2017 Electricity Tariff Forecast Conference
Every December, the government announces the energy tariffs for the next year. As an environmental non-profit that is concerned about the energy issue and the livelihood of the people, World Green Organisation (WGO) is analysing the price trend of the world energy market and the energy usage data of Hong Kong for the coming year. We estimate that the government will reduce the Permitted Rate of Return for the two power companies from 9.99% to 7.99%. This means that there is a probability the electricity tariff will be adjusted downward. The detailed analysis is as follows:
Factors that will cause a potential increase in tariffs:
Increased fuel costs caused by increase of crude oil prices
Price of electricity is influenced strongly by fuel prices as fuel is needed to generate electricity. Fuel cost is part of the electricity tariff, the increase will pass on directly to customers. In the past 5 years, the fuel clause charge has significantly impacted the tariff rate. Therefore, the increases and decreases of crude oil prices directly affect the natural gas price when in turn affect tariff adjustment.
Due to the 14-nation Organisation of the Petroleum Exporting Countries (OPEC) agreement to cut production by 1.2 million barrels per day to 32.5 million, Brent crude oil prices rose from USD50 to USD54 per barrel. This is the highest it has even been in years. The International Energy Agency (IEA) estimated that the oil prices will reach USD60 per barrel. This means that the two power companies in Hong Kong will be under pressure to increase fuel clause charges. However, this increase is estimated to only take effect in the second half of next year.
This is why WGO is proposing to change the current mechanism used to calculate fuel prices by ‘hedging’ the fuel cost. Hedging fuel costs will establish a fixed costs for fuel by purchasing a future contract. This strategy stabilises fuel costs and reduces the risk of adverse price movements of assets and investments to protect buyers.
WGO is also suggesting to implement an ‘incentive and penalty’ scheme along with the ‘hedging’ method in order to incentivise the power companies to optimise hedging in the interest of the public. Through this process, the interest of power companies and the public will therefore be aligned. When actual fuel costs are lower than the contractual fee, the power companies will only have to pay the contracted price. If the actual fuel costs are lower than the contractual fee, the difference will be distributed back to the public and power company. In other words, if the two power companies save fuel costs from the hedging system, 80% of the profits can be distributed back to the public and the remaining 20% will be used to incentivise the two power companies in Hong Kong to save more.
Lack of stability in natural gas supply
In order to fulfil the 2020 requirements as mandated by the government, natural gas capacity must be significantly increased from 34% to 50%. As a result of this, we cannot be completely dependent on only one source of fuel supply as natural gas supply around the world can become instable.
Said Dr. William Yu, Chief Executive Officer of World Green Organisation. As the supply of electricity is dependent on fuel, the government and the two power companies in Hong Kong must seek early contingency plans that doesn’t fully rely on the steady supply of natural gas.
Natural gas supply has been quite stable in Hong Kong and prices has been low for the last 1-2 years. However, there is a risk of the natural gas supply to fluctuate. Existing gas fields may plummet or be exhausted over the next few years. In addition, the international market for natural gas supply is increasing in demand. A solution from the report, Global Gas Security Review suggests utilising LNG (liquefied natural gas) storage to bridge short-term supply disruption. This method can store excess natural gas as a backup which will relieve the pressure on the supply on natural gas when supplies are unstable or disrupted. According to the IEA, there will be a drastic increase in Asia for LNG. They forecasted that by 2021, the demand will increase to 350 bcm which is a 40% increase to 2016. However, this solution is only a short-term one. Pricing for natural gas in the long run cannot be sustained. Power companies must prepare a long-term contingency plan to solve the supply and cost dilemma.
Increased assets for the two power companies
The increase in electricity tariffs are also caused by the net increase of the two power companies in Hong Kong due to increase in fixed assets. Half of the electricity has to be generated through natural gas in the future. Currently, only 34% of natural gas is in the fuel mix. This means that the capacity to use natural gas must be increased. In order to secure the purchase of gas from international market at a lower price, CLP plans to build a new ‘Floating Storage Regasification Unit’ (FSRU) which is a floating LNG receiving terminal in the eastern waters of the Soko Islands, off southern Lantau. However, although this new unit will tap more natural gas from different sources, it is estimated to cost up to HKD5 billion which is more expensive than building a new power plant.
In addition to constructing and building new FSRU, the two power companies in Hong Kong must also build a natural gas generating unit. HEC has already been approved to build a new gas unit (L11) which will cost HKD 4.1 billion. CLP is planning to build a unit at Lung Kwu Tan in the coming year. Although the cost has not yet been announced, the estimated cost of this unit will be as high as HKD 6 billion. Once both of these natural gas generating units are completed, the net asset values for the two power companies will increase and therefore increase the electricity tariff.
Factors that will cause a decrease in tariffs:
Lower returns on profit
There has been speculations that the government will lower the Permitted Rate of Return of the two power companies. WGO estimates that the current Rate of Return will be reduced from 9.99% to 7.99% which will help offset some of the above factors that will increase electricity tariffs.
Fuel Clause Charge Balance is increasing
The balance for fuel clause charge account is increasing. If the difference is positive, fuel purchasing costs is smaller than budgeted costs, the surplus will be added to the account. If it is negative, the companies can withdraw from the account. Over the past two years, the two power companies have been overestimating fuel costs which means that they have to contribute to the account. We estimate that by the end of the year, the fund balance of CLP and HEC will be as high as HKD3.3 billion and HKD3.5 billion respectively.
These two factors that decreases the electricity tariffs to certain extent. Therefore, WGO is estimating the electricity tariff for the coming year to reduce 1-2%.
Note: WGO estimated the electricity tariff based on public information and academic research methods. For the actual level of tariff increases, please refer to publications of the government or the power companies. In addition, this study was carried out independently by WGO and did not accept any form of funding.
About Us
The World Green Organisation (WGO) is an independent non-governmental organisation concerned with environmental conservation and environmentally related livelihood and economic affairs. Through science-based policy research and community projects, the WGO aims to enhance the quality of the environment, promote a greener economy, and improve people’s livelihoods. In particular, it will focus on the social concerns of underprivileged groups and on the creation of a green economy to help realise its vision of sustainable development. For more information, please visit http://www.thewgo.org/。
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