VZCZCXRO8633
RR RUEHCN RUEHGH RUEHVC
DE RUEHHK #0113/01 0160959
ZNY CCCCC ZZH
R 160959Z JAN 09
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 6675
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEAEPA/HQ EPA WASHDC C O N F I D E N T I A L SECTION 01 OF 03 HONG KONG 000113 
 
SIPDIS 
 
E.O. 12958: DECL: 01/13/2024 
TAGS:          
SUBJECT: HK'S POWER SECTOR: EMISSIONS AND FUEL CHALLENGES 
 
REF: HONG KONG 01812 
 
Classified By: CONSUL GENERAL JOSEPH DONOVAN REASONS 1.4 (B,D) 
 
 1. (SBU) Summary: Hong Kong,s electrical power providers are 
on track to meet strict new Hong Kong Government (HKG) air 
pollution caps, which go into effect on January 1, 2010.  The 
utilities plan to meet the industry-targeted caps by 
retrofitting pollution control equipment on some coal-fired 
generators and converting others to burn liquid natural gas 
(LNG).  These plans, however, depend strongly on 
now-uncertain, long-term LNG supplies and the continued 
ability to import low sulphur/low ash coal from Indonesia. 
End Summary. 
 
 2. (C) Comment: The 2002 Hong Kong-Guangdong pollution 
reduction agreement driving the establishment of emissions 
caps did not anticipate the Energy MOU the HKG signed with 
mainland China in August, 2008 (Reftel).  Under this MOU, 
Hong Kong effectively gave up a significant degree of energy 
autonomy by linking LNG supplies firmly to Mainland 
facilities; the MOU resulted in the immediate cancellation of 
long-standing plans to build an LNG terminal in Hong Kong, 
leaving the utilities completely dependent on Mainland 
pipelines and infrastructure for their LNG supplies. Hong 
Kong utilities have serious doubts about mainland China's 
ability to provide the necessary LNG. Without increased and 
stable LNG supplies, power providers believe they will be 
unable to consistently meet the 2010 emissions caps, making 
Hong Kong,s air quality the first casualty of increased 
energy dependence on the Mainland.  The new caps also do 
nothing to address the most publicly complained-about type of 
air pollution ) road-side vehicle emissions trapped in the 
city's urban street canyons. 
 
2010 Emission Caps and Heavy Fines 
---------------------------------- 
 
 3. (SBU) Citing electrical power generation as the largest 
single source of locally produced air pollution, the HKG 
published a technical memorandum to the existing Pollution 
Control Ordinance on November 7, 2008.  The new regulation 
targets Hong Kong,s electricity providers by restricting 
pollution emissions from electrical power generation plants. 
Under the regulation, effective January 1, 2010, 
utility-generated levels of pollutants will be capped at 
25,120 tons of Sulphur Dioxide (SO2), 42,600 tons of Nitrogen 
Oxides (NOX) and 1,260 tons of Resperable Suspended 
Particulates (RSP) per year.  These limits will be split 
between Hong Kong,s two utility providers, China Light and 
Power (CLP) and Hong Kong Electric (HK Electric). Under the 
regulation, the utilities must further break down the caps by 
allocating them to individual power stations based on the 
percentage of that station's contribution to Hong Kong,s 
power grid.  (Note: CLP owns the distribution network and 
operates three power stations in a joint-venture partnership 
with ExxonMobil, supplying electrical power to Kowloon and 
the New Territories. HK Electric owns and operates one power 
station on Hong Kong,s Lamma Island, supplying power to Hong 
Kong Island. End Note.) 
 
 4. (SBU) The HKG and Guangdong Provincial Government agreed 
in 2002 to improve regional air quality through specific 
emission reductions by 2010. The 2010 emission caps are the 
key part of Hong Kong's plan to meet its obligations under 
this agreement.  After January 1, 2010, utilities not meeting 
the emission limits will be subject to escalating fines 
beginning at HKD $30,000 per excess ton of pollutants. 
Repeated failure to meet the caps could result in jail time 
for company officials.  Neither utility participated directly 
in the process to set the caps, but both knew well in advance 
what the caps would be and planned accordingly.  The power 
providers plan to meet the new standards by adding 
state-of-the-art scrubbers and other specialized control 
equipment to some of their coal-fired boilers and converting 
others to burn much cleaner LNG. 
 
CLP ) On Track, but Facing LNG Uncertainty 
------------------------------------------ 
 
 5. (C) CLP officials told Econoff that CLP is on track to 
meet the 2010 air quality standards, but they are concerned 
about their ability to meet both increasing demands for power 
and the emission cap requirements after 2012 due to uncertain 
LNG supplies.   CLP, Hong Kong,s largest utility, generates 
approximately 33 percent of its power from coal-fired plants, 
33 percent from LNG, and gets the remaining 33 percent of its 
power from mainland China,s Daya Bay Nuclear Power Station. 
A five percent stake holder in Daya Bay, CLP is obligated 
under a fixed contract to purchase 70 percent of the nuclear 
power station,s output.  CLP,s primary coal-fired plant has 
 
HONG KONG 00000113  002 OF 003 
 
 
already been upgraded with flue gas desulphurisation 
equipment and other advanced technology to drastically reduce 
sulphur and NOX emissions. 
 
 6. (C) CLP originally planned to further reduce its emissions 
by converting additional boilers to LNG, raising its total 
percentage of LNG-generated power to 50 percent.  Gas 
supplies for the conversions depended on completion of an LNG 
terminal on Hong Kong,s Soko Island, but approval and 
construction of the Soko Island terminal, a one billion USD 
investment, was killed when the HKG unexpectedly signed an 
energy MOU with the Mainland authorities on August 28, 2008 
(Reftel).  Under terms of the MOU, the China National 
Offshore Oil Corporation (CNOOC) will continue to supply Hong 
Kong with LNG at market prices for the next 20 years.  CLP 
officials do not see how CNOCC will be able to meet the 
demand.  CLP currently gets 100 percent of its LNG through a 
780-kilometer undersea pipeline from the Yacheng gas field, 
located in the South China Sea just off Hainan Island.  The 
Yacheng field reached peak production in 2008; CLP analysts 
expect it to be completely depleted by 2013. 
 
 7. (C) CLP officials believe CNOOC cannot increase supplies 
of natural gas without significant new discoveries, and even 
if supplies are discovered, the infrastructure needed to get 
the LNG to their power plants in Hong Kong could take years 
to plan and build.  In the face of uncertain supplies, CLP 
officials are scaling back plans to convert additional 
burners to LNG and are actively considering plans to reduce 
dependence on LNG as a fuel for power generation from the 
current 33 percent to as low as 25 percent.  By controlling 
the growth in projected demand and reducing consumption, and 
thus the off-take from the Yacheng Field, CLP hopes to extend 
the field's life and buy time to work out a solution to their 
long-term LNG needs.  This strategy, CLP believes, runs a 
high risk of violating the emissions caps.  One possible 
solution is for the HKG to ask CNOOC to build an additional 
LNG terminal in Guangdong near Hong Kong, possibly with 
CLP/ExxonMobil participation.  CLP would also like to 
increase the amount of power it can draw from the Daya Bay 
Nuclear Power Station, but this would require building 
additional reactor units, again only a longer-term 
possibility. 
 
HK Electric ) Better Off but More Dependent on Coal 
--------------------------------------------- ------ 
 
 8. (C) HK Electric, the Special Administrative Region,s 
second utility provider, supplies Hong Kong Island,s power 
needs through a single large power plant on Lamma Island.  HK 
Electric officials are planning to meet the new air quality 
requirements by converting coal-fired boilers to LNG and 
installing additional pollution control equipment.  HK 
Electric currently generates 20 percent of its power from LNG 
and 80 percent from coal.  Pollution control upgrades and 
conversion work will be completed this August, increasing the 
company's LNG use to 30 percent.   Additional conversions are 
planned which should bring the overall LNG/coal fuel mix 
ratio to 50 percent LNG and 50 percent coal by 2015.  Like 
CLP, HK Electric,s ability to meet the new air quality caps 
depends on converting generators to use LNG and the ability 
to increase LNG supplies. 
 
 9. (C) HK Electric,s LNG is shipped from gas fields in 
Northern Australia to a small LPG terminal in Shenzhen and 
then piped across the border to their Hong Kong power plant. 
The Shenzhen LPG terminal is expanding its capacity and HK 
Electric is in negotiations with Qatar to secure additional 
long-term contracts for LNG, leaving it in good shape for 
this fuel source.  Unfortunately, the Shenzhen LNG 
terminal,s location and existing customer commitments make 
it unviable as an option to supply CLP,s needs. 
 
Coal as a Problem for Both Utilities 
------------------------------------ 
 
 10. (C) Both CLP and HK Electric officials told Econoff they 
have serious concerns about the quality and reliability of 
coal supplies.  Low-sulphur/low-ash coal from mainland China 
is not available, leading both utility providers to import 
all their coal from Indonesia. According to HK Electric 
officials, the coal delivered is often of lower thermal 
quality or under the contracted tonnage. The contracts are 
negotiated through Indonesian brokers, who, the utilities 
claim, are often unresponsive to their complaints. Coal 
prices are also volatile, recently reaching historic highs 
and then dropping dramatically, making planning difficult. 
For now, both CLP and HK Electric report their coal problems 
are manageable and coal supplies are stable, though the 
lower-than-promised quality impacts the ability to meet the 
pollution requirements and price fluctuations are making 
 
HONG KONG 00000113  003 OF 003 
 
 
power generation costs hard to control. 
DONOVAN