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2019-2023 Development Plan - HK Electric to Enter into a New Era of Gas Generation

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2019-2023 Development Plan - HK Electric to Enter into a New Era of Gas Generation

3 Jul 2018

HK Electric announced today a capital expenditure of HK$26.6 billion in the next five years to build the infrastructure required for the transition from coal to gas generation in order to increase the proportion of gas-fired generation, while continuing to provide a highly reliable power supply and excellent services.

HK Electric is pleased that its 2019-2023 Development Plan has been approved by the Executive Council today, said Managing Director Mr. Wan Chi-tin who pledged full support for the Government in combating climate change and improving local air quality.

Under the new Development Plan, HK Electric will invest HK$16.2 billion (see table 1) in projects related to power generation, which accounts for 61% of total investment. A large part of it will be used to build the new gas-fired units and associated facilities required to replace the retiring coal-fired units.

The company is currently constructing two new gas-fired units (L10 & L11), and together with the newly-approved unit (L12), three new gas-fired units will be commissioned in the next five years. They will replace five coal-fired units and one old converted gas-fired unit that are retiring before 2023. By then, the total installed capacity of HK Electric will be lower than that of now.

Mr. Wan said, "The next five years will mark a new era of gas generation for HK Electric as we increase the proportion of gas-fired generation - from above 30% of total generation now to 50% in 2020, rising further to about 70% in 2023." (see fig.1)

To achieve these targets, other than building new gas-fired units, HK Electric will need to develop a new source of natural gas to avoid over-reliance on the current "single source, single pipe" gas supply. The company has been partnering with CLP Power to explore the development of an offshore LNG (Liquefied Natural Gas) terminal in Hong Kong waters. This terminal, when commissioned, will enhance the security of the natural gas supply as well as the company's bargaining power for pricing.

As for the transmission and distribution system, HK Electric will invest HK$9.1 billion for new transmission facilities required by the new gas-fired units, cable replacement, construction of new zone substations in Eastern and Central Districts, as well as installation of smart meters to build an intelligent information exchange platform for customer energy management to facilitate Hong Kong's transformation into a smart city. Capital expenditure for customer services and corporate development will total another HK$1.3 billion.

Mr. Wan noted that capital investment in the coming years will inevitably put pressure on tariff, and together with the increasing use of natural gas, the promotion on renewable energy, energy efficiency and conservation under the new Scheme of Control Agreement (SCA) will also result in higher costs.

The pressure on tariff will be eased from 2019 when, under the new SCA, HK Electric's permitted rate of return will be reduced to 8% of net fixed assets. Together with other adjustments, the basic tariff for 2019 will be reduced to 101.3 cents per unit of electricity, 7.8 cents lower than the 109.1 cents in 2018. (see table 2)

However, following two years of substantial special rebates in 2017 and 2018 - "Special Rent & Rates Rebate" and "Special Fuel Rebate", there is no room for HK Electric to provide the same in 2019. These two rebates will be reduced from 20 cents per unit of electricity in 2018 to 4.6 cents in 2019, with the shortfall of 15.4 cents to be reflected in the 2019 tariff.

Mr. Wan explained that though the reduction of permitted rate of return will lower tariff, it could not fully offset the impact of the substantial reduction in the two special rebates. As a result, there will be a rebound in 2019 net tariff by 7.6 cents per unit of electricity, from 112.5 cents in 2018 to 120.1 cents in 2019, representing an increase of 6.8%.

"The higher net tariff for 2019 is mainly attributed to the substantial reduction in special rebates. If the impact of the rebates were taken out, the net tariff for 2019 would have been lower than that of 2018 by 5.9%.

Describing the new Development Plan as very pragmatic, Mr. Wan added that it fully demonstrates HK Electric's long term commitment to Hong Kong. He is confident of achieving the Government's carbon and emission reduction targets as the company continues to provide a highly reliable electricity supply and excellent services to the homes and businesses in Hong Kong.

Table 1: 2019-2023 Development Plan

Components

Investment
HK$ Billion

Power Generation System

16.2 (61%)

Transmission and Distribution System

9.1 (34%)

Customer Services and Corporate Development

1.3 (5%)

Total Capital Expenditure

26.6

Figure 1: HK Electric Enters into a New Era of Gas Generation

Towards Low-Carbon Power Generation

Table 2: Net Tariff for 2019

Components

2018
cents/unit

2019
cents/unit

Adjustment
cents/unit

Basic Tariff

109.1

101.3

- 7.8 (7.1%)

Fuel Clause Charge

23.4

23.4

--

Net Tariff Payable

132.5

124.7

- 7.8 (-5.9%)

Special Rent & Rates Rebate

- 4.0

- 2.3

+1.7

Special Fuel Rebate

- 16.0

- 2.3

+13.7

Net Tariff Payable
(Including Rebates)

112.5

120.1

7.6
(+6.8%)