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CLP Power, which runs Castle Peak power station in Tuen Mun, will be allowed to earn a guaranteed 8 per cent, down from 9.99 per cent. Photo: Felix Wong

Guaranteed earnings cut for Hong Kong power firms

New 15-year deal allows CLP Power and HK Electric to earn 8 per cent returns, but suppliers fail to commit to minister’s idea that tariffs could drop 5 per cent

CLP Group

A long-awaited deal to lower the cap on guaranteed earnings for Hong Kong’s two power companies was announced on Tuesday, but it fell short of public demands and locked the city into another 15 years of full dependency on them.

Environment minister Wong Kam-sing said the agreement could see electricity tariffs reduced by up to 5 per cent, but CLP Power and HK Electric would not commit to this.

The amount the two suppliers are allowed to earn will be slashed from 9.99 per cent to 8 per cent of their net fixed assets after a new 15-year regulatory agreement with the government, known as the scheme of control, replaces the existing one next year.

“This will help maintain a reliable electricity supply and meet our carbon intensity reduction target to combat climate change,” Wong said, citing the impending shutdown of all coal-fired plants over the next decade as the power companies switch to cleaner, non-fossil fuel.

But his suggestion that electricity bills could be cut by at least 5 per cent next October if “all factors remain unchanged” was met with scepticism by experts, green groups and lawmakers. Factors such as fuel costs might make it impossible, they said.

While the new permitted rate of return is well above the 6 per cent Wong once mentioned as a possible target, he said it was still within a 7 to 9 per cent range recommended later by a consultant.

Incentives have been built into the framework for the firms to develop renewable energy, including feed-in tariffs, which are payments power companies make to purchase clean energy from households and businesses generating them. They are usually set higher than the market price.

More frequent adjustments will also be made to ensure customers’ power bills more accurately reflect changes in energy prices, given that both firms amassed huge surpluses in their recovery accounts by overestimating their fuel costs over the years.

The top permitted return was 13.5 per cent between 1964 and 2008 before being slashed to the current level, to reflect the lower cost of capital and interest rates. CLP and HK Electric’s existing 10-year schemes will expire at the end of next year.

As for whether or not their dual monopoly over the electricity market would ever be broken, Wong said the government was still committed to bringing in competitors when “requisite market conditions are present”.

Professor Raymond So Wai-man, who chairs the government’s Energy Advisory Committee, expected electricity prices to remain stable in the coming one or two years before price pressures increased by 2020 due to new carbon emission and pollutant targets.

We should not expect too much that [the new agreement] will reduce electricity charges a lot
Professor Raymond So Wai-man, Energy Advisory Committee

“We should not expect too much that [the new agreement] will reduce electricity charges a lot,” So said.

Pro-establishment lawmaker Gary Chan Hak-kan argued that power tariffs would go up in the long run, as replacing coal-fired plants with more expensive natural gas-fired ones would inevitably drive up costs.

Tanya Chan, who chairs the Legislative Council’s environmental affairs panel, said a 5 per cent reduction was “overly optimistic” and urged officials to monitor whether the firms’ future fixed asset investments would be at a reasonable level.

While WWF-Hong Kong’s head of climate and Energy, Prashant Vaze, welcomed the new renewable energy commitments, he said feed-in tariffs would have to be set high enough to be effective. Neither Wong nor the two suppliers have provided full details of the scheme.

“The specific payment rate needs to be set at the introductory rate of around HK$4 per kilowatt hour for solar panels to properly incentivise consumers and businesses to invest in decarbonising Hong Kong,” he said.

Hu Xinmin of Hong Kong-based electricity industry consultancy Lantau Group said the 8 per cent permitted return was a “compromise” that compared favourably among developed international markets from the point of view of electricity operators.

He noted in Australia, regulated returns of power transmission and distribution firms ranged between 5.5 per cent and 6.8 per cent.

“A long-term regulatory framework and stable return will help strengthen investors’ confidence and ensure that Hong Kong continues to enjoy the necessary electricity infrastructure,” HK Electric managing director Wan Chi-tin said.

CLP vice-chairwoman Betty Yuen So Siu-mai called the new agreement “fair and sensible”, saying the company would make appropriate investments to meet the government’s energy policy objectives.

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