We may have to accept higher electricity tariffs in future
Last week, Hong Kong’s two power companies announced tariff arrangements for the coming year. Those who follow annual tariff adjustments know that these two companies will make the announcement on the afternoon of the second Tuesday of every December. This arrangement is to dovetail with the meeting of the Legislative Council’s Panel on Economic Development. This has been the norm for many years. This arrangement gives lawmakers a chance to discuss tariff adjustments and enables them to perform a monitoring role.
Traditionally, the annual power tariff adjustment is big news as it will affect all society. But the community seems to be less concerned about the upcoming tariff adjustment. This is probably because of the pricing strategies adopted by the two power companies. For the coming year, the basic tariffs have been increased by both companies, but these increases are offset by corresponding decreases in fuel surcharges or rebates. Given that consumers will need to pay less for electricity next year, the two power companies are not under as much pressure from the LegCo and the media as this year.
To the community, a lower tariff is always welcome news. However, it is not rational to think that tariffs will always remain low in future. The tariff adjustment is made according to a complicated Scheme of Control Agreement (SCA), and there are new policies governing emissions. But this may mean that the community should brace for tariff increases in future.
Under the SCA, the power tariff is composed of two parts: the basic tariff and fuel adjustment. The basic tariff is actually the price that the two power companies can charge consumers and is a source of profits for the power companies. The fuel adjustment is levied on the consumers based on actual usage. When the basic tariff is increased next year, the two power companies are in fact raising their prices. The consequence of this is that the base of the power tariff will be increased. In future, given that the base has increased, a small percentage increase in the tariff will translate into a high figure for tariff changes. Given that fuel prices will not stay cheap forever, future tariff increases are very likely. This is why the government keeps trying to manage public expectations by saying that the current decrease in fuel surcharge is a one-off and may not be sustainable.
In fact, electricity charges will rise as the two power companies need to invest more in gas turbines. Two years ago Hong Kong had a consultation on the future fuel mix. The community, in general, favored using natural gas to produce electricity domestically. To realize this option, the government needs to approve the acquisition and building of new infrastructure for the two power companies. Naturally, these assets will be included into the SCA. The two power companies can legitimately earn higher profits. This is the choice of the community and we need to realize The author is the dean of the School of Continuing Education at Hong Kong Baptist University.
When the basic tariff is increased next year, the two power companies are in fact raising their prices. The consequence of this is that the base of the power tariff will be increased. In future, given that the base has increased, a small percentage increase in the tariff will translate into a high figure for tariff changes.”
that. Unless fuel prices keep on dropping, future power tariffs will have a higher chance of staying at higher levels.
There is some controversy in regard to fuel account balances. People have questioned the practice of keeping a high balance on the fuel account so as to keep power tariffs high. But, we need to understand that balances in the fuel account are actually prepayments and the two power companies cannot make profits out of it. In the past, there were cases in which negative balances were observed. The two power companies then reversed the negative balances by charging higher fuel surcharges. The amount of fuel surcharges is determined jointly by the two power companies and the government. The government will also take advice from independent energy consultants. It is possible to change the current annual fuel adjustment to monthly fuel adjustment. However, it may lead to the undesirable effect of highly fluctuating power tariffs from month to month. Any changes to the current system will need careful consideration.
A new SCA will be negotiated and introduced in 2018. Clearly the tariff adjustment mechanism will be one of the focal points. Other important issues include the percentage of permitted returns, use of more renewable energy, opening up of the power grid, etc. Given the previous negotiations 10 years ago, it can be anticipated that there will be more difficult challenges ahead.