Power plan: Secretary for Economic Development & Labour Stephen Ip explains the Government's proposed framework for the future development of the city's electricity market.

A three-month consultation has been launched inviting views on the future development of the electricity market in Hong Kong.

The Economic Development & Labour Bureau today published a consultation paper, setting out the proposed framework for the future development of the city's power market after the existing Scheme of Control Agreements with the two power companies expire in 2008.

Key proposals

The proposed regulatory framework contains a number of new proposals:

* lowering the permitted rates of return for the power companies to 7-11% for different types of assets;

* shortening the term of the new agreements to 10 years, with an option for a five-year extension after a review before expiry;

* more flexibility for periodic review of the key terms in the agreements;

* new financial disincentives to ensure the power companies will meet emissions-reduction requirements; and

* encouraging the use of renewable energy.

Secretary for Economic Development & Labour Stephen Ip said the proposed framework aims to ensure the public can continue to enjoy reliable, safe and efficient electricity supplies at a reasonable price, and to minimise the environmental impact caused by the production and use of electricity.

Speaking at a press conference this afternoon, Mr Ip said most Hong Kong residents consider the current permitted rates of return for power companies too high.

He believed the proposal to reduce the rates from 13.5-15% in the existing Scheme of Control to 7-11% is acceptable.

"If we used the proposed permitted rate to calculate the 2006 tariff, there could be a drop of 11-20% in tariff," he noted.

Tariff adjustments subject to Govt's approval

The secretary said exact rates will be reviewed closer to 2008, and at five-year intervals thereafter, adding all tariff adjustments and development plans relating to power supply will subject to the Government's approval.

When asked whether the two power companies will accept the new conditions, the secretary said the Government will discuss the issue with the companies and he is confident proper arrangements can be finalised before 2008.

Mr Ip said the Government has adopted an open attitude on opening up the power market. However, he stressed a number of factors must be addressed, such as the availability and stability of new power-supply sources.

"Since electricity supply in Guangdong would remain tight in the near term, the Government considers it would be prudent not to predicate the future development of the power market on supply from the Mainland at this stage," he said.

Facilitating power transfer

"However, the Government will continue to monitor closely developments in the Mainland and make preparations for the provision of grid access and increased interconnection with Guangdong."

The Government will facilitate easier connection/access for renewable energy users and suppliers and will ask the two power companies to jointly take forward and plan for increased interconnection at an "optimum" level.

It will also work with the power companies to make preparation for enhanced interconnection within Hong Kong and with Guangdong to facilitate future power transfer. This includes:

* conducting necessary technical studies;

* initiating and drawing up the regulatory framework regarding provision of grid access for other new supply sources; and

* preparing the groundwork for the future setting up of a separate regulatory authority.

Initiatives to improve environment

To improve the environment, the Government proposed to reduce the permitted rates of return on all assets if the power companies cannot meet the statutory emission caps, and provide a bonus return if they reduce their emissions to levels below these caps.

It also proposed to provide financial incentives for meeting the target of having 1-2% of our local power needs met by renewable energy by 2012.

The Government will also lay the groundwork for the future setting up of a separate regulatory authority to oversee technical and economic issues relating to the electricity market.

People are invited to forward their views on the proposals and other related matters presented in the consultation paper to the bureau by March 31.

The bureau will carefully consider comments received before finalising the regulatory arrangements for the post-2008 electricity market.