Provisional Legislative Council Panel Paper : China Light and Power's Excess Generating Capacity

Provisional Legislative Council Panel Paper : China Light and Power's Excess Generating Capacity

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Introduction

This paper summarises for Members' information the background and considerations leading to the agreement between the Government and the China Light and Power Company (CLP) on reducing CLP excess generating capacity.

Background

In December 1994, after CLP had lowered their forecasts of growth in demand for electricity, the Administration accepted proposals by the company to exercise contractual options to defer installation of generating units 5-8 at Black Point Power Station by up to two years.

CLP lowered their forecasts of demand growth further in 1995, citing as reasons slower growth in the economy and the shift of the manufacturing sector to China.The Administration commissioned a study of future demand for electricity and were advised by consultants that deferral of Black Point units 5 to 8 for five years would bring economic benefits to consumers.

On 5 November 1996, the Executive Council advised and the Governor ordered, among other things, that the China Light and Power Company should be urged to submit to the Government, within three months, a detailed proposal for the deferral of Black Point units 5 to 8, each for five years.

CLP Response

CLP responded on 5 February 1997 to the effect that units 5 and 6 were too far advanced to be deferred and that, while units 7 and 8 could be deferred, this would not be in the interests of consumers because the initial savings would be outweighed by additional costs, including payment of additional charges to the plant supplier, over the long term.

CLP also suggested decommissioning of some diesel-fired turbines at Castle Peak and Tsing Yi, as an immediate means of reducing their excess capacity, and sale of electricity to Hongkong Electric from 2003 to 2005, using the existing interconnector, as a future means of reducing excess capacity.

Consideration of CLP Response

The Administration evaluated CLP response in detail and sought the advice of the Energy Advisory Committee.After lengthy consideration, and with the benefit of a presentation by CLP, the Committee advised in respect of Black Point units 5 to 8 that -

units 5 and 6 are too far advanced to defer and should proceed according to the schedule agreed in 1994; and
units 7 and 8 should be deferred for five years, with a further review of the position in three years' time.

The Committee advice was discussed with CLP and an agreement reached.

Agreement Between Government and CLP

The agreement between Government and CLP concerning Units 5 to 8 is that -

Units 5 and 6 will be commissioned in 1998 and 1999, in accordance with the schedule agreed in 1994.Unit 5 has been delivered and is 90% paid for.Unit 6 will soon be ready for delivery and is 30% paid for.The supplier is not prepared to warrant the units' performance if they are mothballed for three to five years.Exhaustive examination of the relevant data and documentation indicated clearly that deferring manufacture or installation of these units would be impractical.
Units 7 and 8 will be deferred initially for three years (to 2003 and 2004, respectively), subject to a special review in the last quarter of 1999 of possible further deferral of up to two years. In other words, Units 7 and 8 will be deferred by up to five years should the circumstances require.The special review in 1999 will examine the company requirements for generating capacity in the light of actual and forecast growth in demand and the system reliability criteria agreed between the company and the Government. The units are in the early or preliminary stages of manufacture and the supplier is prepared to defer their delivery without loss of the warranties. CLP will negotiate with the plant supplier for the best possible deferral terms.

CLP will also implement its proposal to decommission and put into preservation 442MW of diesel-fired turbines at Castle Peak and Tsing Yi by the end of July 1997.The peak demand that the turbines are designed to meet can be met from elsewhere in the system.The special review in 1999 will also consider whether these turbines should be disposed of, recommissioned or continue to be preserved.

Benefits to CLP Customers ^*

CLP assessment of the cumulative costs and benefits to customers ofand deferral of Units 7 and 8 by three years indicates net benefits to customers until 2014, when the breakeven point is reached. The Administration assessment indicates that there will be net benefits to customers of $130 million at 2014. A separate assessment by the Administration consultants indicates that there will be net benefits to customers of $452 million at 2014.(The differences result from use of different assumptions for apportionment of capital costs.)

The Administration and its consultants have estimated that if Units 7 and 8 are deferred for 5 years, there would be net benefits of between $111 millionand $478 million for the economic life of the units, i.e. till2032.

After decommissioning, the 442MW of gas turbines will be written off the books and will no longer earn permitted return, even if eventually recommissioned. There will be benefits to CLP customers of $119 million.

Economic Services Branch
May 1997

^* All values quoted are net present value at 12% discount rate.