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The Environment Bureau of the Hong Kong SAR Government Case Study

Project:

Review of electricity price setting mechanisms

Client:

The Environment Bureau of the Hong Kong SAR Government

Country:

Hong Kong

IPA was commissioned by the Hong Kong Government to carry out a regulatory study of different electricity price setting mechanisms (PSMs) commonly adopted in overseas electricity markets and by local utilities, and their applicability to the local electricity market.

IPA conducted an objective review and assessment of different PSMs commonly adopted in overseas electricity markets and by other local utilities and recommend changes, if any, with justifications for consideration by the Government. Tasks included:

  • Introduction to the economic theory behind natural monopolies and the need for regulation to incentivise efficient investment.
  • Review and an economic assessment of alternative options for PSMs used in power market regulation, covering rate-of-return, price-cap/revenue-cap, sliding scale and yardstick regulation, detailing the economic and financial incentives of each.
  • International case study of regulatory frameworks and PSMs used in: Finland, Norway, the Netherlands, Chile, Singapore, New South Wales (Australia), New York City (USA) and Alabama (USA).
  • A detailed case study of the evolution of current GB energy market arrangements for transmission and distribution, from RPI-X to RIIO, detailing lessons learnt and how current policy design is implemented through the new regulation.
  • Review of the local electricity market, development of regulation regarding tariff design and current issues.
  • Examination of price setting mechanisms and the setting of tariffs by other local utilities.
  • Assessment of the pros and cons of the various PSMs and their applicability to the local electricity market, based on price efficiency, ability to attract economic investment, and security of supply for users.
  • Recommendation of an appropriate regulatory policy and electricity PSM, proposing improvements to the mechanism that sets the allowed rate-of-return based on economic efficiency criteria, which would balance consumer interest over both the short and long term.

The Executive Summary outlining IPA’s key findings and recommendations has been published on the Environment Bureau’s website.