Power play: Hong Kong may buy more Chinese electricity in challenge to tycoon-backed utilities

HONG KONG, July 23 Tue Jul 22, 2014 5:00pm EDT

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HONG KONG, July 23 (Reuters) - Hong Kong is pushing to boost electricity imports from mainland China to reduce pollution and the dominance of two local utilities backed by powerful families, say industry experts who have been involved in consultations with the government.

Ageing coal-fired plants, which supply over half of the city's electricity, are due to be shut from 2017 and Hong Kong is weighing whether to more than double its mainland imports or nearly triple the use of natural gas in local power generation to meet 60 percent of its power needs - roughly equivalent to demand in New Zealand.

The government recently wrapped up three months' of public consultations and is expected to make a decision this year.

Some of those involved in the discussions between officials, power executives and other stakeholders said the government was leaning towards the import option. Officials from the Environment Bureau, Hong Kong's energy policymaker, discussed at length the advantages of what they called the "grid purchase" option, while highlighting the downside of the so-called "local generation" option, the people said.

"They would prefer to open up the market. And the only way is through connecting with China," said Johnny Chan, a professor specialising in energy and environment with the City University of Hong Kong, who took part in those discussions.

Plugging Hong Kong into the Chinese grid would create competition for the city's dominant local utilities - CLP Holdings, backed by the wealthy Kadoorie family, and billionaire Li Ka-shing's Power Assets Holdings - and further strengthen Hong Kong's ties with mainland China at a time when many query Beijing's growing influence in the semi-autonomous territory.

Hong Kong already meets over a fifth of its electricity demand via a dedicated line from the Daya Bay Nuclear Power Station in the southern Chinese province of Guangdong. Hong Kong's grid is not interconnected with China Southern Power Grid (CSPG), which supplies electricity to Guangdong and four other southern provinces.

CSPG and State Grid Corp, China's biggest electricity supplier, have acquired significant stakes in units of Hong Kong's dominant power companies. CSPG last year bought a 30 percent stake in CLP's power unit Castle Peak for $1.6 billion, while State Grid spent about $1.2 billion to buy into the local initial public offering of HK Electric , a spinoff of Power Assets, early this year.

GREATER INTEGRATION

Importing more electricity from China would limit the scope for CLP and Power Assets to grow locally, analysts say, forcing the two firms, which have a combined market value of $40 billion, to speed up their diversification away from Hong Kong where they have enjoyed attractive, guaranteed returns for decades under what is known as the Scheme of Control.

In an emailed reply to Reuters, the Environment Bureau said it has "an open stance" on the two options and will consider the more than 86,000 submissions it received from the public consultations before making a decision. But it noted drawbacks of going ahead with increasing local gas-fired capacity.

"Allowing existing power companies to construct new generating units, however, may add to the potential ... costs that consumers will have to bear," it said. "There will be more constraints in introducing competition to the electricity market if we decide to go for this fuel mix option."

Some industry professionals and local business communities complained about a lack of information in the consultation paper, which they say prevented them from making an informed decision. Some call for a more flexible mix of mainland power and local gas-fired generation. Barring overwhelming opposition, experts say, the government would go for the import option, or a watered-down version of that, as the "local generation" alternative would entrench the utilities' duopoly.

CLP and HK Electric largely dismissed the "grid purchase" option, warning this could compromise Hong Kong's world-class power supply reliability. Elaine Wong, a HK Electric spokesperson, said it would expose Hong Kong to the risk of "cascading power interruptions or even massive blackouts."

CLP customers experience an average unplanned power interruption of just 2.3 minutes per year, versus 138 minutes for customers of China Southern Power Grid.

No one from State Grid and CSPG could be reached for comment for this article. In March, Tan Xinjian, an official at state-controlled China Resources Power wrote in a magazine published in mainland China that the Hong Kong government or Chinese state utilities should take over CLP and Power Assets' Hong Kong assets in 2018 when the Scheme of Control expires as the system has fuelled wasteful spending. A China Resources Power official said the article was Tan's personal opinion rather than the company's. Tan could not be reached for comment.

LOWER RETURNS

Under the existing Scheme of Control, CLP and HK Electric receive an annual return of 9.99 percent on net fixed assets - putting HK Electric among Asia's leading electric utilities by return on equity, according to Thomson Reuters data.

While the scheme, initiated by the British government in the 1960s to encourage private investment ensured reliable power supply, critics say it's too generous and has led to over-investment. The scheme allows utilities to pass on fuel and other costs to users, resulting in recent tariff hikes that have stoked social tension in a city with a yawning wealth gap.

Hong Kong power tariffs are still significantly cheaper than in cities such as Singapore and London, and electricity bills are a fraction of average household expenditure.

Others say that imports don't offer any clear environmental or cost advantage, pointing out that 62 percent of mainland Chinese plants connected to the southern grid are coal-fired, and the cost of building an interconnector would exceed the estimated $1 billion needed to add local gas-fired capacity.

($1 = 7.7498 Hong Kong Dollars) (Editing by Anne Marie Roantree and Ian Geoghegan)

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