Power company rate of return cut to 8% until 2033 from 9.99%
15-year term to help investment in non-coal assets: government
Hong Kong will cut the size of returns its power utilities are allowed to make to 8 percent under a 15-year plan it hopes will help wean the city off coal while keeping electricity bills down.
CLP Holdings Ltd. and HK Electric Investment Ltd. signed a new so-called Scheme of Control with the government after more than a year of negotiations, Secretary for Environment Wong Kam-sing said Tuesday during a televised press conference. The previous 10-year agreement, which started in 2008, set the rate of return at 9.99 percent.
As most of Hong Kong coal-fired power plants will be retired within the next decade, the 15-year term will provide “a clearer environment” for utilities to invest in gas-fired and non-fossil fuel plants, Wong said, according to a government statement.
“The new rate at 8 percent is bang in line with what many on the sell side were forecasting, and its at the top of the 6 percent to 8 percent range the government had floated back in 2015,” said Simon Powell, head of Asian utilities research at UBS Group AG in Hong Kong.
Power tariffs for customers could fall by more than 5 percent under the new scheme, the government said, though that assumes “relevant factors remain unchanged.” It warned, however, that using more-expensive natural gas will “exert very heavy pressure on tariffs”.
HK Electric lost 0.4 percent to HK$6.78 as of 9:37 a.m., while CLP added 0.2 percent to HK$80.95. The city’s benchmark Hang Seng Index rose 0.6 percent.
HK Electric earnings could be hit harder than CLP as the company has almost all of its earnings come from Hong Kong’s market when the new scheme of control takes effect in 2019, compared with 65 percent for CLP, UBS analysts led by Powell wrote in a note.
Hong Kong got about 53 percent of its power from coal as of 2012, compared with 22 percent from natural gas and about 23 percent from nuclear, imported via a transmission line from mainland China, according to the Environmental Protection Department.
Both of Hong Kong’s power utilities issued statements saying they welcome the new rate because it provided clarity and stability. CLP said in its statement the contribution of its Hong Kong business to operating earnings will decrease under the new version of the scheme, which has helped regulate the city’s electricity production since 1964.
The new agreement will also include a feed-in tariff mechanism and a renewable energy certificates program to promote the use of cleaner power, the government said in its statement. The new agreement will start Oct. 1, 2018 for CLP and Jan. 1, 2019, for HK Electric.