Why is Hong Kong robust in the energy war?

An energy expert says Hong Kong has secured energy from nuclear to gas-fired power.

Unlike the rest of the world, Hong Kong has a more secure and diverse energy supply, making it resilient to brownout threats and reducing exposure to the highest energy costs seen in many countries at this time.  For example, the nuclear electricity supply from Daya Bay Nuclear Power Station is extended up until 2034. This can help Hong Kong keep up with the energy crisis, Mike Thomas, a founding partner at energy consultancy firm, The Lantau Group, told Hong Kong Business.

Comparing Hong Kong to other markets, Thomas cited California, which has experienced difficulty meeting electricity demand due to massive heat waves in the state.  European countries are continuing to experience energy woes as part of the Ukraine war and the loss of gas supply from Russia. The UK even bought an excess supply of liquified natural gas (LNG), according to a news report.

Thomas also talked about how Hong Kong could speed up its transition to renewable energy even as the market lacked solar and wind power.

In this Q&A, Thomas brings over 30 years of energy consulting experience to share his insights on why Hong Kong’s energy supply is faring better than other markets amidst rising costs.

Why is the Hong Kong energy sector in better shape than most markets? 

Based on the fuel mix in Hong Kong, it is taking some nuclear power, which is not exposed to coal or gas markets. It is taking some natural gas, much of which comes from Turkmenistan via the 9000km West to East pipeline and some comes from local gas resources near Hainan Island which comes from Turkmenistan. It's not the same as the LNG that Europe, Japan, and Singapore, are paying extraordinary premia for. This is long-term contracted, pipeline-supplied gas. That's kind of a different dynamic. Then there is coal, which is also still part of the Hong Kong mix. 

Hong Kong benefits right now from its very diverse energy mix compared to, say, Singapore, which relies on imported gas for over 98% of its electricity generation. Singapore does a great job of keeping the lights on, but the cost has been very high. Singapore is not in the same category of risk as Europe which has experienced the unexpected loss of gas supply from Russia and has a particular need for natural gas for both electricity and heating in the winter.  

At the moment, Hong Kong really doesn't have that same kind of issue or problem so that's good. Let's just recognise that that's a product of all of the things that got us to this point, which is a reasonable regulatory regime, well-run power companies, decisions made back in the 1990s concerning contracting for supply from the Daya Bay nuclear power station, and the good fortune of a diversified fuel mix. 

Can you expound on what makes Hong Kong’s energy more resilient than California’s?

At the time we are talking [on 7 September in California], it’s 103°F, which is pretty hot by any standard, almost 40 degrees Celsius.  People have been concerned about whether the lights will stay on in Northern California.  In fact, everyone is being asked to conserve as much as possible.  

Compared to California, Hong Kong has a more robust system and reserve margin for meeting peak demand.  Our exposure to such surprising heatwaves is probably lower because it is always hot in Hong Kong each year – whereas Northern California is normally much more temperate.  Surprise is what challenges complex systems.  The scope for surprise is what you have to plan for.  No one likes energy surprises.  We have to plan for the ‘expected surprises’ and hope to be able to avoid or find a way to manage through the ‘unexpected surprises’.

Recently, we’ve seen the same sort of a surprise in August when temperatures when the Mainland experienced its most extreme heatwave ever combined with drought.  Hydropower availability was greatly reduced – much more than expected – leaving the system with a shortage.  Businesses went without electricity.  It’s always a problem when complex systems are pressed beyond what they have been planned to accommodate.  It can be expensive, however, to plan a system to accommodate extreme outcomes. It’s a question of needing to be aware of what could go wrong and being willing to pay what it takes to be prepared for that kind of rare outcome.

With more extreme outcomes in fuel markets and in weather patterns, many systems in many countries will need to revise their planning factors, what kind of reserve margins are needed, and what kind of supply mix and technologies are most appropriate.  Fortunately, Hong Kong has systems that are well-planned for the range of contingencies we are seeing right now.  Tariffs must go up due to higher fuel costs, but lights, life, and business will go on.

Around the world, more generally, it almost seems that anything to do with temperature and water these days is a problem. The European problem is more tied to the sudden loss of Russian imported gas. But everywhere else, it's been temperature and drought. 

Why is Hong Kong better at mitigating rising costs and brownouts? 

It's the same issue as before, the diversity of fuels and technologies that Hong Kong has.

There's a saying you go to war with the army you have. What Hong Kong has at this moment in terms of electricity and infrastructure. It just happens to be a particularly good mix of resources and technologies to deal with.  It’s not a carbon-neutral energy mix – that is a future challenge.  But it is a resilient and robust energy mix.  We can at least enjoy the benefits right now of that.

Hong Kong is not dependent on hydrology and rainfall. Hong Kong is not as dependent on imported LNG. Hong Kong has different kinds of capacities that can be used, if one thing is not available, something else can be made available. 

For the energy war that's going on right now, so to speak, the Hong Kong army is well situated. 

But in the energy transition, moving away from some of the coal that's in Hong Kong, will still be a challenge that will push us more towards depending on natural gas. Then, moving away from natural gas to renewables will be more challenging because we don't really have the obvious resource candidates to support that. 

We don't have vast tracts of solar or wind resources. It's not clear what you can do with the offshore wind yet to scale or for Hong Kong so that challenge, we haven't started facing quite yet.

CLP, one of the largest power firms in the Asia Pacific region, revealed that it is ramping up its natural gas as it prepares to phase out coal-fired generation in Hong Kong amidst carbon neutrality goals. It is also seeking to shift to renewable energy. 

With these goals, do you think it would pose risks to Hong Kong’s resilience to mitigate rising costs?

I don't think anybody has an absolute answer to that. Willingness to pay is always going to be important here. Singapore can keep the lights on, but it requires more costs right now.  Physically, the Singaporean system is very resilient. Financially, it takes more money right now.  Resilience needs to be thought of in terms of what it takes to keep the lights on as one part of the equation versus how to pay for it as the other part of the equation. There's a balance between what has generally been called affordability or reasonable pricing, or acceptable tariffs, and the timing and of building new things to display solid tech.

If you've got a perfectly good functioning, existing, generating unit that's almost paid for, turning it off and replacing it with something that costs a lot of money will probably make your tariff go up.  Hence the energy transition is a balance between willingness and ability to pay vs how fast you replace otherwise functional power generation assets with zero carbon alternatives.

What we're thinking might start happening more now in many countries exposed to such volatile and high fossil fuel prices is that it will increase people's appetite for renewable energy. Even if it's a little bit higher in cost, but a lot more stable and predictable, people may start putting a premium on certainty and accelerate the reduction in reliance on fossil fuels, which are both volatile in price and sometimes there can be difficulties actually obtaining them within budgets. 

This will be harder in Hong Kong but obviously easier across the border. The exchange of carbon credits may help. Longer-term power transmission may help. Nothing can or should change too quickly, but the wheels of change can be put in motion or even accelerated a bit.

READ MORE: How Hong Kong plans to reach its carbon neutrality target

Do you think Hong Kong is least attractive in driving energy-sector green foreign-driven investments (FDI)? How can they improve on this and should they do improvements to drive more FDIs?

Hong Kong is attractive for FDI in the sense that the regulatory regime supports investment in projects agreed to meet the needs of Hong Kong.  But what does this really mean?  

To drive more, FDI would require that Hong Kong find even more projects to do. Hong Kong is limited by size and resource base. Also, there is a question of timing and cost and need. 

If you invest more today to stop using something you already have then, you may increase your price of electricity by more than if you waited and retired existing capacity resources as they aged.  We could do that, but it isn’t a reason to track FDI.  It’s more a consequence of accelerating zero carbon energy due to having a willingness to pay more for it.  That’s just a different calculus.  FDI is a consequence, but not a target or metric or lever here in Hong Kong.

It’s just better to not look at FDI. More FDI is not necessarily better if the FDI is going into things that are not needed yet or that would raise costs more than they are considered to be worth. It’s always better to look at the fundamentals and let Hong Kong’s openness to innovation and financial sophistication help after that.