A switch in time

Before we, the public, celebrate our victory in temporarily obtaining a lower increase in our electricity tariff this year, we should take a moment to reflect on what we can learn from this hard-fought battle over the fate of our future energy policy.

The reason for the rise was essentially this: there is a pressing need to significantly expand generation capacity, and hence capital expenditure, to cope with Hong Kong's increasing electricity demand. It comes as no surprise that our two electricity providers are again looking to expand their capital expenditure. Why? Because the companies' profits are based on the return on their equity values. Simply put, the more power generation infrastructure that CLP Power and Hongkong Electric invest in, the greater the profits they earn.

Under the existing scheme of control, tariff rates are set so as to allow the utilities to recover their operating and capital expenditure. By rejecting the proposed increase, the Hong Kong government has disagreed with the companies' projected growth rate in electricity demand.

This raises two fundamental questions. First: what kind of model are the companies using to project rises in electricity demand? And, second: where exactly will this growth in demand come from? The new West Kowloon Cultural District project? The high-speed rail line? Or the GDP growth rate? Certainly, gross domestic product growth should no longer be the main driver of growth in electricity demand. The two measurements have decoupled over the past six years, and energy consumption growth in Hong Kong is now much slower than GDP growth.

Looking at historical figures, Hong Kong's entire energy consumption - including electricity - only increased by 6.3 per cent over the 10 years between 1998 and 2008. It's now time for a careful review, especially after the government stated, in its 2009 climate strategy, that Hong Kong's projected energy demand in 2020 would be 36 per cent higher than that of 2005.

There can be no dispute that we need to combat climate change. However, the proposed climate strategy is to make the reduction in carbon emissions mostly the responsibility of CLP Power and Hongkong Electric.

By 2020, the government proposes that almost 70 per cent of projected reductions should come from changes in the utility companies' fuel mix - while only 30 per cent will come from energy efficiency improvements in buildings, appliances and transport. Such a strategy gives CLP Power and Hongkong Electric carte blanche to change the way they supply power. This will inevitably require changes in their capital assets, leaving the door open to raise electricity tariffs.

Let's now take a different approach. If electricity demand were to be reduced through demand-side management measures - simply by reducing consumption through energy saving - then the need for new power plants could be eliminated. Many governments around the world undertook such initiatives after the 1973 energy crisis, many of which became legally binding.

For example, energy costs to individuals and businesses were reduced by US$56 billion from 1974 to 2006 because of demand-side measures introduced by the California Energy Commission. New standards are expected to save another US$23 billion by next year. Additionally, the cost of cutting energy consumption on the demand side is much lower than increasing the generation capacity on the supply side. It should be obvious that reducing the demand for electricity and shrinking the entire 'consumption pie' is the most sensible strategy to adopt.

There is a precedent. Hong Kong's household electricity consumption dropped by 2.8 per cent between 2007 and 2008. The decline was reversed the following year, with a huge 9 per cent surge in consumption. This coincided with the government's policy of offering electricity subsidies, which encourage energy consumption. This in turn will almost certainly result in the need to build more power plants, which will boost the electricity tariff and perpetuate a vicious cycle, year after year.

Hong Kong has great potential to save energy. The Hong Kong Energy Index - a tool developed by WWF and City University - recently revealed that in 2008 Hong Kong wasted 26 per cent more energy compared to that used in 1990 to perform the same activity. This starkly underlines the fact that we have plenty of scope to bring our energy consumption down, simply by cutting waste.

So, what needs to happen now? First, the incoming government should begin urgently needed talks with the two electric utilities, backed up by a study to determine whether liberalisation of the local electricity market is needed.

International experience suggests that market reforms should be phased in. In the short term, different options - including interconnection of the two existing utilities to address the excessive reserve capacity - should be investigated.

The separation of generation, transmission, distribution and supply networks should be on the agenda. A benchmark comparison in operational efficiency and costs should be made between the two utilities. Performance-based regulation is popular in the West, and can stimulate competition while reducing the shortcomings of the traditional 'guaranteed rate of return' model.

Hong Kong people cannot and should not rely on public outrage, government gestures and legislators' protests to ensure a reasonable electricity tariff. Instead, we all need to play our part and start saving energy to reduce the need for an expensive increase in electricity generation capacity.

We still have the power to choose our own fate. It's time to start making changes before fate makes the choice for us.

Dr William Yu is head of the climate programme at WWF-Hong Kong