At the end of the day, local residents pay the costs of climate change, not to mention the health care costs associated with pollution, while the power companies reap rewards. Photo: Sam Tsang

Hong Kong power companies should be made to play by 'polluter pays' rule

Sarah Keung backs revising their contract terms to enforce effective curbs


The "polluter pays" principle is the commonly accepted notion that those who produce pollution should bear the costs of managing it to prevent damage to human health or the environment. For instance, a factory that produces toxic byproducts is usually held responsible for their safe disposal.

Recently, a special meeting was called in the Legislative Council by the Environmental Protection Department to discuss new emission caps for Hong Kong's two power companies, in terms of three types of air pollutants: nitrogen oxides, sulphur dioxide and respirable suspended particles.

The proposed caps will, on the surface, bring cleaner air through more stringent regulation. However, the inconvenient truth is that we the people - not the power companies - will pay for these improvements through increased electricity bills.

This is how it works. The scheme of control agreements allow CLP Power and HK Electric to set tariffs and meet their "permitted rate of return". Originally, that rate was designed to regulate the companies' profits, but it has mutated into a guaranteed fixed rate of return for them. It is linked to the companies' fixed assets - that is, the more fixed assets they have, the higher the permitted rate of return they will enjoy.

When the government previously tightened emission caps on sulphur dioxide, the companies invested in advanced flue gas desulphurisation devices to meet the new standards. The devices became fixed assets, allowing the companies to increase their return.

So, basically, the existing terms allow the companies to generate extra profits by complying with environmental requirements.

Furthermore, if the companies go "over and above" emission caps, they can enjoy an increased rate of return.

Ironically, CLP Power and HK Electric are also the city's top greenhouse gas emitters while both are evading their responsibilities to reduce carbon emissions, for which there is currently no cap.

The Hong Kong government has approved substantial investments in new natural gas power plants over the past 10 years. But while these new investments are coming on stream, the two power companies still rely heavily on coal.

In total, power generation is responsible for over 60 per cent of Hong Kong's total greenhouse gases. At the end of the day, local residents bear the costs of climate change, not to mention the health care costs associated with pollution, while the power companies reap rewards.

Further, the companies should be encouraged to enhance energy efficiency, as this would reduce emissions. However, the schemes of control are not doing enough in this regard - they offer incentives to the companies for keeping modest energy saving targets, without penalising them for not meeting robust standards.

Power utilities elsewhere - for example, in most EU member states - are mandated to meet ambitious energy-saving targets. Penalties are imposed if they fail.

The weakness of the schemes of control in regulating Hong Kong's power companies has long been a source of criticism. Obviously, the "polluter pays" principle is not taken seriously. But this could change after 2018, when the government is able to introduce changes to the electricity regulatory framework. It can then regain control of setting tariffs, impose a stringent cap on greenhouse gas emissions and set higher targets for energy conservation and clean energy use, post 2018.

Officials must follow world leaders' pledge to tackle climate change and roll out policies to support renewable energy development and aggressive energy saving.

This article appeared in the South China Morning Post print edition as: Power companies should play by 'polluter pays' rule