Hong Kong must seize the opportunity to cut fossil fuel use in favour of renewable energy

Imagine if our chief executive announced that everyone had to pay an extra HK$5,600 next year for their electricity to cover the cost of dealing with the effects of fossil fuel use. While this is unlikely to happen, the government is nevertheless subsidising the use of fossil fuels here. Data from the International Monetary Fund shows that this annual subsidy came to more than HK$40 billion in 2015.

Electricity generation accounts for 54 per cent of the city’s fossil fuel consumption. As almost all local power generation uses coal and natural gas, we can conclude that power generation and consumption benefit from more than half of the HK$40 billion subsidy.

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As a comparison, we note that the subsidy is equivalent to nearly 80 per cent of our health care budget – a good share of which is spent on treating the effects of poor-quality air on our lungs and hearts.

Attributing the real cost of fossil fuel use is important for several reasons. The profits that the two power companies are allowed to make are based on a formula in their respective scheme of control agreements, which is related to their capital investment and costs. If power companies and other direct users do not pay the real cost of the impact of fossil fuel use, the public has to bear this cost either directly in their bills or indirectly through taxes, which the government uses to clean up the effects of fossil fuels.

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Fossil fuel subsidies stand in the way of changes needed to achieve the goals set at last year’s Paris climate summit of a net-zero carbon economy this century, according to both the UN and the World Bank.

In Hong Kong, the scheme of control agreements will expire in 2018, providing an important opportunity for change. The city has the potential for solar, wind, tidal and wave power. The key lies in shaping a beneficial renewable energy policy and an enabling market environment.

To shape policy, we can learn from the experience of similarly developed economies. First, market access and diversification is important. Beyond 2018, power company regulations should give priority access to all who are willing and able to generate renewable energy, with a guaranteed connection to the grid.

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Second, investment in renewable energy must be supported by a guaranteed price for clean electricity. Guangdong province, for one, pays twice the rate for solar power as for coal-generated electricity.

Third, a redirection of existing funds is needed. The Environment Bureau wants to revise the scheme of control agreements so the return on fixed assets is lowered from 9.9 per cent to around 6 per cent. If all or part of the reduction went into a feed-in tariff fund, it could provide a stable source of funding to encourage the development of renewable energy in Hong Kong.

At a rough calculation, with 2 per cent return on revenue paid into such a fund, about HK$30 billion a year would be generated. Assuming the government would contribute another half, an annual HK$45 billion fund could be created. If the average feed-in tariff is set at HK$2.50 per kWh, the fund would be sufficient to buy 1.8 billion kWh of clean electricity per year. This would kick-start renewable energy power generation by raising its contribution to 4 per cent of total production.

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Fourth, providing space for community participation is vital. Citizens and businesses with suitable rooftops could take advantage of clean energy programmes. The government could allot space in housing estates, public facilities and other suitable areas for groups to form social enterprises and plan community-based investment in solar or wind power facilities.

Germany has invested heavily in renewables, which now account for a third of its energy use. Some 92 per cent of Germans support the transition. One of the main reasons is that the government placed great emphasis on opportunities for ordinary citizens to participate in creating and benefiting from renewable energy programmes through funding and investment schemes.

In Hong Kong, there are 17 reservoirs suitable for the installation of floating solar power plants, similar to those now appearing elsewhere. Offshore waters are also suitable for the installation of wind farms.

Finally, there’s green finance for the new era. With a stable feed-in tariff, renewable energy schemes are predictable enough to attract green funds from around the world. To allow more people to share the fruits of renewable energy development, the government could consider issuing green bonds.

There are many advantages to the transition to renewable energy. A transformation of our energy system to multiple technologies and diverse suppliers will stimulate the economy and create green jobs.

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The power companies may see asset growth stemming less from generation and more from an expanded role as providers of a smart grid. A new energy model for Hong Kong can reduce pressure on the government to import power from the mainland. It will also mitigate pubic calls to merge the two existing power companies, or to separate power generation and distribution.

For the public, implementing a feed-in tariff does not increase electricity tariffs. On the contrary, introducing more diverse renewable energy sources would reduce future vulnerability to increases in gas prices and electricity costs. The public would also benefit from reduced pollution and avoid hefty health care costs.

Meanwhile, local business can find new opportunities in engineering design, equipment supply, installation and maintenance in the fast-growing renewables sector.

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For the financial sector, the development of local renewable energy projects is the best opportunity for Hong Kong to become a credible green finance centre. By 2030, it is estimated the world needs US$2.4 trillion invested in renewable energy to reach targets set in Paris.

China’s National Energy Administration has set a national average target for utility companies to generate 9 per cent of total electricity from renewables by 2020, not including hydroelectric or nuclear power. For Guangdong province, the target is 7 per cent.

In this context, the plan outlined above for Hong Kong to put in place incentives to generate 4 per cent of its power from renewables should be seen as only a first step in the right direction.

Who in Hong Kong will have the decisiveness, courage and vision needed to set ambitious targets for renewable energy development? After all, Hong Kong’s contribution to national and international reductions in greenhouse gas emissions will ultimately be even more important for the city’s development and the well-being of its people than the next chief executive election.

Albert Lai is policy convener at the Professional Commons. John Sayer is director of Carbon Care Asia