professor Wu said. 'If the answer is yes, potentially there is a big benefit, then we need to look at how to achieve that. First we have to look at the policy issue, then the economic analysis and then the engineering solution.

'If you've answered those questions then the next ones are, change to what? What are the alternatives? Are they cost effective and worthwhile?'

One of the options being discussed is the introduction of limited competition through strengthening the interconnection between Hongkong Electric and CLP Power, allowing them to sell electricity to consumers in the other's territory.

The two are already interconnected, but that connection is for emergency purposes only and is unsuited to full-time use.

Another option being considered is the separation of generation and transmission, allowing new entrants to sell power - most likely imported from the mainland - through existing infrastructure.

As reported recently, several entities are lobbying for the right to access the network, although where they will buy their electricity and how they plan to transport it to the city remain up in the air.

A third option is complete integration with the southern China electricity network. CLP Power admits the third option is most likely, but it is a long way down the track.

'A lot of experts are advising us that it is difficult to have meaningful competition unless we introduce some more players,' says CLP Power planning director Chan Siu-hung, 'for example, incorporating us into the regional market in Guangdong or southern China.

'This is one of the pictures that we need to look at. But we have to look at the technical standards and the levels of performance and reliability in terms of the system we are going to interconnect with.

'And Guangdong's situation is that in 2003-2004 it experienced phenomenal growth and in turn it has suffered in terms of power supply shortages.'

Most analysts agree that given the long lead times required for building infrastructure, southern China's electricity shortages are not likely to disappear in the next five to 10 years.

'If it turns out that we do interconnect with them and they do not have a stable supply, then Hong Kong will suffer dramatically,' Mr Chan says. 'They are taking power from Hong Kong already and in the future if they can't balance demand and supply it will always only be one way.'

Another concern is that in other places where deregulation and market integration have taken place, it has usually been between jurisdictions with a similar regulatory and reliability environment.

'But Guangdong, China and Hong Kong are operating under entirely different regimes,' says Mr Chan. 'Guangdong still has state-owned utilities and is still controlling the end-user tariff, not to mention the level of political intervention.

'That is why this poses problems and constraints in the short to medium term. In the long term, perhaps the concept may work. But it will involve a big market with a lot of players.'

In the meantime, Hong Kong must decide which road it wishes to follow. 'Is there any need for change?' asks Professor Wu. 'It's fairly cheap and reliability is very high. Is there any reason to change now, or will there be any reason to change in the next five, 10 or 15 years, because we have to look ahead. We cannot just look at today.'

Hongkong Electric refused to comment for this article.

The South China Morning Post will host a seminar on electricity market reform at the Island Shangri-La's ballroom on Monday, April 18. For more information visit http://conferences.scmp.com