20 April 2019
Hong Kong's new agreements with local electricity suppliers strike a balance between interests of the power producers and the public’s demand for lower energy prices. Photo: HKEJ
Hong Kong's new agreements with local electricity suppliers strike a balance between interests of the power producers and the public’s demand for lower energy prices. Photo: HKEJ

New pacts with power utilities: Not perfect but still acceptable

The government recently renewed its “Scheme of Control Agreements” (SCAs) with CLP Power and Hong Kong Electric Company (HEC) under which the permitted rate of return of the two electric power companies has been reduced to 8 percent, from 9.99 percent previously, of the total value of their average net fixed assets.

In the meantime, the period of validity of the new agreements has been extended to 15 years, with their expiry set for 2033 after commencement late next year. The longer time-frame for the new pacts, the government said, is aimed at ensuring a more predictable and stable operating as well as investment environment for the two power utilities.

According to Secretary for the Environment, KS Wong, it is expected that local households can enjoy at least a 5 percent reduction in electricity prices once the new SCAs come into effect.

Now, the “Scheme of Control Agreement” has often been dubbed the “Scheme of Profit Agreement”, as under the agreement the two local electric power companies have been making whopping profits.

For years there have been calls among society for the government to review the SCAs and lower the permitted rate of return.

To address the public’s concerns, the Environment Bureau had commissioned two different private consultancies to carry out studies on the feasibility of lowering the permitted rate of return and its implications for the local electricity market. According to the recommendations made by the studies, it would be more in line with public interests if the permitted return is lowered to 7 to 9 percent.

It appears the government has steered a middle course this time by lowering the permitted return to 8 percent.

In theory, energy prices are likely to fall once the permitted return is lowered. However, in reality it is not necessarily the case, as the amount of the profits of the two power companies is in fact proportional to the value of their fixed net assets.

In other words, the more they invest in their fixed assets, such as power plants, the more profits they are allowed to make under the terms of SCAs.

As such, we believe Secretary Wong could be a bit too optimistic in his forecast for future energy price cuts. It is because both CLP and HEC are planning to invest hugely in their power plants and upgrade facilities in the near future, through initiatives such as replacing most of their coal-fired generators with the less polluting but more expensive natural gas-powered ones.

Such huge investment will inevitably further boost the value of the net fixed assets of the two power companies, and in turn, allow them to make more profits under the SCAs.

But even so, we still welcome the conclusion of the new SCAs as we believe the new agreements did, to a considerable extent, strike an acceptable balance between the profitability of the two power companies and public interests.

Meanwhile, the newly concluded SCAs also touch on the subject of how to foster energy efficiency and promote energy-saving measures. According to the Environment Bureau, it is going to discuss with the two electric power companies the issue of opening up their power grids.

Wong said one option currently on the table is that in the future individuals or private businesses can invest in renewable energy sources such as wind power or solar power, and then sell the electricity generated by the facilities to CLP and HEC, which will then resell it to their customers.

If the two power companies eventually agree with the government on this arrangement, it can be seen as a first positive step towards opening up our energy market to more competition, which is definitely good news for the citizens as it is likely to drive down electricity prices in the long run.

However, investing in renewable energy sources can be a costly and high-risk undertaking. In order to protect the rights of investors, the government must make sure the two power utilities won’t go back on their word regarding the prices at which they agree to purchase clean energy in the future.

This article appeared in the Hong Kong Economic Journal on April 26

Translation by Alan Lee

[Chinese version 中文版]

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