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Following is a question by the Hon James Tien and a written reply by the Secretary for the Environment, Mr Wong Kam-sing, in the Legislative Council today (June 24):
Question:
The Environment Bureau is conducting public consultation on the future development of the electricity market. In this connection, will the Government inform this Council:
(1) as an independent energy consultant has suggested that consideration be given to lowering the permitted rate of return of the two power companies from the current 9.99 per cent to six per cent - eight per cent, but some experts have pointed out that the Government has failed to clearly explain how the magnitude of the suggested rates of return were computed and this approach lacks transparency, whether the authorities will make public the relevant information on the computation methods (including the relevant contents of the consultancy report); if they will not, of the reasons for that;
(2) as there are views that Hong Kong is now in a period when the interest rate is close to zero, a permitted rate of return at six per cent - eight per cent is already a very high level of investment return, whether the authorities have studied the possibility of further lowering the rate of permitted return, or negotiating with the two power companies the addition of provisions during the future interim review to stipulate that the authorities may further revise the rate of permitted return, in the light of the then prevailing business conditions and tariff levels of the two power companies;
(3) as there are views that since the Mainland has been vigorously developing nuclear power generation in recent years, even if Hong Kong increases its import of nuclear power from the Mainland, the impact on the Mainland's total nuclear power capacity will be minimal and therefore nuclear safety risks will not increase significantly, and given that the prices of nuclear power are relatively cheap and stable, whether the authorities have studied if it is feasible to increase the share of nuclear power in the fuel mix for electricity generation, so as to reduce the financial burden on members of the public; if they have, of the details; if not, the reasons for that;
(4) as the Government introduced a "stranded costs" provision to the Scheme of Control Agreements (SCAs) in 2008, enabling the two power companies to receive compensation for the impacts they sustain as a result of the Government's opening up of the electricity market, whether the authorities will consider discussing with the two power companies the removal of the provision from the new SCAs to be signed in 2018, so as to safeguard public interest; if they will not, of the reasons for that;
(5) whether the authorities will, when they discuss with the two power companies on the new SCAs in 2018, explore the possibility of controlling tariff increases and introducing competition, including requiring the two power companies to implement power interconnection as well as introduce the technologies and hardware of third-party competitors when the authorities vet and approve the new electricity generation networks and power generation units of the two power companies in future;
(6) whether the authorities will consider phased implementation of the voluntary emission reduction targets of the two power companies to avoid any drastic increases in tariff levels within a short period, with a view to balancing the considerations of environmental protection and the tariff affordability of members of the public as well as small and medium enterprises; and
(7) as the Government has indicated that the introduction of competition to the electricity market will continue to be its objective, whether the authorities have formulated detailed and concrete work indicators and timetable; if they have, of the details; if not, the reasons for that?
Reply:
President,
The current Scheme of Control Agreements (SCAs) signed between the Government and the two power companies will expire in 2018 and we need to consider how to further develop the electricity market in Hong Kong. In conducting the review, we have been guided by the four energy policy objectives of safety, reliability, affordability and environmental protection, and have paid due regard to the goal to introduce competition when the requisite market conditions are present. The Government launched a three-month public consultation on the future development of the electricity market on March 31 this year. The consultation document covers a range of issues, including the performance of the current electricity supply, experience of overseas markets in introducing competition and the presence of relevant conditions in Hong Kong, possible areas for improvement in the regulatory framework, the future fuel mix for electricity generation, etc. For the various parts of the question, our reply is set out below:
(1) and (2) The Government commissioned a consultancy study during the mid-term review of the SCAs in 2013 to review the methodology, parameters and assumptions used for setting the permitted rate of return (RoR). Taking into account different factors including the risk free rate, the cost of equity and the cost of borrowing in a regulated utility market, the consultant suggested that we could consider reducing the permitted RoR to the range of about six per cent - eight per cent. As the analysis and content of the consultancy report involve strategic study and considerations, we consider it inappropriate to disclose the report as it may affect future negotiation on the SCAs. In addition, as set out in the consultation document, in preparing for the negotiation with the power companies, we will commission a study to review the need to update the proposal having regard to the latest market situation.
(3) Regarding the future fuel mix, the Government received more than 86 000 submissions during the public consultation on fuel mix last year. Of the two options, most of the respondents preferred local generation. We plan to increase the percentage of local gas generation to around 50 per cent in 2020. As regards the use of nuclear power, subject to a reasonable import price, we will maintain the current interim measure to import 80 per cent of the nuclear output from the Daya Bay Nuclear Power Station, such that nuclear import would account for around 25 per cent.
We have considered different options for importing electricity from the Mainland when we reviewed the future fuel mix for electricity generation last year. As compared with importing electricity from a dedicated power plant (including a nuclear power plant) using dedicated transmission lines, purchasing from the power grid would allow Hong Kong to benefit from the strong support provided by the Mainland power grid with multiple sources of supply and to gain access to multiple sources of supply on a grid-to-grid basis, thereby enabling us to achieve a higher degree of fuel diversification. In addition, the option of grid-to-grid purchase of electricity would provide us with greater flexibility in meeting possible changes in future demand within a shorter planning lead time, rather than limiting us to the planned generation capacity of the dedicated source. Also, the price differential of importing nuclear power through dedicated transmission lines and purchasing electricity from the grid would not be substantial. As such, we considered that purchasing electricity from the grid was preferable over importing electricity through dedicated transmission lines and promulgated it as one of the fuel mix options for public consultation.
(4) According to international experience in the development of the electricity market, a mechanism has to be established to deal with stranded costs before full liberalisation of the electricity market. In the absence of a mechanism to deal with the issue of stranded costs, power companies would very likely reduce long-term investment drastically, which may affect the safety, stability and reliability of electricity supply ultimately. Having considered international practices, the Government introduced stranded costs provisions to the existing SCAs. The Government may require power companies to implement measures to mitigate the amount of stranded costs pursuant to these provisions. As regards the future regulatory arrangement with the power companies, we would consider the views received after the end of the consultation in charting the way forward, and commence negotiation with the power companies.
(5) and (7) A key determining factor of whether we are ready to introduce competition to the electricity market after the current SCAs expire in 2018 is the availability of stable and reliable sources of new supply. However, the result of the public consultation on the future fuel mix for electricity generation conducted last year shows that most of the respondents expressed reservation about importing electricity from the Mainland at this stage. Major reasons quoted include concerns over the stability and reliability of importing electricity from the Mainland, transfer of emissions from electricity generation to the Mainland in importing electricity from the Mainland, and turning Hong Kong into a captive buyer without any control over the quality and price of the imported electricity. On the other hand, it is unlikely that there would be a new, sizable local electricity supplier because of land constraints. Nevertheless, we consider it necessary to undertake the necessary preparatory work to pave the way for introducing potential new suppliers. We have therefore proposed in the consultation document that we would discuss and jointly conduct a study with the power companies on the detailed arrangements to enable access to the power grids by new players. We also plan to commission a study to look into the detailed arrangements for strengthening the interconnection between the power grids of the Mainland and Hong Kong as well as that between the existing grids in Hong Kong. We will also pursue with the power companies to publish their segregated cost data pertaining to their generation, and transmission and distribution systems, in order to promote transparency and to pave the way for introducing new players.
In respect of tariff, we have proposed in the consultation document to expand the scope of the tariff approval mechanism by the Executive Council to include not only the Basic Tariff Rate but also the net tariff so as to enhance scrutiny of fuel price forecasting. We would like to hear the public's views on this arrangement.
(6) To improve the environment, we consider it necessary to set emission reduction targets. In order to meet the pledged environmental targets for 2020, we need to increase the percentage share of local gas-fired generation and reduce coal-fired generation. As the price of natural gas is higher than that of coal, and we would also need to construct new generating units to replace some of the coal-fired generating units that will retire in succession in the coming few years, we expect that the tariff will increase. However, how the increase in generation costs for electricity would be reflected in tariff would depend on a host of factors, including the retirement schedule of existing units, the pace of capital investments, etc. The tariff level of a particular year is also affected by other factors, including operating costs, sales volume, and changes in the balances of the Tariff Stabilisation Fund and Fuel Clause Recovery Account. We will continue to perform our gatekeeping role with a view to maintaining tariff adjustments at reasonable levels.
Ends/Wednesday, June 24, 2015
Issued at HKT 13:22
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