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LCQ2: Electricity tariffs of two power companies

     Following is a question by the Hon Kam Nai-wai and a reply by the Acting Secretary for the Environment, Dr Kitty Poon, in the Legislative Council today (May 23):


     The surge in energy prices in recent years raises the chance of upward adjustment in Hong Kong's electricity tariff in the future, and members of the public may face a substantial level of increase in electricity tariff.  The new-term Government will commence negotiation with the two power companies next year in respect of the Interim Reviews of the Scheme of Control Agreements (SCAs) and the Five-year Development Plans, which are closely related to people's livelihood, the environment and the economy and will affect the sustainable development of Hong Kong in the future.  In this connection, will the Government inform this Council:

(a) of the timetable for conducting the Interim Reviews of SCAs and formulating the Five-year Development Plans next year with the two power companies, as well as the contents of the Interim Reviews proposed by the Government; whether the authorities will consult the public on SCAs and the Five-year Development Plans of the two power companies; whether the authorities will make public the background information (including data on projected electricity sales and maximum electricity demand in Hong Kong for the next decade) on Hong Kong's electricity market; if they will, of the details; if not, the reasons for that;

(b) given that it has been reported that CLP Power Hong Kong Limited has claimed that with the signing of the Memorandum of Understanding on Energy Co-operation between the SAR Government and the National Energy Administration in 2008, Hong Kong's long-term reliance on natural gas supply from the Mainland and uncompetitive fuel prices would result in drastic increases in local electricity tariff, whether the authorities have assessed the impact of the increasing use of natural gas for power generation on the investment on fixed assets of the two power companies in the next decade; if they have, of the details; whether the authorities have estimated if the two power companies need to install additional new natural gas-fired generation units and transmission and distribution networks as well as the expenditure involved; if they have, of the details; and the other impact of the contents of the Memorandum of Understanding on Energy Co-operation on Hongkong Electric Company Limited; and

(c) whether the authorities will make reference to the experience of overseas electricity markets and introduce a new bill to determine the charges to be imposed by an electricity network owner on a third party for hiring its transmission facilities, with a view to implementing the segregation of the generation sector from the network sector in the electricity market; whether the authorities have assessed the feasibility of making direct government investment in facilities for full interconnection of the networks of the two power companies or in the installation of energy-saving equipment in the buildings in Hong Kong to reduce the expenditure on electricity tariff?



     It is Government's energy policy objective to ensure safe and reliable energy supply at reasonable prices, while minimising the environmental impact caused by the production and use of energy.

     All along the Government has been adopting the Scheme of Control Agreements (SCAs) signed with the power companies to regulate the electricity market.  The existing SCAs were signed in 2008 for a term of ten years. In signing the SCAs in 2008, the Government has reduced significantly the rate of permitted return calculated on the average net fixed assets of the power companies, resulting in a saving in electricity charges of over $5 billion each year. In addition, improvements were made to the SCAs in many other aspects, for example, in encouraging the use of renewable energy, tightening the cap on the Tariff Stabilisation Fund (TSF) balances, introducing a new emissions performance linkage mechanism, and further promoting energy efficiency, etc.

     Electricity supply is an important infrastructure to the society and necessary services for the public's daily life.  Electricity tariff also affects the development of industries and businesses in Hong Kong, as well as the daily expenses of domestic households.  Therefore, in dealing with any electricity-related investments or tariff review proposals, the Government would stringently carry out the gate-keeping duties under the framework of SCAs.  In summary, our works are carried out at two levels and with five focus areas.

     At the first level, we scrutinise the five-year Development Plans of the power companies.  With the assistance of independent energy consultants, we would be meticulous in examining the capital investment proposals submitted by the power companies in terms of necessity, timing and cost effectiveness, with a view to avoiding investments that are excessive, premature, unnecessary or unreasonable.  

     At the second level, we work to ensure that electricity tariffs are maintained at a reasonable level by examining the tariff proposals of the power companies in annual tariff reviews.  We would examine the capital investment and operating costs, as well as the major supporting data and justifications submitted by the power companies, and strive to exclude from the forecasts the components which are considered inappropriate in the tariff increase proposal submitted by the power companies annually.  

     Our work focuses on five major areas:

     First, to scrutinise the capital expenditure of the power companies to avoid increase in profits through excessive, premature or unnecessary investments.  One of the examples is that we have taken out the investment in a liquefied natural gas terminal project costing $10.4 billion from the 2008-2013 Development Plan of CLP Power Hong Kong Limited (CLP).  

     Second, to request the power companies to exercise stringent control over operating costs, with a view to preventing them from passing unnecessary costs onto consumers.

     Third, to review the Fuel Clause Recovery Account (FCA) of the power companies.  In the years when the tariff increase pressure is relatively significant, we would request the power companies to lower the tariff increase by assuming a bigger forecast deficit balance in the FCA, with a view to moderating the tariff impact on people's livelihood and businesses. Taking the 2012 tariff review as an example, in response to our request, both power companies agreed to increase the FCA deficit balances to ameliorate the tariff increase. The 2012 year-end FCA deficit balances projected by CLP and Hongkong Electric Company Limited were $800 million and $1,400 million respectively, which have helped contain the increase in the fuel clause charges.

     Fourth, to make proper use of the TSF.  The purpose of the TSF is to accumulate the excess of net revenue of the power companies over the permitted return, so as to provide funding, when necessary, to ameliorate the impact of tariff increases on the consumers.

     Lastly, to pay attention to whether the power companies will have additional revenue in the following year, to ensure that the related sum will be recorded in the books without delay to benefit the consumers as soon as possible.  

     We have, in past few years, made our best endeavour in carrying out the gate-keeping measures mentioned above; and will continue to do so in the future.

     Our replies to the questions raised by the Hon Kam Nai-wai are as follows:

(a) In accordance with the SCAs, we will conduct an interim review of the SCAs and examine the new Development Plans prepared by the power companies within 2013. We would continue to listen to the views of Honourable Members and the public, and to ensure that electricity supply in Hong Kong achieves the policy objective of striking a balance among safety, reliability, reasonable price and environmental protection.  We would, in accordance with the usual practice, report to the Legislative Council when appropriate. In the discussion of the power companies' new Development Plans, we would make public the relevant background information.

(b) In August 2008, the National Energy Administration and the Hong Kong Special Administrative Region Government signed the "Memorandum of Understanding on Energy Cooperation". This guarantees the long-term stable supply of clean energy, which includes natural gas from the Second West-East Pipeline (WEPII).

     The new gas source from WEPII mainly serves to support the operation of CLP's existing gas generation plants. According to CLP, the existing natural gas source from Yacheng will be further depleting in the coming year. Hong Kong needs to explore new gas sources to sustain existing gas-fired power generation. At the same time, the WEPII project also increases the gas delivery capacity. This allows Hong Kong to increase the use of natural gas for power generation, which works to reduce emission and improve air quality.  Furthermore, in scrutinising the "Second Technical Memorandum for Allocation of Emission Allowances In Respect of Specified Licences" formulated under the "Air Pollution Control Ordinance" in end 2010, the Legislative Council supported the increased use of natural gas in power generation by making full utilisation of existing gas-fired units, which would further reduce emissions from the electricity industry.

     Implementation of "Memorandum of Understanding on Energy Cooperation" per se would not require the two power companies to build new gas-fired power generation units.  We believe Members would recall that the WEPII project which came onboard following the signing of the "Memorandum of Understanding on Energy Cooperation" in 2008 had replaced CLP's original proposal of a $10.4 billion liquefied natural gas terminal project, and significantly reduced the tariff increase pressure that might otherwise be imposed by the related capital investment.

(c) In signing the existing SCAs with the two power companies, the Government has undertaken to study the open market structure and regulatory framework, and enhancement of interconnection, etc. within the regulatory period.  We would make preparation in the current regulatory period, introduce competition to the electricity market when the market conditions are in place, and carry out relevant studies and explore related matters.  In accordance with the timetable stipulated in the SCAs, the Government will discuss with the two power companies market readiness, potential future changes to the electricity supply regulatory framework and transition issues before 2016.

     In addition, the Government makes the best endeavour in enhancing buildings energy efficiency through implementing a new piece of legislation and providing financial incentives.  For example, we received very positive response to the Buildings Energy Efficiency Funding Schemes launched in April 2009.  As at end February 2012, over 890 applications have been approved with Government subsidies amounting to over $350 million, benefiting over 5,700 buildings.  This helps bring about savings of 150 million units of electricity per annum and reduce carbon dioxide emissions by about 105,000 tonnes.

     On the other hand, the Buildings Energy Efficiency Ordinance will commence full operation in September this year.  In the first decade of implementing the new legislation, we expect to achieve savings of more than 2.8 billion units of electricity in new buildings, and reduction in carbon dioxide emissions by more than 1.96 million tonnes.

Ends/Wednesday, May 23, 2012
Issued at HKT 13:23


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