by Aude Pommeret and Lin Zhang[1]
On
December 13th, 2016 Hong Kong Electric (HKE) announced a reduction
in the Net Tariff by 17.2% starting January 1st, 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 NOX 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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