Here's why reliable electricity should not be taken for granted

The reliability of the electric power generation system is vital to the economic and social well being of Hong Kong. Its reliability depends upon the seamless operation and coordination of generation and distribution systems.

Today, maintaining Hong Kong's power system faces challenges from multiple objectives such as affordability, environmental protection and sustainability, and changes in demographics and business demands.

Hong Kong businesses and its population have benefited for decades from world-class levels of dependable electricity supply. Currently, the city's reliability level stands at over 99.999% -- one of the highest in the world.

This translates into an unplanned power interruption that was less than three minutes per customer on average each year. This compares favorably with other metropolitan cities such as Sydney, New York, and London.

The high reliability level of electricity power supply in Hong Kong is a direct result of the ability of power firms to attract capital to ensure sufficient capital investments in the system network, critical assets, and maintenance.

For example, individual generating units are installed with power system stabilisers; sufficient reserve capacity margins are maintained by the two power companies; and interconnection between the two power companies systems enable emergency support in the event of unexpected load variations or generator failure.

However, decades of stable service have created high expectations from users. Hong Kong residents are used to having this unusually consistent level of energy supply.

Because of that, the public often forgets about what constitutes the value and importance of having an uninterrupted electricity supply. Thus, they omit or overlook the very tangible value of reliability when pricing their electricity services.

Imagine if a power blackout occurred in Hong Kong. Railways and subways would immediately cease running. Stock market transactions would be interrupted. Elevators would stall and strand passengers in tall buildings. Internet and phone services would be severely disrupted. Life and commerce would come to a standstill.

Hong Kong is heavily dependent on a secure electricity supply because of two unique demand characteristics. It is one of the world's most densely populated cities and a major international financial center. Both of these factors have a low tolerance for electricity failure.

Today, Hong Kong has the greatest number of skyscrapers (defined as a building that reaches or exceeds a height of 150m) in the world -- nearly twice the number in New York City or three times Tokyo's.

More than 50% of the population currently lives above the 15th floor. And everyone is dependent on air-conditioning and elevator systems. The MTR subway and Airport Express networks carry an average of about 4.71 million passengers per day. The Hong Kong Stock Exchange is one of the world's largest stock markets.

Thus, a power disruption on a business day in Hong Kong would inflict an immediate and significant economic and societal cost on users and institutions. Even a single outage would create a long-term impact on Hong Kong's attractiveness as a global financial center.

Assessing a price for an uninterrupted power supply

Modern economies are driven by technology, which are completely dependent on reliable and secure electricity services. The cost of failure and sensitivity to supply disruptions continue to increase over time.

Accepting lower reliability in order to save on or reduce the amount of capital investments would be negatively offset by disproportionately higher immediate and long-term costs on the economy and society. The disruptive outcome could potentially outweigh any limited investment savings.

Based on SDG's previous experience, immediate unplanned outage costs in similar US areas range from HK$ 4/kWh for some residential customers to HK$160/kWh for critical financial services.

The immediate cost consequences of a blackout could be catastrophic. The collapse of financial trading systems could cause enormous losses in trading activities. Payment processing impairment could lead to crippling bank runs. Road, marine, and air traffic problems would reduce retail and wholesale turnover through business delays.

By applying these cost ranges to the Hong Kong's customer mix the overall cost of an hour-long power outage in the whole city would be approximately HK$300 million.

However, the total social and economic impact of major outages greatly exceeds customer outage costs. The cost of a power interruption varies by customer and is a function of the impact of the interruption on operations, revenues, and direct effects on health and safety.

Persistent outages and service failures would surely jeopardise Hong Kong's long-term leadership as regional financial hub and corporate headquarters.

Potential causes for power disruption

The most common source of power interruption in Hong Kong is damage to or faulty underground cables, which are caused by excavation works, thunderstorms, floods, landslides, and fire. Other reasons include ageing infrastructure, construction defects, and operating errors.

Adequate maintenance schedules, sufficient reserve capacity margins, and backup generation are critical for power companies to sustain a reliable supply of electricity and mitigate the potential risk of encountering power outages.

Meeting these goals and standards over the long term require significant investments. This implies that regulators need to ensure that power companies are sufficiently incentivised to invest in maintenance and critical infrastructure.

However, power companies that experience shortages of capital will potentially result in a higher frequency and severity of service interruptions.

In 2014, the Government launched a public consultation on the future fuel mix for electricity generation. Two options were put forward: import more electricity through purchase from the Mainland power grid; and use more natural gas for local generation.

Despite the lower cost of purchasing electricity through a grid compared to local generation, there are concerns that large-scale grid purchases are less stable and untried. Additional investments would be required for local back-up capabilities. The potential for lower reliability represents economic and social risks.

The true value of reliability

Identifying and quantifying the value of a reliable electricity supply is an important part of developing Hong Kong's power generation policy. It is unclear whether the Government has accounted for the true cost of power interruption when determining the level of permitted rate of return for the power companies.

For certain types of customers, reliability is a key business and operational concern, rather than merely an inconvenience. These customers would be willing to pay a premium for a reliable power supply in order to avoid significant losses or impairment of revenue, critical data, and operations.

In future reviews of the Scheme of Control Agreements that regulate the local electricity generation industry, which is bilaterally negotiated between the Government and the two local power suppliers, a pricing structure should incorporate the actual value of an uninterrupted power supply in order to reflect its true cost.