Advisory Council on the Environment

Presentation by Friends of the Earth on "Restructuring Hong Kong's Power Sector and
Maintaining Environmental Priorities"


(ACE Paper 22/99)
for information

Enclosed please find a paper prepared by the Friends of the Earth (FoE) on how the power sector in Hong Kong should be restructured with a view to maintaining Hong Kong's sustainability, taking into account environmental and social priorities. Representatives from FoE will attend the ACE meeting on 28 June 1999 to brief Members on the paper.


ACE Secretariat
June 1999

Restructuring Hong Kong's Power Sector and Maintaining Environmental Priorities
A summary for the Advisory Council on the Environment



1.1 The manner in which Hong Kong designs its power sector will have long term impacts on environmental quality, employment, and economic stability. Power is a keystone industry whose design will determine a major part of our sustainability.
1.2 We observe that competition on its own does not cause the power sector to make the most efficient use of energy resources, or to create the most equitable social benefits, or to choose the lowest environmental impact. Additional programs, incentives, and regulation are required to support environmental and social priorities.
1.3 We are extremely concerned that the HKSAR Government is investigating competition and inter-connection of the electric utilities without first having a stated policy connecting energy use with environmental and social priorities, and without any demonstrated capacity to act as an independent power system administrator.
1.4 We recommend that:
  A. An energy board should be established:
    (i) To develop an energy policy which contains commitments, targets and incentives for environmental and social priorities.  
    (ii) Which has the capacity to evaluate independently the full costs of energy choices, and the capacity to perform independent long term planning.
  B. A Renewable Portfolio Standard (RPS), or equivalent, should take effect immediately and be maintained through any future market structure.
  C. A Systems Benefit Charge (SBC) should be levied immediately to support:
    (i) Intensive load management and other priority DSM until such time as the market has adequate incentives to pursue aggressive DSM.
    (ii) An Advanced and Renewable Technology (ART) program, or equivalent, to identify, develop, and integrate the most sustainable energy systems.
2.1 Re-regulation of the power sector provides a number of opportunities to align Hong Kong's development with the HKSAR Government's stated goals of sustainability.
  A. Getting the prices right. The harsh reality is that sustainable development does not work unless prices include total costs. Following the example of several other countries, energy prices can be revised to reflect external costs.
  B. Tax shifting. To balance the higher prices of resources when externalities are included, taxes on income and wages should be reduced. This shifts the economy toward investment in human capital and away from resource waste.
  C. Meeting international goals. By the year 2010, the European Union is targeting 12% of its energy from renewables, the USA is targeting 7.5%. Hong Kong urgently needs to re-structure its energy sector with incentives for efficiency and renewables so that international goals like the Kyoto protocol can be met.
  D. Employment. Hong Kong will be under increasing pressure to provide employment. Energy efficiency services, renewables, and decentralized energy systems provide many more jobs than traditional centralized fossil fuel systems. Incentives can be developed to promote these more sustainable paths.
  E. Competitive technology. Energy efficient designs are known to produce more comfortable living and working spaces, and therefore to increase productivity. Hong Kong also has the opportunity to showcase decentralized energy systems in its uniquely compact urban setting, and to become involved in the massive growth industry of renewable energy in mainland China.
3.1 Briefly, there are ten main concerns about introducing competition in Hong Kong's power sector before a strong framework for supporting environmental and social priorities is in place. These comments are based on the observation of re-regulation in California, New Zealand, and England and Wales.
  A. No full costing. The market will not automatically include external costs, and therefore price signals will not move the market in a sustainable direction.
  B. Lack of support to efficiency programs. Many of the barriers to resource efficiency remain in place under competition, particularly as companies lose security of their customer base. Companies fighting for survival under these conditions are more likely to expand market share by selling more power rather than by adapting to provide tailor-made efficiency programs for individual customers.
  C. Lack of support to renewable technologies. Utilities and banks are still largely unfamiliar with developing and financing renewable energy projects. This is a barrier which competition only intensifies unless a particular company has previous experience and vision, or consumers demand green power. Neither scenario is likely in Hong Kong at the present time.
  D. Compromised safety standards. Competitive utilities immediately cut business costs by reducing their least profitable staff, which in most cases is related to maintenance. In the case of nuclear power plants this can create major safety problems. Several such plants were shut down in the USA due to safety violations directly related to competitive cost-cutting.
    Environmental standards can also be compromised if there is no level playing field in the market for pollution emissions. If cleaner technologies mean a loss to bottom line profits, then utilities cannot be expected to invest responsibly.
  E. Incentives for over-capacity. Power sector competition does not magically bring supply and demand into balance. Some reasons for this include:
    Peak load demand may continue to be poorly managed (point B) resulting in inefficient use of power plants for most of the year.
    If the competitive market is dominated by only two large players, major consumers (business and industry) may try to avoid the uncertain competition by contracting directing with smaller new power generators, creating over-capacity in the overall system.
  F. Loss of employment. If fossil fuel resources continue to appear cheap, then wages will continue to appear expensive and competitive companies will prefer to minimize jobs in preference for greater fuel use.
  G. Unequal retail benefits. Unlike telecommunications, the experience of bringing power competition to the level of individual households has not shown a drastic drop in prices. The dominant trend is for special rates and deals to be made between utilities and large consumers in business and industry, termed "Cherry picking". Domestic consumers are unlikely to gain much price advantage from power competition unless they can be aggregated into larger purchase groups. There is a strong case for saying that household-level power competition would require much more regulation than now in order to ensure equity of service to the smallest consumers.
  H. Loss of planning control. Power is an essential service like hospitals, and in this sense the supply and demand of power cannot be compared to competitive markets like IDD telephone service or computers where busy tones or out-of-stock are an acceptable part of supply and demand adjustment. Because power supply must meet demand at all times, and individual companies are no longer responsible for the integrity of the power grid under competition, some third party must take responsibility for long term planning. It is not yet clear how to replace the planning process of regulated monopolies with a competitive planning system based on financial incentives which is stable and sustainable under all conditions.
  I. Uncertain competition. If there are two main players in a power market who are capable of controlling the clearing price of the wholesale power pool because they own a majority of the power plants, then consumers are unlikely to fully trust that competition is taking place. As mentioned in point E, this may lead to a behaviour of large consumers seeking new contracted power elsewhere and creating over-capacity locally. In the interests of using energy resources wisely, Hong Kong may find that simple competition is not a quick fix solution.


Friends of the Earth
June 1999


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