The cause and consequences of lowering of electricity price in Hong Kong

by Aude Pommeret and Lin Zhang[1]

On December 13^th, 2016 Hong Kong Electric (HKE) announced a reduction in the Net Tariff by 17.2% starting January 1^st, 2017. In the meantime, CLP announced the frozen Average Tariff for 2017 with a rebate. The official justifications provided by HK Electric were first that in reducing its electricity price, the utility was returning to customers the refunds HKE had received from government as rents and rates had been overcharged in the past. Second, the operating cost of the utility had been lower than expected due to lower fuel costs.

 

At first sight, this price decrease seems to be a generous move from HKE with the utility sharing part of its profits with the consumers. It is in fact far from being the case. Recall that the tariff encompasses three components.[2] The first is the Basic Tariff, the second comes from the Fuel Clause Recovery, and the third concerns the rebates from the Tariff Stabilisation Fund and the Rate Reduction Reserve.

 

Since January 2017, the Basic Tariff has in fact increased by 3.2% (going from HKD105.5 to HKD 108.9). However, it has been more than covered by a rebate of 3.8% (from HKD108.9 to HKD104.9) and more importantly by an adjustment of the Net Fuel Clause Charge going from HKD27.9 to HKD5.5 that is, decreasing by 64%. All in all, the total Tariff has therefore decreased by 17.2% (going from HKD133.4 to HKD110.4). The total decrease is therefore mainly due to the fuel clause (see the following figure).

 

 

As acknowledged by HKE itself, the current price decline is viewed as a strategy to help customers prepare for the tariffs changes with the projection of increased fuel price: HKE will increase the use of natural gas from 33% of electricity generation (present) to 50% by 2020, which will generate a rise in tariffs as natural gas is more expensive than coal.

 

What needs additional attention is that HKE takes advantage of the Net Fuel Clause Charge to increase the Basic Tariff, which is hardly noticeable to the public. This is because the increase in the Basic Tariff is hidden behind the huge decline in the Net Fuel Clause Charge, and this part of the tariff will not decrease in the future to compensate for the increase in the Net Fuel Charge. In doing so, HKE enjoys a higher Basic Tariff together with a Fuel Clause Charge increase adjusted to the larger share of gas for electricity generation. Therefore, what HKE has done is to exchange some current profits for secured future profits, but certainly not sharing benefits with its customers.

 

If this were happening with no harm to the rest of the economy, HKE’s decision on current tariffs in order to secure future profit would not be so bad. This is, however, not the case. There are several economic and environmental impacts to be taken into account.

 

By adjusting tariffs up and down frequently, HKE is generating fluctuations in the price of consumers’ purchases and creating uncertainties as consumers face incomplete information regarding HKE’s pricing strategy. Uncertainty will increase the precautionary savings of individual consumers. In the end, this reduces the welfare of consumers who make financial decisions over their lifetime in order to smooth their year-by-year consumptions.

 

At the same time, the lowering the of electricity price is very likely to increase electricity consumption, which obviously has some adverse consequences for the environment, as a large part of electricity in Hong Kong is generated using fossil fuels. In 2008, the HK government offered a HKD 3,600 per annum of electricity subsidy for each household and it had already been perceived by local environmental groups as counterproductive to the earlier initiatives to promote energy saving (the subsidy has been abandoned in 2015).[3]

 

In fact, we can perform simple calculations to estimate the potential environmental impacts. In economics, the change of electricity demand with respect to the price change can be measured by the price elasticity of electricity. Based on the electricity consumption and the price change between 2015 and 2016, the price elasticity across all sectors in HK is about -0.3. For the residential electricity demand, the elasticity is as high as -1.8. Given the 17.2% decline in electricity price, total electricity demand and residential electricity demand are therefore expected to rise by 5.16% and 30.96%, respectively. This is equivalent to 13350 Terajoules of electricity demand increase per year for HK residents.

 

Considering the fuel mix in Hong Kong’s electricity generation, the price decrease in electricity will result in more emissions: 2.23 million tonnes of CO₂ equivalent, 1484 tonnes of SO₂ and 2251 tonnes of NO_X per year will additionally be released in the atmosphere_. These additional emissions will implicitly increase potential health problems and the costs we have to pay for pollution mitigation and adaptation.

 

Therefore, a careful analysis of the reasons behind HKE’s decrease in tariffs and of the consequences, suggests that HK residents should not take it as good news. Alternatively, there is another way HKE can secure future profits together with a cleaner environment: HK utilities are constrained to a maximum return of 9.99% based on electricity generation from fossil fuels. However, they can enjoy an 11% return if they were to use renewables instead. Of course, it would have different implications on their tariffs, which may not be so popular, but this is another story….

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[1] City University of Hong Kong

[2] https://www.hkelectric.com/en/OurOperations/Documents/HECsca_full_Eng_.pdf

[3][3] See Daphne Mah and Peter Hills, 2016 “An international review of local governance for climate change: implication for Hong Kong” Local Environment 21(1), 39-64.

Carbon Capture and Sequestration: How to remove the barriers?

 

Tunç Durmaz[1] and Aude Pommeret

 

Eight years on since the United Nations IPCC was awarded the Nobel Peace Prize in recognition of its effort in combating climate change, fossil fuel remains the most dominant global energy source. As the total replacement of fossil fuel burning is not expected to take place immediately in the near future, the International Energy Agency (IEA) has repeatedly declared carbon capture and sequestration (CCS) as a key technology for mitigating climate change.[2]

 

Although CCS is envisioned to play critical role in the fight against climate change, why have these technologies not had an international breakthrough? And what needs to be done for it to happen?

 

From an economic perspective, there are 3 major barriers for CCS technology development. The first arises from the competition from non-fossil based energy carriers including renewables and nuclear. The second concerns the maturity of the CCS technology. The last is related to the cost of capture and storage.

 

Let us first consider the competition from other energy carriers. Wind and solar, when coupled with storage technologies to tackle intermittency issue, allow power generation without the emission of greenhouse gases. The same is true for nuclear energy but its public acceptance has been on decline following the Fukushima Daiichi nuclear disaster. Therefore, wind and solar are considered the most serious competitor with the CCS-mitigated fossil fuel. However, the formers’ high costs compared to the fossil fuel render unlikely threats to the use of CCS.

 

Turning to the degree of maturity of the CCS technology, one has to recall that CCS has three major components: (CO₂) capture, transportation (of CO₂ in a liquid-like state) and geological storage. Although these three components are in commercial use, their integration and the scaling up of CCS is yet to be seen. The Saskpower’s Boundary Dam CCS project in Saskatchewan, Canada, has been plagued with numerous shutdowns that cost CAD$1.2 million (HKD 7 million) in penalties. Similarly, the CCS facility in Mississippi Power’s Kemper County lignite plant has been struggling with delays, most recently, related to the ash removal system.[3] From these examples, it is evident that the CCS technology has been facing first-of-its-kind risks to costs.

 

The last barrier, that is, the cost of CCS, is apparent. A lower cost of CCS per ton CO₂ will make it more economically feasible. Yet, according to the report of the Office of the Canadian Parliamentary Budget Officer (see p 40), the cost for the Boundary Dam CCS project has come in at CAD$ 917 million (HKD 5.32 billion) — it was originally budgeted to cost CAD$800 million (HKD 4.64 billion).  Putting together estimates of revenues and expenditures, the project is expected to generate a loss of CAD$ 1 billion (HKD 5.8 billion).[4]

 

In order to overcome these barriers, two factors stand out. The first one concerns the carbon policy. The second one is an improved technology that would allow for a successful integration the three major components at a lower cost. 

 

            Carbon policy is imperative for CCS. Unless CO2 emissions are taxed, a coal-fired power plant will have no incentives for using CCS. It will simply release CO2 into the atmosphere. The same applies if the emission tax is lower than the cost of CCS. It has been estimated that emission tax of CAD$ 57 (HKD 331) per ton CO2 will be necessary to motivate a power plant to undertake a CCS project.

 

            To improve the technology, an important component is learning-by-doing (LbD). LbD is simply productivity gains through production practice, minor innovations, and specialization. Saskpower stated that LbD can reduce costs by approximately CAD$200 million (HKD 1.16 billion) on its ongoing CCS activities.  In this case, a CAD$47 (HKD 273) per ton CO2 carbon tax will allow the power company to undertake a CCS project.

 

With the growing number of CCS projects, it is only a matter of time before all the technological drawbacks are properly addressed. Thus, to have CCS, what remains to be seen is a credible carbon policy that can allow investors to undertake CCS projects. This will be crucial in building a global CCS industry to deal with fossil fuels as the dominant energy source in the coming decades.

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[1] Econ. Dept. Yildiz Technical University. PostDoctoral Fellow at SEE 2015-2016.

[2] https://sequestration.mit.edu/bibliography/ccs-crossroads.pdf

[3] It is estimated that any extension of the in-service date past Feb. 28 can add around $30 million a month to the total cost of the project.

[4] There are also new costs that have been coming out of the operational side of CCS. As an example, the cost of amine, an ammonia derivative used to clean particles of CO2 from exhaust, is much higher than anticipated for Sask Power due to the solvent being degraded much more quickly than expected. The cost of amine, which was budgeted for CAD$5 million per year, is now budgeted for CAD$20 million. See http://www.cbc.ca/news/canada/saskatchewan/saskpower-carbon-capture-1.3896487

Green Growth for the Energy Transition (the French law on energy transition). Act III: what are the financing mechanisms?

Prudence Dato (IREGE/ Savoie Mont Blanc University)

As a follow-up to the economic analysis of the French law on energy transition, we devote this third note to the financing mechanisms of energy transition. The scenes in the act III draw attention to the limits of current public policies and to the role of financial sectors in the transition to a low-carbon economy.

Act III; scene 1: Current policies are not doing the job.

The public funds that are directed to support the energy transition comprise both public budget and fiscal policies. Public budget is used to subsidy low-income households: it concerns energy subsidies and social electricity tariffs, for instance. Fiscal policies take the form of tax credit and eco-loans that are supposed to motivate renovation of buildings and adoption of energy-efficient equipment. Are these measures efficient in a long term? Unfortunately, Tyszler et al. (2013) finds that they do not provide a long term solution for lifting a household out of fuel poverty.[1] One reason is that their implementation is complex because of administrative issues, lack of bank’s expertise in evaluating home renovations, etc. Also, they reduce the borrowing capacity of the household to face non-energy issues. So, what could be the solution? Promoting “collective eco-loan” for residents living in the same building or imposing home renovations during private residential property transactions for instance, could serve as solutions. This is now the time when the financial sector appears on stage…

Act III; scene 2: Trying to go beyond a green image.

Although there has been a growing awareness of the role of the financial sector in the transition to a green economy, most of the banks and insurers are mainly concerned with their image instead of structured strategies.[2] Is “green image” the solution? Their strategies should be beyond communication on the green projects they have financed or on their direct environmental impact.  Why not consider the indirect environmental impact of the business activities they have financed (coal mining businesses and coal-fired power plants, for instance)?  Consequently, banks and insurers would account for the potential impact of climate change on financial stability. As stated by Carney (2015), “an abrupt resolution of the tragedy of horizons is in itself a financial stability risk”.[3] This is now the time when central banks appear on stage to help finance the energy transition…

Act III; scene 3: Are the central banks the happy ending?

Central banks are bound by their financial stability macroprudential mandates that refrain them from driving the transition to a low-carbon economy. But the good news is that, given the large commitment of countries for the Paris Agreement, we can now start believing that governments will adapt the mandate of central banks to the risks of climate change. For instance, Green Quantitative Easing (GQE) programs could drive green bonds deployment…

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[1] Tyszler, J., Bordier, C., & Leseur, A. (2013). Combating Fuel Poverty: Policies in France and the United Kingdom. CDC Climat Research, CDC Climate Report (41).

[2] http://www.novethic.fr/fileadmin/user_upload/tx_ausynovethicetudes/pdf_complets/Green-financing-are-european-banks-and-insurers-contributing.pdf

[3] Carney, M. (2015). Breaking the tragedy of the horizon—climate change and financial stability. Speech given at Lloyd’s of London, September, 29.

In HK, even a car that is not running is a bad car!

A particular feature of the transport system is its extreme complexity. It has multiple objectives, externalities, sectors (housing, residential, business, construction) levels (city, region, country, international) and players.  This complexity creates problems when it comes to implementing public policies in the sector.  All the externalities are interrelated, so that it is impossible to only target one of them.

However there is an effect that is completely forgotten in the economic approach, which concerns Volatile Organic Compounds (VOCs emissions when the car is not running. It has been proven (Yamada, 2013, EPA 2014 or De Gennaro et al., 2016) that VOCs emissions from cars that are parked account for a significant part of VOCs emissions. This is especially relevant for countries like Hong Kong where the diurnal temperature is rather high on average.

In Hong Kong, VOCs emissions generated by road transport accounted for 20% of total VOCs emissions in 2014. Evaporative VOCs from cars come from different source (see Table 1). According to the EPA that conducted a study on representative vehicle fleets (EPA 2014b), the diurnal source (or cold soak) is estimated to correspond to about 25-35g of emissions per day per car. They represent at least half of the total VOCs emissions from cars. The latter correspond to 34kg per year per car or are equivalent to 50 liters of liquid gasoline per year per car. De Gennaro et al. (2016) conducted a study in some Italian cities (Firenze and Modena) and found an evaporative VOCs density equal to 4 to 8 kg/km²/day.

Since the year 2000 (following the Council Directive 98/69/EC), gasoline vehicles for the European market have been equipped with an activated carbon canister placed on the vent of the tank. Its purpose is to trap the fuel vapours instead of having them released into the air. The carbon canister has a limited capacity. For the canister to be purged, and the hydrocarbons to go back to the tank, it needs the vehicle to be running. However, it is once the carbon canister gets saturated due to long time parking, or insufficient purging that evaporative VOCs become significant. This likely to be the case in Hong Kong where cars do not run at a sufficient speed to trigger the purge! The size of the carbon canister, the Gasoline Working Capacity of the activated carbon and the purging strategy are key parameters affecting the efficiency of the evaporative emission control system (See Martini et al, 2014).

Accounting for these evaporative VOCs would significantly alter public policies. For instance having cars parked for a longer time in city centers to avoid congestion was not supposed to have any cost in terms of pollution: this would no longer be the case. In addition, the level of evaporative VOCs depends on the age of the cars (what matters is the existing legislation at the car’s building time) and on the size of the tank but in a way that differs from the relationship existing between polluting emissions and tank size or car newness when the car is running. To summarize, it was so far considered that a good car is car that is not running; we now argue that even a car that is not running is a bad car!

Table 1: sources of evaporative VOCs from cars

Source: Yang (2016)

 

References:

De Gennaro M., Paffumi E., and Martini G., (2016), “Data-driven analysis of the effectiveness of evaporative emissions control systems of passenger cars in real world use condition: Time and spatial mapping”, Atmospheric Environment  129, 277–293.

EPA, (2014a), http://www.epa.gov/oswer/riskassessment/glossary.htm (accessed in October 2016).

EPA, (2014b) “Evaporative Emissions from On-road Vehicles in MOVES2014”, EPA-420-R-14-014, September 2014.

Martini G., Paffumi E., De Gennaro M. and Mellios G., (2014),  “European type-approval test procedure for evaporative emissions from passenger cars against real-world mobility data from two Italian provinces” Science of the Total Environment 487, 506–520.

Yamada H., (2013), “ Contribution of evaporative emissions from gasoline vehicles toward total VOC emissions in Japan ”. Science of the Total Environment 449, 143–9.Yang W. (2016) «Evaluation of evaporative VOCS in passengers Vehicles for regional air quality management » Master Dissertation Thesis, City University of Hong Kong.