Reform Proposed for Electricity Market to Protect Consumer Welfare

4 December 2014
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Full report (English only)   | Executive summary  | Presentation

The Consumer Council recommends a progressive and holistic approach to review and reform the electricity market in Hong Kong to tackle the twin problems of combating environmental issues and mitigating the impact of any inevitable price rises that this may entail. The solutions must consider Hong Kong's particular circumstances, notably its physical constraints.

The existing method of regulation through the Scheme of Control Agreements has, in many aspects, served Hong Kong well providing reliable and affordable supplies of electricity. However, it is anticipated that the current regulatory regime will not be flexible enough to adapt to the new environmental policy supporting emission reduction over the next 30 years.

Following extensive reference to international experience in electricity market reform, the Council is convinced there is no one model that could address perfectly the competing objectives of reliability, affordability and cleanliness of energy without a conscious trade-off in policy decision.
The Council concludes the need to reform current regulatory system of the electricity market but the change should take place incrementally with an emphasis on ensuring the merits of the existing system are not lost and new objectives are met.

Meaningful public participation and transparency in the regulation are two imperatives underpinning the future regulatory framework towards enhanced consumer welfare.

Fair access to networks is a critical enabler for potential new generators to access the established network at non-discriminatory conditions should the Hong Kong Government opt for more competition.

An expansion in interconnection will both improve economic efficiency among the incumbent power companies and create feasibility towards generation market liberalization.

Integrating these efforts on the supply side coupled with active demand side management that provides incentives for higher efficiency performance and energy saving is a more sustainable and secure way forward for the long-term development of the electricity market in Hong Kong.

Conclusions and suggestions drawn in the study were intended to offer the Council's view on policy direction. The Chairman of the Council's Competition Policy Committee, Mr. Thomas CHENG said, "It is our sincere hope that the study, from consumer perspective, will provide an important and comprehensive collective set of views to stimulate a structured discussion to advise the Government on the most suitable way forward."

This was borne out in a 170 page study report aimed to examine the three broad elements of competition, sustainability and regulation in the electricity market of Hong Kong.

The study was undertaken with expert advice of the Consumers International, the global federation of consumer organizations, by an expert group formed specifically to look into the international experience of electricity regulatory reform and its implications for consumers. The markets covered included those in Australia, Mainland China, in particular the UK, Germany and France.

Locally, the project engaged extensively stakeholder groups, including the chambers, professional and industry associations, the power companies, the environmental groups, academia as well as the Government. Despite the very extensive engagement, the study faced limitations in accessing commercially sensitive information for in-depth analysis.

Regulation

Experts observed that the current structure and regulation in electricity market under the Scheme of Control (SoC) system is not fair to consumers in that the two power companies are allowed to earn a high risk-free permitted profit and to pass-on business risks to consumers to an undue degree. It is also not flexible enough to meet the new environmental goals on carbon emission reduction in response to a growing concern on particulates and greenhouse gas pollution.

The Council suggests much stronger consumer engagement in the development of energy policy and market rules. It is important for policy makers and regulators to acknowledge the disparity in consumer interests in the energy market, for example between commercial and household and between different income levels among household consumers.

Further, study findings accentuate the importance of transforming the existing regulatory regime with concerted efforts to achieve better results in environmental sustainability and to diversify generation fuels into alternatives, like natural gas, renewables, and biomass.

Retail Market Liberalization

Liberalization in the retail electricity market, however, presents no sound solution in this regard as overseas experience has found retail competition to be to the detriment of consumer interests due to the intrinsically uncompetitive nature of electricity and imbalanced bargaining power.

Market liberalization overseas has been shown to confer more benefits upon commercial users than domestic consumers. Hong Kong could face similar disappointing consequence given its limited possibility for competition and relatively small and geographically constrained market.

Generation Market Liberalization

Liberalization in the generation market, on the other hand, may offer more promises to local consumers in the long run whereby a diversified fuel mix would support fuel security and better price stability.

Generation market liberalization cannot be realized without an open and fair access to the network among the new and incumbent providers. Expanding interconnection would allow the generation mix to be optimized across incumbent systems, bringing improved economic efficiency by being able to reduce reserve while retaining reliability, benefiting all consumers in Hong Kong, Kowloon and the New Territories.

Sustainability

The report brings into play diversified energy sources as power station fuels, including natural gas, renewables, nuclear and biomass, which all have been proven to be significant in reducing emissions of greenhouse gas.

Given rapid increases in global reserves, the presence of more natural gas pipelines connecting to Hong Kong, and technological advancement in small-scale electricity co-generation, the Council encourages further study to look into open access to the pipelines and the viability for enabling small-scale co-generation for wider commercial use.

Currently, renewables accounts for only 1-3% of the electricity supply in Hong Kong. The Council believes that greater use of renewables is worth further exploration as the global cost for renewables is on a downward trend and new technologies are emerging.

Purchasing electricity from Southern China does offer another possibility so long as favorable national policy and tighter inter-governmental collaboration can clear the uncertainties in supply shortage and cleanliness of fuel. The option of having new nuclear facilities poses uncertainty with the rising capital investment costs and associated cost overruns and long-term nature of the investment.

Demand Side Management & Energy Efficiency

In addition to the rising block tariff, alternative financial incentives can also be offered to alter consumer behavior, e.g. to reduce demand at peak times and to choose energy efficient appliances and hence to keep consumption below critical level.

In Hong Kong, air-conditioning accounts for around 30% of the total electricity consumption. In summer, increasing the thermostat temperature of air-conditioning system by just 1 degree can reduce related energy consumption by around 10%, equivalent to 3% of the total electricity consumption.

Successful demand side management may well also improve security of supply and uphold the existing standards in security and reliability as a result of reducing demand especially at peak times. This should help keeping the plant margin and reserve capacity at a much more "affordable" level.

Protection for the Low-income Consumers & Fuel Poverty

The Council has also expressed concern over the need to protect the under-privileged from rising fuel bills, in particular those living in multi-occupancy dwellings and households in fuel poverty.

Subject to the same Rising Block Tariff (RBT) structure, those multi-occupied households that share a single meter are paying higher tariffs disproportionate to their actual consumption, because taken together, they are "high-users".

There is a pressing need to quantify and locate the extent of "fuel poverty" so that policies can be put in place that will ensure low-income households can afford the power they need to protect their well-being. A well-targeted energy efficiency program should also be explored so that the low-income households can receive the energy service that they need but for a lower consumption of power.

Conclusions

The report recommended a holistic review of the current regulation regime to examine in detail a number of key areas to assess their implications and benefits to electricity users in a coherent and integrated approach.

The Council has also proposed the formation of an Energy Commission to tackle the issues raised in the report, and ultimately to meet the future challenge of competing objectives of the Government's energy market reform policy.

Greater representation of consumers, together with stronger transparency and impartiality in the regulation process, will be crucial to transform the current regime to one that enhances the welfare of Hong Kong consumers.