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The electricity market is often regarded as a public asset which has several characteristics. A public asset normally requires a large capital investment in technology. Profits can only be made in the long term. Because of its large capital input, many public assets require market protection. In many other economies, public assets are state-owned or nationalized, and losses are common as the cost of production is either inefficient or subsidized by state funds.

In Hong Kong, the two electricity supply companies are largely privately owned, and their operations monitored by the government to ensure maximum efficiency. There are several advantages of a privately owned utility company. One is the lack of reliance on fiscal subsidies, and the cost of production will not be subsidized by taxpayers. The two electricity companies make profits, and price is raised at regular intervals. But compared with other economies, the cost of electricity in Hong Kong is still reasonable. Another advantage of a privately owned electricity company is business responsibility. Under normal circumstances, it is very rare to experience power failures in Hong Kong. The overall service performance of the two electricity companies is of a high standard.

There is, of course, room for improvement. Environmentalists complain about the level of air pollution, as the energy mix used for electricity generation requires constant improvement. This should put pressure on the two companies to upgrade their technology and the mix of energy inputs. However, technology improvement in electricity production requires time and capital investment. Given that the Hong Kong market is reasonably stable and demand estimates should be quite accurate, the two companies should be able to come up with a way to achieve energy savings and reductions in pollution. Indeed, it would be advisable for these two companies to collaborate further to work for the long-term benefit of Hong Kong.

In the meantime, the two companies can educate the public about exploring avenues to save electricity. They can even introduce viable technologies to reduce electricity usage. For example, would it be economically viable in the long term for residential and office buildings to install solar energy equipment on their roof-tops? Then, the electricity generated could be used to serve common areas in the buildings.

We are primarily self-sufficient in the supply of electricity in Hong Kong and supply and demand have been steady. The market system has been working effectively. Improvements can only be conducted in the long-term.

But the mainland market is much larger, and the supply of electricity is less stable than in Hong Kong. This is because electricity supply there varies considerably among different provinces. The use of energy inputs there also varies. The electricity supply system on the mainland is less secure compared with the more mature system in Hong Kong. So, would importing electricity from the mainland add more uncertainty to the Hong Kong market? One does not need to contemplate an extreme case of mass electricity failure in Hong Kong if the supply of electricity from the mainland was affected. This is because the local supply will always be there to back up the provision of electricity.

The economic and non-political choices facing Hong Kong include: 1) Would it be better to be more self-reliant in the supply of electricity (as this would minimize uncertainty to electricity users in Hong Kong); 2) Would the cost of electricity be easier to control if the supply was through the two local companies rather than opening up to a new supply source which would add to prices and cause uncertainties to local users; 3) As the system of electricity supply on the mainland is still maturing, would it be more appropriate to let the system there develop before considering the possibility of exporting electricity? The conditions of demand and supply on the mainland are still uncertain. So it would not be wise for Hong Kong to experience potential supply difficulties coming from the mainland.

One should also consider a practical issue. Electricity from the mainland would need to reach users through a wiring network controlled by the two electricity companies in Hong Kong. Hence, the cost to users could be higher as there would be additional charges on the electricity and the network which transmits the supply. There are economies of scale involved because of the two companies responsible for the entire system of supply and the transmission network. In short, operation of the electricity market would be simpler under the current system.

The demand for electricity is steady in Hong Kong and there is a dependable supply from the two local companies. Therefore, importing electricity from the mainland could lead to the export of electricity to nearby countries and regions by the two electricity companies. Hong Kong residents would not really benefit from importing electricity.

The author is associate professor of the Department of Economics and Finance at City University of Hong Kong

(HK Edition 03/31/2014 page1)