CLP Group

Hong Kong should let market forces keep the price of its electricity down

PUBLISHED : Thursday, 29 December, 2011, 12:00am
UPDATED : Thursday, 29 December, 2011, 12:00am

I would be delighted to be paying the proposed new CLP Power tariff of 101.1 cents per kilowatt-hour for my electricity. I would still have been happy to pay its original proposed tariff of 102.8 cents.

But I won't get the chance. Instead, I, like all the other residents of Hong Kong Island, will be paying the 131.1 cents demanded by Hongkong Electric - that is, 30per cent more.

Naturally, the government has come out with all guns blazing to attack ... CLP Power!

This should have been the first clue for our legislators that something fishy was going on. Instead, they have once again failed in their duty to dig deeper into the subject and ask the questions that really matter.

The key one is: can we so arrange affairs that there is competition between power generators to provide electricity reliably at the lowest possible price?

Before we explore that issue, we need to establish some of the context and dismiss some of the myths.

First, neither power company has a monopoly in its geographical areas; each has no more or less than a franchise.

Secondly, these franchises are governed by schemes of control which are negotiated between the companies and the government, and give the latter extensive powers to scrutinise the investment plans and commercial dealings of the former.

Thirdly, the equipment needed to generate and distribute power is extremely expensive, so companies investing need the assurance of guaranteed long-term arrangements to be able to raise the capital involved and write it off over a reasonable period.

Fourthly, industry practice is for fuel to be supplied under long-term contracts with guaranteed prices. This in turn gives fuel suppliers the confidence they need to make their investments in coal mines and gas fields and so on, while also giving power generators the guarantee of long-term supply on known terms.

Indeed, it is these last two factors that provide the need and justification for franchises and schemes of control.

Some countries have been experimenting with ways to bring the forces of competition to bear in power supply by creating a market. In essence, it involves allowing companies to generate power and distribute it at the retail level (by selling to individual customers) via a grid to which everyone has access on the same terms.

In Hong Kong's situation, that would require finding a formula to bring together two independently owned chunks of grid (one on Hong Kong Island, the other covering Kowloon and the New Territories) and also providing a connection between them so that power could go both ways across the harbour when necessary. Having a unified grid has some advantages, in terms of reducing the amount of spare capacity needed to ensure a 24/7 supply, but it proved too difficult to address the issue when the schemes of control were last under review.

One option might be to create a special purpose vehicle to implement the project, financed by a loan, the capital and interest for which would be paid off by a tiny levy on existing customers. Later, the existing power companies could vest their distribution assets in the company in exchange for shares corresponding to the value of the assets injected. This could then become a straightforward regulated utility with a low and stable rate of return. Power generation, and attracting customers, would then be the commercially risky activities that could be left to the market.

Let's put this complex subject on one side and look at the present hoo-ha. Our environment minister has finally done something right and specified tough standards for emissions so as to reduce our chronic air pollution. He has agreed with the power companies the capital investment programme to achieve those standards. He is fully aware of, and has endorsed, the fuel mix concerned. The rate of return on the investments required was agreed by him in the negotiations over the schemes of control. Correctly, the bill for these efforts is now being passed to the consumers of electricity in accordance with the 'polluter pays' principle.

So what is the fuss about? Why is the minister now pretending he did not know these things would happen? Why is he, and our chief executive, in capitalist Hong Kong trying to bully the company into charging less than it is entitled to? How long has profit been a dirty word, and will the same principles be applied to our property developers and other major companies?

I have come to have rather low expectations of the present administration in its dying days. But, nonetheless, it was disappointing to see the head of the administration on TV urging the power companies to 'make a wise decision' with the words 'or else' implied, though unspoken.

After all, we elected a chief executive, not a capo di tutti capi.

Mike Rowse is the search director of Stanton Chase International and an adjunct professor at the Chinese University of Hong Kong.