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    Hong Kong, China Energy & Utilities Infrastructure Forecast

    May 10, 2022 - Fitch Solutions Sector Intelligence


      THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.

      Hong Kong, China Energy & Utilities Infrastructure Forecast

      • 06 Apr 2022
      • Hong Kong
      • Infrastructure

      Key View: The outlook for Hong Kong, China's energy and utilities infrastructure sector will remain stable, with growth set to remain below 1% until the end of our forecast period to 2031. Hong Kong, China will remain a net importer of electricity from Mainland China, with investment restricted to the progressive replacement of coal-fired generation capacity. A number of major developments are expected to increase Hong Kong, China's energy supply requirements towards the end of the decade.

      Latest Developments
      • The replacement of coal-fired power plants with combined-cycle gas-fired units will sustain growth in the energy and utilities sector. After an estimated 3.5% contraction in 2020 as a result of Covid-related disruption and a moderate recovery in 2021 with estimated growth of 1.4%, we forecast energy and utilities construction industry value to grow by 0.8% y-o-y in 2022 and by an annual average of 0.4% y-o-y between 2023 and the end of our forecast period in 2031.
      • In February 2022, CLP Group confirmed that the West New Territories landfill waste-to-biogas station had generated 38GWh of electricity in 2021. A larger waste incinerator project, which intends to produce up to 480mn kWh of electricity from non-recyclable waste from a 3,000 tonne/day capacity incineration plant, is under construction on an artificial island and is expected to be operated under a build-develop-operate project from 2025.
      • In October 2021, Chief Executive Carrie Lam Carrie Lam outlined plans to develop a Northern Metropolis along the northern areas of the New Territories, to create up to 926,000 new residential units to house up to 2.5mn people.
      • In September 2021, CLP Group confirmed progress on the engineering, procurement and construction contracting for a second combined-cycle gas-fired unit at Black Point Power Station, which is scheduled to begin generation in 2023.
      • In July 2021, the Civil Engineering and Development Department awarded Ove Arup & Partners a HKD220.0mn (USD28.2mn) 42-month consultancy to conduct a planning and engineering study into the first 1,000 hectare phase of the artificial island land reclamation project to the east of Lantau Island, covering road and rail infrastructure requirements. The Lantau Tomorrow Vision project could eventually yield more than 400,000 new housing units, according to Fitch Solutions analysis.
      • The Water Supplies Department has awarded a design-build-operate-maintain contract for the first phase of the HKD9.0bn (USD1.15bn) Tseung Kwan O desalination project to a consortium which includes ACCIONA. The contract covers construction of the plant, which started in 2020, and a 10-year operation period.
      Energy And Utilities Infrastructure Data (Hong Kong, China 2021-2031)
      Indicator 2021e 2022f 2023f 2024f 2025f 2026f 2027f 2028f 2029f 2030f 2031f
      Energy and utilities infrastructure industry value real growth, % y-o-y 1.4 0.8 0.6 0.6 0.6 0.6 0.5 0.3 0.2 0.1 0.1
      e/f = Fitch Solutions estimate/forecast. Source: Local sources, Fitch Solutions
      Structural Trends

      Limited Power Expansion Plans

      Hong Kong, China's electricity market will expand slowly over the coming years given subdued electricity demand, a limited market size and access to energy imports from Mainland China, which limits demand for the development of new domestic capacity. We forecast electricity consumption to increase by an annual average of just 1.0% between 2022 and 2031, undermining demand for a significant build-up of new capacity. In line with this, we expect electricity capacity to increase by an annual average of 2.1% over the same time period, totalling 16.3GW by 2031, up from 13.3GW in 2021.

      While growth across Hong Kong China's power sector will be limited, there will be a notable transition in the domestic power mix as the government turns to gas in order to reduce its elevated reliance on coal-fired power and comply with emissions reduction targets. The addition of gas turbines to both the Black Point and Lamma power stations, coupled with the development of liquefied natural gas (LNG) import capacity, will ensure that gas steadily pushes coal out of Hong Kong, China's power generation mix over the coming decade. We estimate that gas accounted for 47.3% of the electricity mix in 2020 and coal made up 51.3%. In 2030, gas will increase its share to more than 70% as coal loses market share.

      Hong Kong, China’s LNG import plan has been pushed back by a year due to headwinds stemming from Covid-19 and elevated political risks. The construction of an offshore LNG terminal, dubbed the Offshore LNG Terminal Project, started in late 2020 after initially targeting a start-up in 2019. This will see the start of first LNG imports through the terminal materialise in 2022, a full year later than was originally anticipated. Hong Kong, China’s attempt at developing an offshore LNG terminal is spearheaded by a consortium of the biggest domestic utilities and electricity firms. In June 2019, Hong Kong Offshore LNG Terminal, a joint-venture (JV) between Castle Peak Power (owned by CLP Group) and HK Electric, announced the signing of an agreement with Japan-based Mitsui to charter a floating storage and regasification unit (FSRU) for 10 years. The FSRU will have LNG send out capacity of about 8.1bn cubic metres (bcm) per annum, or more than twice Hong Kong, China’s estimated gas demand in 2019. The first LNG supply deal has been signed with Royal Dutch Shell, which will supply about 1.6bcm from its global portfolio. The terminal has cleared several key hurdles towards a final investment decision, including the approval of the project environment plan in 2018; the launch of public consultation on foreshore and seabed reclamation in 2019; and the successful awarding of a key EPC contract in January 2020. This should see the project back on track relatively quickly once market conditions stabilise.

      Castle Peak Power - Power Generation Assets
      Name Location Fuel Capacity
      Black Point Power Station Tuen Mun, Hong Kong, China Gas 2,500MW
      Castle Peak Power Station Tuen Mun, Hong Kong, China Coal, gas and oil 4,108MW
      Penny's Bay Power Station Lantau Island, Hong Kong, China Diesel 300MW
      Net generation capacity na na 6,908MW
      na = not applicable. Source: CLP Holdings, Fitch Solutions

      Slow Renewables Growth Expected

      Hong Kong, China's government has plans to increase the contribution of solar, wind and biomass to 3-4% of the domestic energy mix by 2030. The government has yet to introduce incentive mechanisms, so we maintain our muted outlook for the sector. There is substantial upside risk to this outlook, and these forecasts will be subject to upward revisions as more projects enter planning and development stages.

      The government has identified two sites where offshore wind power farms could be developed, with a potential capacity of 100MW (South West Lamma) and 200MW (South East Ninepin). The Climate Action Plan 2030 states that the development of these projects remains possible within the next 15 years, although the plants would provide only 1.5% of Hong Kong, China's total power consumption and be more expensive than equivalent natural gas-fired resources. As a result, we have not included them in our power forecasts.

      Solar power has long been neglected and typically confined to small-scale and rooftop capacity deployment as well as solar heaters. We believe that there will be limited scope for large-scale solar facilities in the market over the coming years given the high price of land and the limited land availability. There is substantial potential to develop distributed solar power capacity, although this would likely require the introduction of incentives, such as feed-in tariffs, which have been mooted by the government. Floating photovoltaic systems are in place at Shek Pik Reservoir and Plover Cove Reservoir.

      Biomass is another sector which the government aims to develop further. There is already a system in place to collect waste cooking oils and fats and produce biodiesel. In 2017, the market saw its first energy generated from an organic resources recovery centre, with a second plant expected to be commissioned in 2021. This is due to be followed by a waste-to-energy plant on Shek Kwu Chau Island, which should become operational in 2024 and add 480GWh of electricity to the market.


      We believe that most of the opportunities in Hong Kong, China's energy and utilities sector lie with the water utilities sub-sector. The government is becoming increasingly concerned about water scarcity and is looking to explore new water sources so as to ensure sustainable supply. In 2012, the authorities started a detailed planning and investigation study, including an assessment of the feasibility and cost-effectiveness for the construction of a desalination plant on a reserved site in Tseung Kwan O, with a view to tapping seawater as a water source. The anticipated output capacity of the desalination plant is expected to account for 5-10% of Hong Kong, China's total water consumption.

      In May 2019, the Legislative Council's public works sub-committee unanimously approved a plan for the government of the special administrative region to build the Tseung Kwan O plant, with an estimated cost of HKD7.7bn (USD981.5mn). The desalination plant, to be built on an 800,000sq m site, is expected to produce 135,000 cubic metres of drinking water a day, equivalent to 5% of local consumption. Members also proposed for the future expansion of the plant to cut dependence on a river in Mainland China's Guangdong Province. Officials dismissed the idea, saying that both sources would be needed to offset risk from climate change on Hong Kong, China's water supply, such as severe droughts. A contract for the project was awarded to a consortium which includes ACCIONA. The contract covers construction of the plant, which started in 2020, and a 10-year operation period.

      Hong Kong, China - Major Energy & Utilities Infrastructure Projects
      Project Name Sector Project Risk Metric Value (USDmn) Size Unit Companies Status Construction End
      Sha Tin Cavern Sewage Treatment Works, Sha Tin Water 9.4 3,840 na na AECOM[Consultant/Project Management]{US}, Drainage Services Department[Operator]{Hong Kong, China} At planning stage 2027
      Sai Kung Offshore Wind Farm, New Territories Power plants and grids 7.4 903 200 MW CLP (China Light & Power)[Sponsor]{Hong Kong, China} Feasibility studies/EIA under way /a
      South West Lamma Wind Farm, New Territories Power plants and grids 7.1 386 100 MW Hong Kong Electric[Operator]{Hong Kong, China} At planning stage na
      Tseung Kwan O Desalination Plant, Sai Kung Water 10.0 n/a 49 mn cu m water per year China State Construction Engineering Corporation[Sponsor]{Mainland China}, Jardine Engineering Corporation[Sponsor]{Hong Kong, China}, Acciona Agua[Sponsor]{Spain}, Government of Hong Kong, China[Sponsor]{Hong Kong, China}, Black & Veatch[Consultant/Project Management]{US} Under construction 2023
      Integrated Waste Management Facility, Waste-To-Energy Plant Project, Shek Kwu Chau Island Power plants and grids 9.7 n/a 480


      China Harbour Engineering Company[Construction]{Mainland China}, Environmental Protection Department[Sponsor]{Hong Kong, China}, Keppel Infrastructure[Operator]{Singapore} Under construction 2025
      Note: Top five projects by value. na = not available. Project Risk Metric scores out of 10; higher score = lower risk. Source: Fitch Solutions
      This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings.


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