Green organisation urges Hong Kong power companies to 'hedge' on gas prices

Environmental organisation says buying gas at locked-in rates could protect against volatility, but firms insist idea unsuitable for Hong Kong

PUBLISHED : Monday, 29 June, 2015, 12:29am
UPDATED : Monday, 29 June, 2015, 12:29am

The city's two power companies should procure natural gas at locked-in prices to protect themselves against the risk of volatile and rapid price fluctuations, an environmental conservation organisation says.

By securing prices under forward contracts, the companies can secure natural gas imports and "hedge" against adverse price movements, according to the World Green Organisation, which says it could prevent sudden rises in customers' bills.

The call comes as the government seeks to have 50 per cent of energy used in the city generated locally from natural gas by 2020, from 20 per cent now.

Much of CLP Power's upwards tariff adjustment this year was driven by a rise in pricey piped gas from the mainland's second West-East pipeline, which is three times more expensive than the fast-depleting Yacheng reserve off Hainan .

The natural gas price is closely tied to that of crude and can swing wildly according to weather, season and supply.

"Hedging will not necessarily bring down fuel costs but it will mitigate fluctuations in natural gas prices, which can move as much as 40 per cent in a day," said organisation chief executive Dr William Yu Yuen-ping.

Yu has proposed that a hedging mechanism be included in the "scheme of control" - the regulatory framework between the suppliers and government.

Citigroup analyst Pierre Lau said: "Professional hedging, if implemented carefully, could mitigate fuel cost volatility risk."

Lau said the ideal gains and losses ratio from hedging could be set at 80 per cent to customers and 20 per cent for the utilities - the same share on the profits of electricity exported to the mainland - to incentivise the two utilities to optimise hedging. "The interests of the power companies and end-users therefore would be consistent," he added.

This means if gas prices rise 10 per cent from the hedged price, the supplier could reap a 2 per cent saving in fuel and the customer an 8 per cent saving in the fuel clause charge in his tariff bill.

Lau said it was common practice for energy companies as well as airlines to hedge against fuel price for fuel security.

But the risks are high. Cathay Pacific for instance, suffered hedging losses of up to HK$14 billion last year as oil prices plunged. While a utility pockets the difference if spot prices go up, they must square the difference if the price drops below the hedge.

Both city power companies rejected hedging, with CLP Power saying it did not guarantee lower fuel costs and, given market volatility, could even involve losses on the contract itself.

"Mechanisms are in place to ensure fuel procurement terms, including pricing, are appropriate in the market at the time," a spokesman said.

HK Electric said: "Any speculative hedging may lead to higher and volatile fuel cost and operating expenses, resulting in unnecessary tariff volatility for our customers. Therefore, we believe the idea of fuel hedging is not suitable for Hong Kong."

The Environment Bureau said it would listen to all views. A three-month consultation on the future development of the electricity market ends tomorrow.

Henry Hub spot prices for gas - named after a pipeline in Louisiana - have fallen from US$4 per million British thermal units (Btu) last July to US$2.85 in May.