Background
1. In March 2014, the Environment Bureau, released a consultation paper entitled "Planning ahead for a Better Fuel Mix; Future Fuel Mix for Electricity Generation". The Consumer Council (the Council) welcomes the opportunity to provide its comments on this important issue facing Hong Kong consumers.
2. The Foreword to the Consultation Document succinctly states the dilemma facing Hong Kong in relation to maintaining quality of life and supporting economic competitiveness;
"For our city to thrive, we cannot do without safe and reliable electricity provided at an affordable price. Alongside these objectives, we also want a cleaner environment. We are considering how the fuel mix for electricity generation may be changed to better serve our population and economy in future having regard to the need to strike a balance among these competing policy objectives. The issue is important and imminent as our future fuel mix will help shape the contours of our electricity market in the long run.
Regardless of the fuel mix that we would collectively decide upon for Hong Kong, electricity tariffs will likely increase due to wider use of cleaner but more expensive fuel, and as existing electricity generation facilities are to be retired. Nevertheless, we believe Hong Kong can afford to pay more for cleaner electricity in order to further improve our environment."[1]
3. Expressed another way, the question is; "How can Hong Kong design and implement policies which provide safety and reliability in the electricity supply system but at prices which do not exceed the reasonable capacity of consumers to pay while at the same time acting to secure a clean environment and sustainable reduction of greenhouse gas emissions?"
4. Hong Kong is not alone in facing this set of issues. Nor is it alone in the recognition that possible solutions to one set of problems (such as de-carbonising the economy) can easily exacerbate others (such as keeping electricity prices low).
5. The Council is well aware that the current Scheme of Control Arrangements with the two power companies will expire in 2018 and the Government will have to review the arrangement of the post-2018 electricity market. Consumers eventually foot the bill for energy policy and any consequences of market development through payment for energy consumption and related policy expenses. Too often however, consumers are not fully aware of the implications on future policies which directly affect them. Most of the time the supply side are much more active in voicing out their positions.
6. To have a better understanding about the impacts on Hong Kong consumers amongst the anticipated changes in the electricity market, the Council starts a study in gathering overseas experience about reforms in electricity market and impacts of their environmental policies in the energy sector on consumers with a view to facilitating the broader energy policy debate that specific issue of future fuel mix is discussed in the stakeholder engagement stage.
7. The Council is well aware of the policy trade-offs. It is not in the interests of consumers to have prices which are so low that investments are inadequate to ensure reliability and safety. Nor is it in the interests of consumers to pay prices well beyond a market competitive level. The complicating factor with issues relating to energy is the need to factor in the less visible costs of pollution and greenhouse gas emissions. It is thus appropriate for the Council to present its views and represent the interests of an important sector of the community.
8. The Council engages overseas experts in the study. During May 2014, consultants retained by the Council visited Hong Kong to consult a range of stakeholders with respect to the electricity market regulation and fuel mix options for Hong Kong. Consultants retained by the Council detailed questions probing aspects of the Consultation Document. They met with a wide range of stakeholders to inform themselves as to local perceptions and to explore the issues raised in the Consultation Document.
9. The Council's views presented in this response were drawn on the preliminary work undertaken by far.
Overview and Comments
10. The Council would like to emphasise our understanding about the difficulties faced by the Government in articulating a future fuel mix strategy which comes close to achieving all of the energy policy goals already described. Our comments are meant to assist the discussion by raising for consideration some ideas generated from the experience in other jurisdictions, which in the Council's belief, are worthy of consideration in the context of Hong Kong.
11. Chapter 1 of the Consultation Document begins on a somewhat limiting note. The very first paragraph observes that:
"Hong Kong does not have any indigenous resources for electricity generation" it goes on to say that the "governments energy policy is to ensure that the energy needs of the community are met safely, reliably, efficiently and at reasonable prices, while minimising the environmental impact of electricity generation"[2]
12. Thus, from the outset, the potential for various forms of renewable energy, energy efficiency and a range of demand-side options for reduction of energy consumption are de-emphasised as possibilities for consideration for Hong Kong's future energy mix.
13. For many years the Hong Kong's electricity system has served it well providing reasonable prices and internationally high levels of reliability. However, as noted in the Consultation Document substantial upward cost pressure can be expected with predictions of a doubling of generation costs in the coming years. [3] Taken with the goal of phasing out coal-fired thermal power plants and ensuring low carbon emissions to meet air quality standards and decarbonising of the economy, the challenges are great.
14. Thus looking ahead there is no "business as usual" option to address the challenges. Sound measures are needed together with innovation to implement them. Effective though current policies have been, they can be improved and environmental issues require new arrangements. The Council proposes incremental changes building on the strengths of the existing system, whereby the consultation paper on fuel mix is a starting point but innovation and lateral thinking should be added to the mix. Rather than settling for Option 1 or Option 2, community groups and policymakers should consider other options which may serve to reduce predicted price pressures or which better solve environmental and sustainability challenges. The Council therefore puts forward comments on several matters:
(a) Reliability
(b) Affordability
(c) Renewables
(d) Constraint Assessment of Option One and Option Two
(e) Energy Efficiency
(f) Regulation
Reliability
15. While the Council notes that some people strongly oppose compromising the high level of reliability in the delivery of electricity in Hong Kong, the consultation fails to provide any discussion or data on the cost of achieving this level of reliability. It is important in the context of evidence-based policy-making that the actual cost of reliability should be quantified and the question of whether equivalent levels of reliability might be achieved at considerably lower cost. Measures that might be taken to ensure reliability but at lower cost to consumers can be found in many jurisdictions around the world. Some measures, such as reducing plant margin could be implemented without having any adverse impact on reliability. For example, to substitute for spinning reserve, there may be cheaper ways of achieving the requisite standard through demand-side management (in which commercial and even households might be offered financial incentives for reducing demand at short notice to deal with occasional plant or network problems). One further suggestion to explore is the closer integration of the two Hong Kong systems and augmenting the connection to the South China grid. These measures have the potential to reduce the cost of achieving the requisite standard at considerably lower costs.
Affordability
16. As previously noted the Consultation Document foresaw a doubling of generation costs, which may perhaps lead to an increase of 60% in domestic consumer prices and possibly more for high-consumption consumers. At paragraph 1.10 of the Consultation Document, it is noted that:
"As electricity is an essential utility for all walks of life, we must strive to ensure that it is provided at a reasonable price." [4]
17. Paragraph 1.12 goes on to claim that:
"Households in Hong Kong on average spend less than 2% of their expenditure on electricity supply"[5]
18. While correct as a summary data, this figure masks the distributional effect that increasing electricity tariff may impose disproportionate hardship on tens of thousands of families living on the margin of survival with relatively high costs of accommodation and energy consumption. The issue of affordability for low-income households will be explored in the Council's study. Analysis in more detail and overseas experiences and their referenced solutions will be provided in the final report.
Renewables
19. Perhaps one of the most significant areas of concern about the Consultation Document is the limited potential which is assigned to renewable energy as part of the energy mix for Hong Kong. During the engagement with stakeholders, the Council and overseas consultants encountered significant disagreement about the scope for renewables among stakeholders.
20. From the Consultation Document and some commentators felt that renewables are unlikely to reasonably provide more than just a small proportion of electricity supply (1-3%). Both vertically integrated electricity operators stated that ambitious plans for offshore wind could provide between 150 and 200 MW of supply. However, some stakeholders were far more optimistic about the potential for renewables to form a material part of the future fuel mix of Hong Kong (estimated renewables can contribute 10% or more to the total supply). The Council is not in a position to provide a clear recommendation or advice on this issue due to a lack of data and diversity in views.
21. Just as the cost benefit of the current reliability standards was not quantified, power companies do not provide sufficient evidence to support its contention that renewables and in particular wind power are expensive. The Council recommends the government to conduct some innovative market testing methods to determine whether there is a greater potential for renewables. An example is the need to test the market perhaps with feed in tariffs, as experience elsewhere suggests the actual scope for renewable energy is often larger than expected. Besides, technical changes, for example, new building materials, might increase the scope and establishing access will allow these new options to be utilised quickly and efficiently.
22. For larger renewables, e.g. off-shore wind, we suggest to consider a call for tenders with a maximum price specified. The innovative dimension suggested is that tenders could be called from any international supplier of wind power and not just the incumbent operators. International competition and the rapid growth of specialist wind farm constructors and new technology may lead to price, quality and time-lines which are more favourable than policymakers have expected.
23. The Council accepts the general proposition put forward by many stakeholders that Hong Kong's essential high-rise environment limits the scope for rooftop solar photovoltaic technology. Nonetheless, the Council suggests that the potential for solar energy not be written out of the fuel mix, given the large footprint commercial developments such as hotels and commercial establishments, and the considerable expansion of construction in the New Territories.
Constraint Assessment of Option One and Option Two
Interconnector to South China Grid
24. The Consultation Document includes without supporting data the interconnector option and options such as construction of specific facilities. In addition the Consultation Document does not specify the marginal generation fuel which is likely to be used to supply electricity under Option 1. References to existing hydro capacity may not be the best benchmark as there is no feasible way for ensuring that new generation required to provide grid power is derived from a particular generation source.
25. Other important pieces of information missed in the Consultation Document but nonetheless essential in decision-making includes details of the proposed cost, whether the interconnector would operate as a direct current or alternating current system, whether the interconnector would be sub-sea or over-land, how power would be made available to both systems, whether the power would be base-load or dispatched.
26. Because of the absence of much needed information, the Council is not in a position to give firm views about the merit of the interconnector option. The Council believes that more data should be provided to assess the choice on the fuel-mix.
27. Increase Demand of Natural Gas
28. According to the Consultation Document (Chapter 2), the current fuel mix of Hong Kong consists of 22% natural gas. If adopted, Option 2 would see this proportion increased to 60% which may provide the level of greenhouse gas emission reductions sought under the environmental plan.
29. The method of providing this additional gas however should not be unduly restricted. In addition to possible future supply through existing gas pipelines and from the current shared LNG terminal, the possibility should remain open for other options to maximize procurement and transmission at the lowest possible costs. The consultation paper expresses concerns about the security of supply of LNG and price volatility. It is true that LNG as an increasingly globally priced commodity will suffer some price volatility, however it is also the case that vast new supplies of LNG are becoming available in the Asian region.
Energy Efficiency
30. It is noted that Chapter 1 of the Consultation Document negated indigenous resources for electricity generation. In a number of respects it should be reviewed further. A number of studies suggest that there is greater potential for renewable energy than is currently recognised. In a sense, a strong commitment to energy efficiency could serve as a major source of "virtual electricity". Sometimes described as "Nega-Watts", measures which substantially reduce demand particularly at peak periods are equivalent to new generation. Not only can energy efficiency be proxy to new generation, but also it reduces greenhouse gas emissions and related costs.
31. Around the world, it has been noted on many occasions that rising energy prices will increase the pay-off for energy efficiency schemes in terms of consumer costs, social welfare and environmental impacts. In recommending that energy efficiency be included in the fuel mix consultation the Council believes it essential that representatives of consumers, welfare agencies and commercial operators be involved from the outset in planning energy efficiency schemes. Put another way, there is a need to plan from the 'bottom-up' rather than the top-down approach implied in the fuel mix consultation paper.
32. To further illustrate the potential of energy efficiency to contribute to the energy policy goals of Hong Kong, a number of stakeholders told the consultants that should Hong Kong pursue aggressive, world best practice building energy efficiency standards, huge energy savings can be made and continue to be made. The Council understands that much has been achieved and are persuaded that much more can be done in future. However, public support would be required to realize the initiative. As noted earlier, energy consumption foregone represents virtual energy generation.
Regulation
33. A unique feature of the electricity supply system of Hong Kong is the contract based, bilateral regulatory system. The Scheme of Control sets out the obligations of the power companies, prescribes returns to shareholders on the arrangements by which the government monitors the power company's financial affairs. As noted at paragraph 1.16 of the Consultation Document:
"The current scheme of control arrangements run for a term of 10 years and will expire in 2018, with an option exercisable by the government to extend for 5 years until 2023. The government has undertaken to carry out preparatory work, including studying the feasibility to open up the market, within the current regulatory period, before implementing any changes to the post 2018 electricity supply regulatory framework. The outcome of the present consultation on future fuel mix would set the scene for a review of the post 2018 regulatory framework for the electricity market."[6]
34. In many respects it may be more effective to release the Future Fuel Mix for Electricity Generation Consultation Document after discussing possible market deregulation or the introduction of competition to the electricity supply system.
35. Should the government wish to market test certain propositions, such as the viability of new wind farms or competitive third-party entry to the Hong Kong system, this may double the efforts once a prescriptive fuel mix policy is adopted. Potential new entrants to the market for example may wish to bring a new technology or distribution strategy which could be foreclosed and ruling out such options is not consistent with the best policy outcome.
36. The Council suggests a review of the current regulatory system, to consider issues such as the possibility for non-discriminatory access to the network or a case for closer integration of the two systems. There may also be a case to allow the two companies greater access to each other's territories and to separate operation from the ownership of the assets, for example through creation of Independent System Operators. These issues will be dealt with more fully in the Council's final study report.
Conclusion
37. Hong Kong, along with advanced economies around the world is currently grappling with the dilemma of implementing energy policies that ensure safe, reliable, affordable and environmentally sustainable outcomes.
38. The Future Fuel Mix for Energy Generation Consultation Document seeks to engage all stakeholders in the policy development process. It does this through a clear statement of the background to energy supply in Hong Kong and a clear articulation of conflicting objectives in future policy directions.
39. The Council believes the Consultation Document is a good starting point for future development of the sustainable energy policy for Hong Kong. The Council concludes however, that neither Option 1 nor Option 2 stands as the best possible platform for energy policy to proceed in Hong Kong. For the reasons spelt out in this paper, the Council is unable to provide fully argued alternatives to the options within the Consultation Document. Given the limitations, a range of suggestions are put forward and it is hoped that this response might provide stimulations and further inputs for continuous discussion in the wider public, and serving forwards the ultimate benefits of consumers in Hong Kong.
Footnotes:
1 Planning Ahead for a Better Fuel Mix: Future Fuel Mix for Electricity Generation Consultation Document Foreword
2 Op. cit. at Paragraph 1.1
3 Op. cit. at Paragraph 4.27 in relation to gas fired generation
4 Op. Cit. at page 5
5 Op. Cit. at page 5
6 Op. Cit. at page 8
