With the scheme of control set to expire in 2008, a major topic at this year's conference will be the government's proposed new regime THE COMPLEX ISSUE of how to manage Hong Kong's power industry after the current scheme of control agreement between the government and power companies expires in 2008 will be one of the major topics of the conference at POWER-GEN Asia 2006 in Hong Kong this week. Among the key speakers lined up to discuss developments in Asian power markets is Wan Chi-tin, director and general manager, corporate development, Hongkong Electric. Mr Wan will analyse the Hong Kong power market and explain how far talks over its future have progressed. Following the second stage of public consultation on the future development of Hong Kong's electricity market, which attracted more than 17,000 submissions and was debated in the Legislative Council in May, a general consensus has been reached that reliability and safety of supply are the most important issues and should be the key considerations in the future development of the local electricity market, according to Mr Wan. Other issues of concern include the regulation of returns and tariffs, and the impact of the industry's future development on the environment. 'Electricity supply reliability is of utmost importance to Hong Kong in view of its role as a world city and financial hub in Asia,' Mr Wan said. 'We have the highest population of high-rise buildings in the world, as shown in the latest Emporis Skyline rankings. 'The existing scheme of control agreement has provided a fair, balanced and simple regulatory environment. Hongkong Electric, as a result, has invested tens of billions of dollars in building and maintaining the electricity system, making Hong Kong a global leader in terms of supply reliability with a [world record] of 99.999 per cent,' Mr Wan said. The government's position is that under the next scheme of control agreement, post-2008, the power companies' terms of agreement would be reduced to 10 years with a five-year extension option and the return rate would be cut from more than 13.5 per cent to between 7 per cent and 11 per cent. As the five-year option is not guaranteed to be exercised, the government is shortening the existing term of agreement to 10 years from 15, partly in the belief that within 10 years mainland-based companies will be ready to enter the Hong Kong market as competitors to both local players. CLP and Hongkong Electric say the proposed term is too short for them to plan massive investment in Hong Kong. As for the rate of return, by comparison Hong Kong's franchised bus companies have a permitted rate of return from the government of 9.7 per cent. Whether this is a fair number is hard to say, according to independent observers. But in the global power market, power generation is being deregulated and there are few guaranteed returns to providers, especially in developed economies such as Britain, Australia and the United States. The two local power firms, CLP Power and Hongkong Electric, believe that tariffs are reasonable and that Hong Kong should not rush to open up its power market. In their submissions to the second stage public consultation, both companies have expressed reservations about most of the government's proposals. 'The government has set out a policy objective that the general public and business in Hong Kong can enjoy safe, reliable and efficient electricity supply with minimum impact on the environment either by the generation or production or use of electricity at a reasonable price,' said Mr Wan. 'We believe the two power companies in Hong Kong under the scheme of control regime have delivered all these objectives, and we are saying this based on long-term benchmarking of ourselves in these three areas with other power companies overseas in markets including Britain, Australia, the US and China.' Indeed, China is fundamental to the final decision regarding the possibility of a deregulated electricity market in Hong Kong. First of all, there is the question of supply and demand in China and whether it will be ready to transmit power to Hong Kong by 2009 as is being proposed by several mainland companies. Also key are the mainland and Hong Kong governments' future energy policies; specifically, whether the Hong Kong government will approve CLP's request to construct a US$600 million to US$800 million liquid natural gas (LNG) terminal in Hong Kong. Natural gas is an important fuel in meeting environmental challenges. According to CLP, the LNG terminal should help improve air quality and reduce emissions because it will speed up the usage of natural gas from its existing source - the Yacheng gas fields on Hainan Island, which will be depleted early next decade. CLP said it needed government approval by the end of this year if it was to have LNG available in early 2011 to replace the existing gas supply from Yacheng. But Sinopec, China's dominant oil refiner, is posing a challenge to CLP's plans. Sinopec has submitted a preliminary plan to the Macau government and has also suggested to Hong Kong's Economic Development and Labour Bureau that its proposed LNG terminal in Zhuhai could also supply CLP and provide a back-up to Hongkong Electric and Hong Kong and China Gas. Despite power shortages in Guangdong province, Zhuhai has been selling power to Macau without a setback or poor delivery record, and Vietnam is fulfilling procedures to buy electricity from the China Southern Power Grid from April next year. Hong Kong is already a net buyer of electricity from the mainland. The complication in inviting external suppliers to participate in the Hong Kong market lies with the ownership of the electricity network in Hong Kong. Unlike many other countries before deregulation, Hong Kong's network is controlled by both Hongkong Electric and CLP. This means that the government needs to reach an agreement with the two Hong Kong power companies on compensation for opening up their network to newcomers. According to UBS Investment Research, the proposal by Sinopec increases the uncertainty of the Hong Kong government's decision on CLP's proposed LNG terminal in Hong Kong and hence may determine future policy. 'We believe the key lies with the energy policy of the Chinese and HKSAR governments,' said Alice Hui, executive director and head of Asian utilities research at UBS. Mr Wan believed the public tended to believe tariffs were high without knowing the overall picture. 'Apart from supply reliability, Hongkong Electric has also strived to provide services at an affordable and competitive price level.' He pointed out that Hong Kong tariffs were in the low range compared with many major international cities such as Seoul, Singapore, Manila, Paris, London, Wellington, Tokyo, Amsterdam, Rome, Berlin and New York. 'Hong Kong families on average spend only around 2 per cent of their total household expenditure on electricity, which is relatively low,' he said. Hongkong Electric was also responding to public demands for power companies to reduce emissions, Mr Wan said. 'Hongkong Electric has, since 1993, installed flue-gas desulphurisation (FGD) plants in three of its coal-fired generating units and sulphur dioxide emissions will be further reduced with two more FGD plants retrofitted in 2009 and 2010,' Mr Wan said. 'In 2006, we have started using renewable energy for power generation following the commissioning of our wind power station on Lamma Island. 'We are also using natural gas for generating electricity. 'Our first gas-fired generation unit was connected to the grid in late July.'