Policy Statement & Submission

March 31, 2006


Mr Stephen Ip
Secretary for Economic Development and Labour
Economic Development and Labour Bureau
Room 815, Central Government Offices, West Wing
Lower Albert Road, Central
Hong Kong



Dear Stephen,

The Hong Kong General Chamber of Commerce strongly supports the Stage I Consultation conclusions, and overall Government policy, regarding the importance of ensuring that Hong Kong enjoys a reliable, safe and efficient electric power supply, and that such supply be provided at reasonable prices and with minimal environmental impact. We believe getting the right mix in prioritising these objectives is of primary importance.

One of the most important parts of this prioritisation, indeed probably the single driving factor, is pollution. We have no greater broad-based threat to our future prosperity, competitiveness and health than the quality of the air we breathe. We recognize that this consultation exercise is not about the environmental impact of electric power generation, but we feel we must seize every opportunity to drive home the main message of business and the community: The deteriorating environment is harming our businesses and our children. We must do it better, and must do it quickly.

We need a policy roadmap that actively encourages the power companies to undertake the necessary work to ensure that we both reduce our own pollution and continue to enjoy extremely reliable and safe electric power. We need an energy strategy for Hong Kong that considers a broad range of issues in multiple time frames, including regulatory structure, fuel mix, cross-border considerations and management of the transition from our current arrangements to the new model.


Having said that this consultation is not about pollution, and recognising further that it is also not about strategy, we do understand that it is about regulation. However, we feel all three should be more closely linked, particularly during the transition from one Scheme of Control to another. Moreover, we have the impression that the proposals are primarily aimed at reducing tariffs, which we do not believe is in line with the conclusions to the first stage consultation process. As noted in the June 2005 conclusions paper sent to the Legislative Council Panel on Economic Services,

- ". . . reliable and safe supply was the consensus priority, . . ."
- "Some considered reasonable tariffs and minimising environmental impact important;" and,
- "Most of the respondents expressing views on this issue considered the current tariff level reasonable, and only a few held the opposite view."

Reliable, safe and cleaner power
Given the vital importance to our economy of ensuring that Hong Kong enjoys reliable and safe power supplies that minimize pollution, we firmly believe that safety, reliability and environmental considerations rate at the top of the priority list. Hong Kong currently enjoys one of the best power supply reliability records in the world, and does so at tariff rates that are below levels in Singapore, Japan, New York City and much of Europe. This is clearly a strategic advantage, and one that must be preserved. Our environmental impact, however, needs attention.

We are concerned that proposals in the Stage II Consultation Paper would not support future supply reliability, and may not address the community's environmental concerns. The lack of long-term certainty in the regulatory parameters and in the expected rates of return must be addressed, as should the fuel mix and conservation incentives.

A second major concern is the environmental impact of generating power for Hong Kong. We use the phrase ‘for Hong Kong' deliberately, to ensure there is no misunderstanding. Power generated outside the SAR, for use inside the SAR, has no less impact on the environment. Indeed, the reverse is very likely to be the case, and so some think nuclear power may be the best way to go forward in the long run, when weighed against cost, reliability, and environmental concerns. Others are very much against this idea because of the potential safety issues, although experiences in other world cities/developed countries suggest that many old and negative perceptions can be overcome.

Third, we feel there is not enough consideration as to how best to reduce demand. While we recognize that power companies earn profits from selling more power the community, and the environment, benefit from using less power. The single most powerful tool for reducing pollution is conservation, and we strongly urge that this aspect of our energy strategy be given much greater attention. Educating users as to the true cost of excessive consumption is an important first step. Incentivizing conservation and penalizing waste are valuable tools for changing users' behaviour.

Immediate Concerns
In concert with environmental concerns, the top priority should be to ensure that Hong Kong enjoys a safe and extremely reliable supply of electric power. This is particularly important during the transition to the new Scheme of Control and the immediate aftermath (the next 3-5 years). Given the long lead times required to construct new generation facilities, other issues must be considered secondary during this period.

Yet, we find there are serious dangers to supply reliability on the horizon. In particular, we are alarmed that the multi-year planning and construction requirements for new and more environmentally friendly emissions control, fuel supply and power generation projects are not moving forward, due to regulatory uncertainty.

Over time, we may wish to remove coal from the mix of fuels we use to generate electric power in Hong Kong. However, any decision to eliminate this fuel needs to be very carefully thought through. Existing plants would need to be replaced over a planned phase-out period. New plants, perhaps nuclear or powered by more expensive and less readily available LNG, would need to be built. Long-term fuel supply contracts would have to be negotiated and fuel receiving terminals would need to be planned, approved and built. Tariffs would certainly rise. All of this will take many years to accomplish, and a huge amount of investment capital.

Power generation is a capital-intensive industry characterized by very long payback periods. We believe investment decisions made in good faith under existing regulations should be protected against future regulatory uncertainty, and that adequate rewards be available to those investing in the industry. As noted above, changing from the current mix of fuels to one that does not include coal is a very long term and costly proposition. Moreover, the cost and supply reserves for coal are known and attractive, as compared to LNG. There are cleaner ways of burning coal, but ensuring that investors are willing to take on such projects will require an acceptable ratio between risk and reward.

Medium-term Issues
In the process of addressing the most urgent immediate issues, we support a strong role in our energy strategy for encouraging and enforcing conservation, sustainable power generation and emissions controls. As in the case of safe and reliable power supply, a healthy and sustainable environment is a strategic necessity for our city, and one that does not receive adequate attention.

We firmly believe in the principles that the ‘polluter pays' and that the ‘user pays'. Both must be applied fairly if we are to make the changes that future generations require. Because of this, the proposal to reduce returns on investments in emission controls facilities strikes us as environmentally unsound. We are also concerned that existing proposals for retrofitting coal plants now in operation, with state-of-the-art emissions controls facilities, are being unnecessarily delayed.

Long-term Issues
Renewable energy: As should be the case for all segments of society, the business community strongly supports the concept of renewable energy as a component of a comprehensive sustainable development strategy. Hence, we find no reason to object to providing financial incentives to power companies to encourage greater use of renewable resources. Indeed, we would support measures to promote greater conservation on the principle that using fewer resources of all kinds is environmentally and economically superior to using a better mix of renewable and non-renewable resources.

Mainland supplies: We also have no objection to the Government closely monitoring developments in the electricity market in Guangdong. However, in the event that such developments suggest any change to Hong Kong's own power market, we would urge caution and consultation, so as to ensure that our supply and environmental concerns are not compromised. This assurance would, we believe, take precedence over economic savings.

Grid access: The concept of grid access, as presented in the Stage II Consultation Paper, incorporates both new local supplies – which are defined as being from renewable energy sources – and supplies from the Mainland of China. We do not believe that the two should be linked, as the issues and regulatory regimes are very different.

Further, we would remind policymakers that the existing power grids are private property, and need to be respected as such. There are precedents (as in the telecommunications market) for broadening access to a monopoly-like distribution system, and so we anticipate that an agreeable solution will be found.

Finally, we note that the proposal for grid access includes the concept that “Arrangements will have to be in place to ensure that consumers will not be made to bear such costs unduly.” This, we believe, is a violation of the ‘user pays' principle that is widely accepted in Hong Kong.

Interconnectivity: Given the track record of the two power companies in supplying electricity, we see no reason why greater interconnectivity should be a priority. However, we also have no objection to planning for greater interconnectivity, provided that the main priorities set out at the beginning of this submission remain paramount.

Economic regulations: We believe the economic regulations can be improved, but as power generation is a capital-intensive industry characterized by very long payback periods we would urge caution.

On the proposed shift from 13.5-15% to 7-11%, we do not have sufficient information – either on how the new figures were determined or on alternative formulae – on which to base a useful decision. We believe there is a misunderstanding, moreover, as to the difference between return on investment, return on equity and return on assets, and we believe the community should be better informed on this point.

We do note the difficulty in predicting interest rates over a long period, and the risk certainty required to make multi-decade investment decisions. As such, we would hope for a more imaginative solution, perhaps involving returns benchmarked to the cost of capital. This would eliminate the need to review the rate of return every five years (2.56 (b))

Regulatory instruments: In light of the very long planning and pay-back periods involved, we do not think it is useful to shorten the regulatory horizon from 15 years to 10. While we have no objection to annual audits of the financial and technical performance of the power companies and periodic reviews of their future development plans, we find an annual tariff review and shortened regulatory timeframe to be somewhat inconsistent with the character of the business.

Return on investment: In the area of performance improvement, we strongly agree that incentives are the best means of encouraging power companies to improve their use of renewable energy and to achieve savings through conservation, operational efficiency, and service quality or emissions reductions. (2.45)

Where the proposals divert from these principles is in the requirement that savings be shared with users while at the same time proposing that the cost of emission reduction facilities not only be subject to the lowest rate of return, but that this rate be applied so as to avoid passing on costs to consumers (2.58c). The community must share the cost of reducing pollution, and the power companies must be encouraged to take actions that benefit the environment.

Similarly, we are quite surprised that the extra expense of achieving emissions reductions targets agreed upon between the HKSAR and Guangdong Provincial governments is specifically identified as an areas where the Government will “explore options to avoid the costs of installing the facilities being passed onto consumers as far as possible” (2.53). These targets were imposed on the Hong Kong power industry without consultation, and we believe users should share the cost of implementation. If it is a policy and societal objective to reduce emissions, which we believe to be the case, then the beneficiaries should share the cost.

In the absence of any information in the consultation document about the amount of excess investment over the last 15 years, and in the interest of ensuring continued reliable supply, we do not support extending the mechanism for discouraging excess investment to cover all investment.

I trust these comments will be useful in your policy deliberations.

Yours sincerely,




David Eldon
Chairman