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New Scheme of Control Agreement Signed for Long-term Certainty of Power Industry

New Scheme of Control Agreement Signed for Long-term Certainty of Power Industry

25 Apr 2017

HK Electric signs the new Scheme of Control Agreement with the Government, effective for 15 years. Chairman of HK Electric, Mr. Canning Fok Kin-ning (right) and Managing Director of HK Electric, Mr. Wan Chi-tin (left) are pleased that the negotiations have been concluded and a new agreement reached. Secretary for the Environment, Mr. Wong Kam-sing (centre) represents the Government.

HK Electric signs the new Scheme of Control Agreement with the Government, effective for 15 years. Chairman of HK Electric, Mr. Canning Fok Kin-ning (right) and Managing Director of HK Electric, Mr. Wan Chi-tin (left) are pleased that the negotiations have been concluded and a new agreement reached. Secretary for the Environment, Mr. Wong Kam-sing (centre) represents the Government.

The Hongkong Electric Company, Limited (HK Electric) announced today that it has entered into a new Scheme of Control Agreement (SCA) with the Government, effective for 15 years from 1 January 2019 until 31 December 2033.

Chairman of HK Electric, Mr. Canning Fok Kin-ning said the company is pleased that the negotiations have been concluded and a new agreement reached. He considers that the New SCA provides the long-term certainty much needed for the local electricity sector to support the Government's energy and environmental policy objectives and its Climate Action Plan 2030+ with an aggressive target to reduce Hong Kong's carbon intensity by 65-70% by 2030 compared to the 2005 level.

Under the New SCA, HK Electric is entitled to a permitted return of 8% on average net fixed assets. Addressing the community's aspirations for cleaner air, the New SCA introduces a number of elements that will further encourage the use of renewable energy and promote energy efficiency, as well as encourage power companies to further enhance their customer service standards and operational transparency.

Mr. Fok said after the signing ceremony that the New SCA is a mutually beneficial regulatory framework to effectively balance the interests of various stakeholders in the community. "While customers will continue to enjoy service enhancements and price affordability, holders of share stapled units will benefit from the steady asset growth and a stable return offered by the investment opportunities to renew HK Electric's generation portfolio over the term of the New SCA. The gradual replacement of coal-fired units by gas-fired units will result in lower emissions and contribute greatly to the city's carbon reduction efforts," he stressed.

To support Government's target to reduce carbon intensity, HK Electric needs to renew its power generation portfolio and increase the number of gas-fired generating units to replace coal-fired units that will retire. While two gas-fired units, L10 and L11, are currently under construction, other coal-fired units at Lamma Power Station are coming to the end of their useful lives and need to be replaced progressively by gas-fired units over the next decade or so.

The current SCA governing the provision of electricity supply to Hong Kong Island and Lamma Island will expire in December 2018. HK Electric has engaged in talks with the Government for some time on the post 2018 regulatory framework.

Managing Director of HK Electric, Mr. Wan Chi-tin described today as a very important day for the power industry In Hong Kong. The early and satisfactory conclusion of the New SCA, 20 months before the existing one expires, will not only clear the uncertainties in the past years but also enable HK Electric to forge ahead with its investment pipeline, which includes the construction of new gas-fired units and other supporting infrastructure necessary to achieve the Government's objectives.

"A long-term regulatory framework and stable return will help strengthen investors' confidence and ensure that Hong Kong continues to enjoy the necessary electricity infrastructure," Mr. Wan noted.

He pointed out that under the current SCA, HK Electric's supply reliability rating has been maintained at a world class level of over 99.999%; HK Electric has not only honoured the pledge to freeze net tariff for five years but gone beyond to reduce tariff; significant achievements have also been made in reducing the three major emissions substantially by 40% to 90% over the past nine years. These achievements are only possible thanks to an effective regulatory mechanism which enables power companies to make timely investments and operate with flexibility.

Going forward, Mr. Wan reiterated that HK Electric will focus on increasing the use of natural gas for power generation to meet the Government's target to reduce carbon intensity as set out in the Climate Action Plan 2030+. HK Electric is committed, under the new SCA, to continue to work hand in hand with the Government and the community to build a low-carbon future for Hong Kong.

Scheme of Control Agreement