A coal-free future for Hong Kong

By Dr William Chung

Dr William Chung, Associate Professor in the Department of Management Sciences, argues that access to cheaper Liquefied Natural Gas (LNG) world markets can allow Hong Kong to enjoy a coal-free, nuclear-free future. The key to net zero carbon emissions by 2050 is carbon offsetting and this creates an opportunity to green the Belt and Road.

Climate change is the defining issue of our time and we are at a defining moment. The United Nations has declared that "rapid and farreaching" changes are required in order to keep the global average temperature rise below 1.5°C relative to pre-industrial levels. A special report released by the UN Intergovernmental Panel on Climate Change in October 2018 set an urgent new goal: net zero carbon emissions by around 20501. This article shows how Hong Kong can achieve this emissions target by relying primarily on LNG, and using carbon offsets to create a win-win situation and green the Belt and Road.

The Hong Kong government is making its contribution. A public engagement document "Longterm Decarbonisation Strategy" was issued through the Council for Sustainable Development of the Environment Bureau in June 2019. It seeks to "provide a platform to gauge the views of the community in formulating Hong Kong's longterm decarbonisation strategy, charting practical pathways and developing feasible actions to achieve net zero carbon emission by 2050."

Meeting this target is certainly a big challenge. Around 67% of Hong Kong's carbon emissions come from the power sector and around 50% of electricity is generated by coalfired power plants which incur the highest carbon intensity. So, the power sector is critical.

The Hong Kong energy mix in 2017
The Hong Kong energy mix target for 2020

Curbing air pollution and carbon emissions (2014-2020)

The Hong Kong government first targeted air pollution reduction by means of using relative "cleaner" natural gas in electricity generation. Then, carbon emissions reduction became the major target for combating climate change (Climate Action Plan 2030+).

Hong Kong plans 80% nuclear and renewables by 2050

To achieve a carbon reduction target of well below 2°C in 2050 that is in compliance with the Paris Agreement, it is estimated that about 80% of our electricity would need to come from zero carbon energy sources (including renewable energy and imported nuclear energy).

As Hong Kong has very limited renewable energy potential, regional cooperation plays a crucial role in helping us achieve a higher carbon reduction target beyond 2030.

Public Engagement Document, June 2019

The limits of coal-fired generation

Hong Kong's electricity sector has always been privately-owned and operated, and is run by two vertically-integrated power companies, Hong Kong Electric (HKE) and China Light and Power (CLP). HKE provides about onequarter of the territory's power to Hong Kong Island and Lamma Island, whilst CLP provides around three-quarters of the total to the New Territories, Kowloon and most of the outlying islands. The two companies are regulated under a Scheme of Control (SoC) Agreement with the government which is periodically renewed.

Back in 1997, the Hong Kong Government decided not to build any new coal-fired power plants. The idea was to reduce particulate matter, SO2 and NOx, and to resolve the air pollution problem. Any retired coal-fired power plants were to be replaced by natural gasfired power plants. This strategy was based on natural gas being considered a kind of relatively "clean" energy, and has seen dramatically improved pollution performance at CLP.

In order to meet the targets set in 2014 and 2017, Hong Kong began to replace coal-fired power plants with gas-fired. The generation capacity of the two power companies in 2018 is summarised by fuel type in the table on the facing page.

There were ten gas-fired power plants satisfying 27% of electricity requirements in 2017. SO2 and NOx have been greatly reduced at CLP, which supplies around 77% of Hong Kong's electricity requirements.

Progressive reduction of emission target (base year 2005)
Emissions from CLP generation units in 2018 (g/kWh)
Generation capacities of Hong Kong power companies
* Source: https://www.clp.com.hk/en/community-and-environment/green-tools/energy-costs (May 2019)

In this replacement process, Hong Kong faces two major challenges.

First challenge – increased fuel costs

The fuel for electricity generation is imported and the fuel cost factor of a gas-fired unit is around three times that of a coal-fired unit. Consequently, using more natural gas means that the electricity tariff will increase sharply. Hong Kong is facing significantly higher costs to curb air pollution. Added to that, fuel prices are volatile as shown in the index below.

CLP total emissions 1990-2017
Source: CLP (2018)

Second challenge – diversification of LNG fuel sources

CLP has two main gas supply sources, the Yacheng Gas Field near Hainan Island, China which has been used since 1996 and is nearly exhausted, and the Second West- East Gas Pipeline (WEPII) which came on stream in 2013. This is the world's longest gas pipeline crossing 14 provinces of China.

HKE, on the other hand, has a steady supply of LNG from Australia's North-West Shelf and Qatar. The LNG is shipped to Shenzhen where LNG is gasified and delivered to HKE by pipeline2.

When CLP's Yacheng Gas Field is exhausted, it will rely on a sole LNG supplier. This is not good business practice, especially given the increasing role of gas-fired generation in the Hong Kong mix. This vulnerability of supply was highlighted when CLP encountered a two-month suspension of gas supplies from WEPII due to a landslide in Shenzhen in December 2015. As a result, CLP needed to use more coal-fired power plants and this affected its air pollution performance. So, the diversification of gas sources is an important issue.

Fuel price index of CLP
Source: CLP (2018)

A global LNG market

To resolve the challenges of gas price stability and supply security, the two power companies have proposed to build an offshore LNG terminal. This uses state-of-theart Floating Storage Regasification Units (FSRU) to enable direct purchase of LNG from the international gas market.

A global LNG market

The natural gas market is becoming more globalised, and is rapidly changing as can be seen in the divergent prices of natural gas in 2011- 2016. For example, in 2012, the spread between NE Asia average spot price at around US$15 and UK average price was about US$5/mmBtu. To investors, such kind of price divergence was extremely important because it is closely monitored by spot suppliers of liquid natural gas. In order to maximise these suppliers’ profit, they would look to ship their liquid cargoes to the most profitable destinations, typically NE Asia and Japan.

The convergence of natural gas prices will speed up with the maturity of trading hubs and the increasing capacities of LNG's production facilities and cargoes. Since 2016, average gas prices in NE Asia and Japan have been around US$6/mmBtu, while US prices were around $3.5/mmBtu, illustrating the relatively narrow global price range. Obviously, there must be a price gap between US and Asia due to the varying shipping costs.

Price convergence has caused two significant changes in the gas market: shorter contract periods and the delinking of gas and crude oil contract prices. According to the International Gas Union, there is a gradual shift from long-term (5+ years), fixed destination contracts to short-term (less than 2 years) and medium-term ones (2-5 years), due to an increase in the number of contracts that have the flexible destination option and also due to the emergence of new producers and consumers. For contract prices, historically, natural gas prices have been indexed to the price of crude oil and therefore most gas contracts use an oil price as the main index. Recently however, natural gas prices have been increasingly delinked from crude prices, with the potential to get much cheaper.

Convergence of LNG prices
Source: https://www.igu.org/resources-data
Floating Storage Regasification Units
Source: CLP (2018)

An understandable concern for Hong Kong residents is if there is access to an international gas market right now, why is there a need to build this new infrastructure? This is because the profit of power companies in Hong Kong is determined by the Scheme of Control Agreements3,4 with the government. Profit is equal to the permitted rate of return for each year and this is capped at 8% of the total value of their Average Net Fixed Assets for that year. That is, the profit of the power companies relies upon how many fixed assets the companies have built. Consequently, the power companies are constantly interested in investing in more fixed assets, such as the FSRU, in order to generate more profit. The effectiveness of FSRU in terms of gas price stability and supply security is not the key concern of the power companies. Hence, we should take a look at the development of the LNG market and check if using an offshore LNG terminal is effective in the near future. We conclude, as long as the LNG's prices are globally converging and the infrastructure of the LNG's market is becoming mature, the effectiveness of FSRU is justified.

How Hong Kong can meet net zero carbon emissions by 2050

While Hong Kong had been putting some effort into curbing air pollution and reducing carbon emissions, an urgent and challenging target emerged: achieving net zero carbon emissions by 20505. To achieve this carbon neutral state, various international cities and countries have set strategies such as6:

  • Enhancing education and public awareness to reduce consumption
  • Enhancing building energy efficiency – for example, energy saving works (e.g. retrofitting and retro-commissioning) mandatory for all existing large buildings, and mandating all new buildings to be net zero carbon emissions
  • Promoting green transport – such as mandatory zero emission vehicles to replace all conventional fuel-driven vehicles
  • Deep decarbonisation in the energy (power) sector – such as using renewable energy and nuclear energy as the major energy sources, supplemented by fossil fuel generation equipped with carbon capture and storage technology
  • Technological breakthroughs – rigorous technological breakthroughs and advancements to reduce and offset carbon emissions

Indeed, decarbonisation in the energy sector is the most critical pathway. Enhancing building energy efficiency alone cannot achieve a net zero target although 90% of electricity consumption is from buildings. Promoting green transport implies accelerating the adoption of electric vehicles, which pushes the emissions back to the power plants. Hence, not surprisingly, the Hong Kong government proposes to use nuclear and renewable generation (solar and/ or wind) as the major energy sources. Nuclear and renewable generation are generally considered as having a "virtual" zero carbon emission. However, even nuclear energy and photovoltaics have a certain amount of lifecycle green house gas emissions compared to other renewables. But, other concerns may negatively affect Hong Kong in the adoption in achieving the zeroemission target.

Fukushima and worldwide opposition to nuclear power

The increased use of nuclear energy, may be constrained by public concerns. The nuclear energy currently imported from mainland China contributes around 25% of Hong Kong's electricity supply. In the 2014 consultation document (Future Fuel Mix for Electricity Generation), the government proposed to import more nuclear from mainland China, but met with societal concerns due to the 2011 Fukushima incident. Indeed, if we look internationally, four regions have undertaken to end nuclear power generation completely – Germany, Switzerland, Belgium and Taiwan.

How about renewables? Land scarcity does not allow Hong Kong to deploy large-scale solar or wind farms, and offshore busy sea lanes ensure that wind farms are impossible. In June 2019, the Hong Kong government published Public Engagement on Long-term Decarbonisation Strategy7, where it is estimated that according to current technologies, there are only modest realisable renewables including solar, wind, and wasteto- energy at about 3%-4% of total demand, by 2030. The government therefore proposes regional cooperation allowing Hong Kong to tap into renewables available in mainland China.

Note that the government also considers that importing more nuclear energy from mainland China is a kind of regional cooperation. The existing connecting grid is being enhanced to supply around 30%-35% of Hong Kong's fuel mix.

A carbon neutrality coalition

The effectiveness of regional energy cooperation around the world is well documented in the government's consultation publication. For instance, there are interconnective grids between Norway, Sweden and Germany allowing Denmark to export excessive wind power when necessary, and to import Norwegian hydropower, Swedish nuclear power and German solar power when the wind is still.

Obviously, this kind of regional cooperation is not comparable to that proposed by the Hong Kong Government in the engagement document, in which Hong Kong invests in nuclear and renewable generation capacity in mainland China and transmits the power to Hong Kong. In terms of energy policy, it is not a good practice, as mainland China also requires green generation to meet the net zero emission target. Although the government's energy policies have considered the criteria of reliability, security and availability, and affordability, the more appropriate energy policies should include the consideration of "equity". That is, we need to consider if Hong Kong's energy policies negatively affect the "reliability, security and availability, and affordability" of mainland China's power market. Currently, the more power is imported from mainland China to Hong Kong, the more unreliability is imposed on China's power system and end users.

Moreover, if the government insists on the proposed regional cooperation, it should be aware that the technologies of power systems are enhancing rapidly, for example in intelligent grid systems and ways to store electricity, such as giant battery plants. It is therefore recommended that such kind of cooperation should be revised every five years to meet the 2050 target.

Instead of considering regional cooperation through importing predominantly nuclear generation capacity, we should explore other viable alternatives, such as a carbon neutrality coalition.

The importance of planting trees

Although land scarcity prevents Hong Kong from implementing a carbon sink strategy locally, we may still consider the path of carbon neutrality8 by means of planting of trees in the Belt and Road countries and mainland China thereby obtaining a carbon credit to offset Hong Kong's carbon emissions9. Indeed, mainland China can initiate a Carbon Neutrality Coalition10 for Belt and Road countries. With Hong Kong's investment in offsetting carbon emissions, China could develop a Green Belt and Road. Note that reducing emissions from deforestation and forest degradation in developing countries is also a kind of carbon neutrality11. IPCC12 presents a research output that the carbon neutrality potential is estimated up to 23 GtCO2 dominated by reduced rates of deforestation, reforestation and forest management, and concentrated in tropical regions.

A green future

Assuming that Hong Kong uses gas-fired power plants to supply the 63,000 million kWh consumption requirement in 2050 (this implying around 1% increase annually), with the current emission factor (488gCO2eq/ kWh), Hong Kong needs to offset 30.8 million tonnes CO2e which would require planting around 52 times Hong Kong's land area13. According to Pakistan's cost factor14, current marginal abatement cost (US$/tCO2e reduced) is around $10 to $25. The estimated offsetting cost for Hong Kong from now until 2050 would be around US$308 million to US$770 million at current US$ prices in total. With 68 Belt and Road countries to plant trees in, there is plenty of scope for Hong Kong to start the carbon neutral process now and meet the future net zero emission target by 2050. Assuredly, this kind of "regional cooperation" would result in a winwin situation.

Greta Thunberg, the 16-year-old climate activist from Sweden, sails into New York Harbour flanked by a fleet of 17 sailboats representing each of the United Nations Sustainable Development Goals on their sails
Courtesy of the UN Photo by Mark Garten

How about Hong Kong?
How should we generate power?
Gas, nuclear, renewables?
What do you think?

"Changing one disastrous energy source for ‘a slightly less disastrous one’ is not progress"

Greta Thunberg climate activist

Carbon sinks

Carbon sinks are natural systems that soak up and store CO2 from the atmosphere. Forests are great examples. During photosynthesis, trees and plants sequester or absorb CO2 from the atmosphere, using it as food for growth. The carbon from the CO2 becomes part of the plant and is stored as wood, stems and leaves. Although forests do release some CO2 in their natural succession, a healthy forest typically stores carbon at a greater rate than it releases carbon.

The existing carbon sink in Hong Kong is only about 1% of the total carbon emissions, hence the importance of a regional carbon neutrality policy.

Public Engagement on Long-term
Decarbonisation Strategy, 2019

What are carbon offsets?

A carbon offset is a reduction in emissions of carbon dioxide or other greenhouse gases made in order to compensate for emissions made elsewhere. Offsets are measured in tonnes of carbon dioxideequivalent (CO2e). One tonne of carbon offset represents the reduction of one tonne of carbon dioxide or its equivalent in other greenhouse gases.

Offsets typically support projects that reduce the emission of greenhouse gases in the short or long-term. Common project types are renewable energy, energy efficiency and forestry projects.

The potential for global forest cover

The restoration of forested land at a global scale could help capture atmospheric carbon and mitigate climate change. Bastin et al. used direct measurements of forest cover to generate a model of forest restoration potential across the globe. Their spatially explicit maps show how much additional tree cover could exist outside of existing forests and agricultural and urban land. Ecosystems could support an additional 0.9 billion hectares of continuous forest. This would represent a greater than 25% increase in forested area, including more than 500 billion trees and more than 200 gigatonnes of additional carbon at maturity. Such a change has the potential to cut the atmospheric carbon pool by about 25%.

Science, July 2019


Dr William Chung
Associate Professor
Department of Management Sciences