Hong Kong will gain from a more diversified energy portfolio

William Yu says the public consultation on Hong Kong's energy options should explore expanding the sources and types of our imports, and consider ways to open up the power market

PUBLISHED : Tuesday, 18 March, 2014, 4:39am
UPDATED : Tuesday, 18 March, 2014, 4:39am

The heated debate over Hong Kong's energy future was rekindled at the beginning of the year when electricity tariffs were increased again. The price rises over the past few years have mainly been due to the greater use of natural gas in the energy mix. To combat air pollution, utility companies try to reduce the use of coal, substituting it with more natural gas or nuclear power.

In 2012, Hong Kong relied on coal (54 per cent), nuclear power (23 per cent), natural gas (23 per cent) and a negligible amount of renewable energy for its electricity. Among these, gas has emerged as the fuel of choice for the future.

Global gas demand is expected to grow steadily over the next decade and its price is geographically sensitive. In general, the US has the lowest price per million British thermal units (Btu), Europe is in the middle and Asia has the highest price. Studies suggest that the price of natural gas will not fall before the techniques of horizontal drilling and fracking become widely available or transport infrastructure is in place to deliver liquefied natural gas to areas further away.

A regional approach ... and importing alternative sources of clean energy might be worth considering

Thus, Hong Kong can expect natural gas prices to remain high in the mid term, especially when it is bound by the current contracts of between 20 and 30 years signed by the utility companies. We can expect the electricity tariff to continue to rise in line with the increasing portion of natural gas in the fuel mix.

In the short term, nuclear energy appears to offer a better deal in terms of price. But, after the 2011 Fukushima accident, the Hong Kong public might be sceptical about increasing our share of nuclear power. Besides, even if it wanted to, Hong Kong might not be able to get much more supply from the mainland.

CLP recently said it would buy 10 per cent more nuclear power from Daya Bay, raising its share to 80 per cent of the plant's total capacity. With electricity demand rising in southern China, it will be very difficult for Hong Kong to get 100 per cent of Daya Bay's supply.

If the Hong Kong government plans to increase the share of nuclear power in our energy mix from the existing 23 per cent to 40 per cent, or even 50 per cent, the additional supply must come from other newly built nuclear power plants. This implies that future nuclear power prices will no longer be as competitive as those offered by the Daya Bay plant, which was built more than 20 years ago.

Coal prices will also play a part in stabilising electricity tariffs. Prices fell last year, and Indonesia, which supplies the majority of Hong Kong's coal, has capped its output in order to stem the decline in prices.

To secure its energy supply, Hong Kong should not only care about the price but also its reliability and availability. A more diversified energy portfolio would seem prudent for Hong Kong. A regional approach in planning our power supply and importing alternative sources of clean energy might be worth considering.

The government is reportedly looking at importing more electricity from Guangdong, such as through the China Southern Power Grid, which sells about 800 billion kWh of electricity per year.

If a deal is being pursued, the Hong Kong government should make it clear what type of fuel would be used. The ethical consideration lies in whether the additional supply to Hong Kong would be at the expense of mainland China's air quality, by burning more coal in the southern areas.

Apart from sparking a search for cheaper sources of energy, the increase in electricity tariffs in Hong Kong has also led to a debate on market reform. This would entail liberalising the market to accommodate more than the two players that currently monopolise the market - CLP and Hongkong Electric.

Should this occur, the government is obliged to give both utility companies at least 36 months' notice, under the current Scheme of Control agreements. The government may even have to compensate the companies for the loss of any asset as a result.

This raises three critical questions: Would there be sufficient time for the Legislative Council to pass an Energy Act for market liberalisation? How much would this compensation be? And, would it be levied on the taxpayer?

Above all, the Hong Kong government should now urge the utility companies to break their vertical integration into separate business units of generation, transmission and distribution under the same business group. This will definitively facilitate any future changes of ownership.

The UK is seen as a pioneer in reform of the electricity market. In theory, a competitive market within the right regulatory framework can bring social benefits, such as lower electricity tariffs. Liberalisation should bring important benefits to consumers, giving them more choices.

But the reform process has not always been successful. Take the UK. Late last year, Energy UK, the industry's trade body, warned that household electricity bills could increase by 50 per cent over the next six years. The tariff has also been affected by the surge in natural gas prices.

The British example is not fully comparable to Hong Kong's situation. This doesn't mean we should not explore the possibility of market liberalisation. Other European countries are still experimenting with it.

But there is one solution that is often overlooked by energy providers and legislators - demand side management, which is more cost-effective.

Although the big picture for future supply remains unclear, one thing is certain: Hong Kong people must make a rational and informed decision on their energy future in the upcoming public consultation.

Dr William Yu is CEO of the World Green Organisation