LC Paper No. CB(4)231/14-15(02) Searching for New Directions A Study of Hong Kong Electricity Market SEARCHING FOR NEW DIRECTIONS A STUDY OF HONG KONG ELECTRICITY MARKET Hong Kong Consumer Council December 2014 Searching for New Directions – A Study of Hong Kong Electricity Market Table of Content Executive Summary .................................................................................................. i-xiv Chapter 1 Introduction .................................................................................................. 1 Competitive Electricity Market ........................................................................................... 2 Chapter 2 Overseas Experience ..................................................................................... 5 Government Environmental Policy ..................................................................................... 5 Market-based instruments ................................................................................. 6 Nuclear option .................................................................................................... 8 Competition ......................................................................................................................... 9 Structure and reform ......................................................................................... 9 Reconsolidation ................................................................................................ 10 Retail competition ............................................................................................ 12 Regulation .......................................................................................................................... 14 Regulatory models ........................................................................................... 14 Regulatory methodology .................................................................................. 16 Price cap regulation .......................................................................................... 16 Critical mass...................................................................................................... 18 Independence ................................................................................................... 18 Consumer representation ................................................................................ 19 Regulation and consumer protection .............................................................. 21 Tariff-based measures or social security? ........................................................ 22 Overall Conclusion ............................................................................................................. 24 Chapter 3 Development of the Electricity Market in Southern China ............................ 26 Overview of the Electricity Market in China ..................................................................... 26 Electricity capacity and production in China .................................................... 28 Reform in the Electricity Sector ........................................................................................ 32 Structural reform .............................................................................................. 32 Market reform .................................................................................................. 33 Electricity market at Guangdong province ....................................................... 35 Future developments in electricity market in Guangdong .............................. 37 Chapter 4 Hong Kong Electricity Market ...................................................................... 42 Hong Kong Current Energy Policy ..................................................................................... 44 Scheme of Control ............................................................................................................. 46 Tariff adjustment mechanism .......................................................................... 47 Supports from Mainland China to Hong Kong energy market ......................... 48 Development of Renewable Energy in Hong Kong .......................................................... 49 Solar energy ...................................................................................................... 49 Wind energy ..................................................................................................... 50 Waste-to-energy .............................................................................................. 50 Searching for New Directions – A Study of Hong Kong Electricity Market Initiatives of demand side management from power companies ................... 51 Government Future Energy Policy .................................................................................... 51 Reasons for the fuel mix review ....................................................................... 52 Overall Conclusion ............................................................................................................. 55 Chapter 5 Key Issues of Market Structure Reform ........................................................ 57 Hong Kong Context ........................................................................................................... 57 Supply Side Context and Measures .................................................................................. 59 Introducing competition to the Hong Kong electricity sector ......................... 59 Wholesale competition .................................................................................... 60 Retail Competition ............................................................................................................ 61 Retail competition between CLP and HEC ....................................................... 61 New entrant option .......................................................................................... 62 Interconnection of CLP and HEC ...................................................................... 63 The nuclear option ........................................................................................... 65 Renewable Sources of Energy ........................................................................................... 67 Hong Kong’s resources ..................................................................................... 67 Methods to stimulate investment ................................................................... 70 Conclusion on renewables ............................................................................... 72 The Role of Gas .................................................................................................................. 74 Town gas ........................................................................................................... 75 Natural gas as a power station fuel .................................................................. 77 Co-generation ................................................................................................... 78 Reliability Dimension ......................................................................................................... 79 Generation adequacy ....................................................................................... 80 Plant breakdowns ............................................................................................. 81 Weather conditions .......................................................................................... 81 Available capacity ............................................................................................. 81 Alternative ways to meet peaks ....................................................................... 81 Network failures ............................................................................................... 82 Other influences on supply security ................................................................. 83 Conclusion on reliability ................................................................................... 84 Chapter 6 Consumer Perspectives ............................................................................... 88 Participation with Respect to the Environmental Objective ............................................ 88 Motivating Consumers ...................................................................................................... 89 Energy efficiency .............................................................................................. 90 Demand side management .............................................................................. 91 Smart meters .................................................................................................... 92 Domestic household consumers ...................................................................... 93 Commercial consumers .................................................................................... 94 Summary on demand side management ......................................................... 95 Searching for New Directions – A Study of Hong Kong Electricity Market Consumer Welfare – Energy Poverty Dimension ............................................................. 97 Fuel poverty ...................................................................................................... 98 Social tariffs ....................................................................................................