INTRODUCTION

This paper informs Members about the arrangements made to implement demand side management (DSM) programmes, the related costs and benefits and the initial reaction of interested parties to the proposed programmes.

BACKGROUND

2. DSM is a means of encouraging people to contribute to energy efficiency and environmental protection through making more efficient use of electricity. If the community uses electricity more efficiently, the power companies will burn less coal and natural gas as fuel and be able in due course to defer or avoid installing additional generating capacity. In the long run, this will save money for consumers and help to minimise the emissions from power stations and their environmental impact. The long term DSM impact on capacity requirements is very roughly illustrated conceptually at Annex A.

3. In 1996, the Government initiated a consultancy study by the Burns and Roe Company to identify the demand side management (DSM) programmes and technologies and related tariff requirements most appropriate to the different electricity consumption sectors in Hong Kong and the DSM incentive arrangements most suited to those programmes and local circumstances. The consultants, after taking into account experience with DSM in the US and elsewhere, recommended a DSM Plan for Hong Kong that included -

• Arrangements (incentive earnings) to "compensate" the power companies for reducing electricity demand and consumption and ultimately the return on investment in generating capacity.
  
  
• A portfolio of cost-effective DSM programmes involving rebates to the consumer on presentation to the power company of proof of purchase of energy efficient appliances and equipment. All of the programmes are to be implemented in parallel so as to maximise participation and minimise cross-subsidisation among different groups of consumers.
  
  
• Arrangements for measurement and verification of DSM performance.
  
  
• A regulatory framework to support the above arrangements.

4. As regards the impact on consumers, the consultants advised that DSM would put upward pressure on tariffs in the short term, because DSM programme costs always precede energy savings, and downward pressure on tariffs in the longer term as the programmes gathered momentum and substantial savings materialised. The consultants proposed that the companies should not be allowed to increase tariffs by more than 2% above what they would have been without DSM and that DSM programme costs and incentive earnings should be recovered through a DSM account debit on consumers' bills.

5. In September 1996, the Energy Advisory Committee advised that the consultants' recommendations could be accepted as a basis for the Government to enter into negotiations with the power companies. The Government subsequently concluded formal DSM Agreements with Hongkong Electric (HEC) on 5 November 1997 and CLP Power (CLP) on 7 February 1998. The Government has since approved detailed DSM programme proposals submitted by the companies for the next three years. Abridged versions of the approved "DSM Resource Plans" will be published nearer the time that the programmes are launched.

IMPLEMENTATION OF DSM

6. The DSM programmes will be implemented by the power companies, who will offer, simultaneously, rebates to all residential customers who buy energy efficient lighting, refrigerators and room coolers and to non-residential customers who buy energy efficient lighting or energy efficient air-conditioning equipment. The programmes will also include a time-of-use tariff for non-residential customers and general education and informational programmes on DSM.

Programmes to be offered

Residential sector

7. The power companies will write to all of their residential customers offering them rebates for the purchase of energy efficient compact fluorescent lamps (CFLs), refrigerators and room coolers. The companies will explain that -

• Only lighting, refrigerators and room coolers that have obtained an "Energy Label" under the Government's "Energy Efficiency Labelling Scheme" for household appliances will be eligible for rebates.
  
  
• All energy-labelled CFLs will be eligible for a rebate, as will refrigerators and room coolers with the "Energy Label" of Grade 1 (the highest grade of energy efficiency) and Grade 2.
  
  
• Each customer can purchase a maximum of two CFLs from any shop(s) at the retail price at any time within the 3 years from the date of the launch of the DSM programmes and then claim the rebate by sending copies of his electricity bill and the purchase receipt, together with the original flap of the CFL packaging, to the power company concerned at a special PO Box number.
  
  
• Each customer can also purchase a maximum of one refrigerator and two room coolers from any shop(s) at the retail price at any time in the same 3 year period and then claim the rebate by sending copies of his electricity bill, the purchase receipt and the appliance's warranty card, together with the original delivery note, to the power company concerned at a special PO Box number.
  
  
• A customer who purchases after the programme launch date a particular model of bulb, refrigerator or room cooler which has not been awarded an energy label, but which subsequently is awarded one in the next three years, may then claim the rebate in the normal way (the customer should therefore keep the relevant receipt, packaging and warranty card).
  
  
• Rebates will take the form of a credit item shown on the concerned customer's electricity bill.
  
  
• Rebates towards the purchase of the energy efficient appliances as specified in the programmes are available upon the conditions that the documents submitted for rebate applications are confirmed by the applicant to be true and correct and the applicant, if invited, agrees to participate in a subsequent consumption survey to be carried out by the relevant power company's personnel or authorised agents.

8. The power companies will offer the same rebates to developers who install energy efficient lighting, refrigerators and room coolers in new residential buildings. Developers will be invited to apply to the power companies for approval on a project basis and will need to submit proof of purchase, Occupancy Permit and Certificate of Compliance/Practical Completion to the power companies on project completion.

9. The power companies' proposed rates of rebate for respective residential programmes are identical, and are as follows :


Non-residential sector

10. The power companies will write to all of their non-residential customers inviting them to apply to join the DSM programmes. After initial assessment of the cost-effectiveness of the application, the power company concerned may arrange pre-installation audit to verify the quantity of eligible energy efficient equipment to be purchased and the corresponding rebate.

11. If the pre-installation audit confirms that the project will be cost-effective, the power company will approve the application and the customer can proceed with purchase and installation of the energy efficient equipment required. After installation, the power company will inspect whether the agreed quantities and makes of the energy efficient equipment have been installed, before paying the agreed amount of rebate.

12. The power companies' proposed rates of rebate for non-residential lighting programmes are identical, and are as follows -



13. For heating, ventilation and air-conditioning (HVAC) rebate programmes, both power companies will offer rebates to customers for purchasing energy efficient HVAC equipment/installations on a project-by-project basis taking into consideration the cost-effectiveness of the individual project.

14. No DSM programme will be implemented unless it is assessed in advance to be cost-effective (i.e. the savings in capital investment on generating units and the related operating costs should exceed the costs for implementing DSM programmes). The initial 3-year period of DSM is estimated to achieve target total savings of generating capacity of 33MW by the two power companies. Arrangements have been agreed with the power companies for verification and auditing of the actual savings.

Incentive for the power companies

15. As the power companies are in business to sell electricity and earn a return on their investment in assets such as generators, it is reasonable that they should not be worse off because they have been asked to make serious efforts to encourage their customers to save electricity. The DSM Agreements between the Government and the power companies, while obliging the companies to pursue DSM, also enable them to earn a return comparable to the return that they would have earned if, instead, they had added generating capacity and transmission and distribution facilities. This return is referred to as "incentive earnings".

16. The companies will not be able to earn the full incentive earnings and recover the full programme costs from the DSM scheme unless they achieve a minimum level of performance. The programmes must be cost-effective and achieve more than 50% of the planned target.

COSTS AND BENEFITS FOR THE CONSUMER

Costs for the consumer

17. Implementing DSM programmes will entail costs, including the rebates, the promotional expenses and DSM incentive earnings for the power companies. Accordingly, these costs and the incentive earnings will be recovered from all consumers as a monthly or bimonthly DSM charge, separately identified on electricity bills, starting in January 2000.

18. The DSM programmes will also reduce the volume of sales of electricity and thereby lower tariff revenue. As such revenue is needed to meet the cost of supplying electricity, it will be made up in future tariff adjustments.

19. The overall tariff impact of implementation of DSM is expected to be well below the maximum of 2% proposed by the consultants (paragraph 4 above).

Benefits for the consumer

20. Consumers will benefit immediately from DSM as follows -

• Through the rebate programmes, they will be able to achieve savings in purchase of energy efficient lighting, refrigerators, room coolers and HVAC equipment/installations.
  
  
• Participants' own electricity bills will be lowered, as energy efficient lights, appliances and equipment cost less to run.

21. Consumers will benefit further from DSM in the longer term. Electricity savings accumulated through DSM will in due course enable the power companies to defer or avoid installing new generating capacity. For any new plant that is avoided, there will be no capital or operating costs to pass on to the consumer and no impact on the environment. DSM will thus save money for all consumers, including those who may not have participated in the DSM programmes, and benefit the environment for the whole community.

22. To illustrate the main costs and benefits to consumers, a rough and ready estimates assessing particular scenarios is at Annex B.

AVAILABILITY OF ENERGY-LABELLED PRODUCTS

23. There are currently 8 brands and 133 models of CFL, 6 brands and 26 models of refrigerator and 14 brands and 91 models of room cooler for which energy labels have been issued. Applications for energy labels for a further 10 brands and 316 models of CFL, 7 brands and 29 models of refrigerator and 4 brands and 23 models of room cooler are being processed by the Electrical and Mechanical Services Department (EMSD). Consumers will therefore have a wide range of energy efficient brands and models to choose from when DSM is launched. Information on the energy-labelled models will be posted on EMSD's internet homepage.

CONCERNS EXPRESSED

Concerns expressed by the trade

24. The power companies and EMSD have maintained close contact with the electrical appliance suppliers and traders over the implementation of the DSM rebate programmes for many months. The trade is aware of the forthcoming launch of DSM and the need to position itself for it, in terms of stocking sufficient energy-labelled CFLs, refrigerators and room coolers to meet market demand. The trade has nonetheless expressed concern that, once the DSM scheme is launched, it may not be able to sell products already in stock that are less energy-efficient than those which qualify for an energy label. We wish to address this concern to the extent possible. We have therefore -

1. deferred the launch of the DSM scheme by several months to allow more time for existing stock to be sold; and
   
   
2. agreed with the power companies that, in respect of models of CFL, refrigerator or room cooler which do not bear an energy label at the time of purchase after the start of the DSM scheme but are subsequently awarded one in the three years following the launch date, retrospective claim of the relevant rebate will be allowed.

Concerns raised by the Consumer Council

25. The Consumer Council has raised the following concerns -

1. whether it is worthwhile to pursue DSM as opposed to mandating through legislation the use of energy efficient appliances;
   
   
2. whether the cost of administering the DSM programmes should be borne by consumers; and
   
   
3. whether there might be an inflationary effect on retail prices for eligible appliances.

26. As regards (a), the use of a certain type of electrical appliance would normally only be prohibited for safety reasons. The Government's existing policy towards promoting energy efficiency and conservation is to proceed through negotiation and mutual agreement with energy suppliers or through the issue of voluntary codes of practice on the efficient use of energy in buildings and through public education and publicity.

27. As regards (b), it is considered reasonable for the costs of implementing DSM to be borne by all consumers, including those who do not participate in the DSM programmes, as these programmes will benefit every consumer in the long run through tariff savings and environmental improvements.

28. As regards (c), the large number of brands and models of energy-labelled energy efficient CFLs, refrigerators and room coolers in the market will ensure that consumers will have an adequate choice of energy efficient appliances and that market forces will ensure that there is adequate competition and that prices remain stable.

Other concerns expressed

29. Other parties have asked -

1. whether consumers who may not be able to afford rebated energy efficient appliances should have to bear part of the programme costs; and
   
   
2. whether DSM will result in extra profits for the power companies compared with supply-side investment.

30. As regards (a), the reasoning in paragraph 27 applies equally here. Every consumer will benefit from DSM in the long run through tariff savings and environmental improvements.

31. As regards (b), as explained in paragraph 15 above, the DSM Agreements only enable the power companies to earn a return comparable to the return that they would have earned if they had added the equivalent generating capacity instead of promoting energy savings.

DSM LAUNCH DATE

32. From an energy efficiency and conservation perspective, we wish to launch the DSM programmes as soon as possible. The power companies are making detailed plans to launch their DSM programmes, in close consultation with the Economic Services Bureau and the Electrical and Mechanical Services Department. The launch date will be set once all the arrangements are in place. The power companies will start their DSM programmes immediately thereafter, together with publicity and educational programmes.

Economic Services Bureau
May 1999