Why HK remains robust amidst energy crisis

INTERVIEW Why HK remains robust amidst energy crisis

Lantau Group expert says Hong Kong has secured energy from nuclear to gas-fired power.

Unlike the rest of the world, Hong Kong has a more secure and diverse energy supply, making it resilient to brownout threats and reducing exposure to the highest energy costs seen in many countries at this time. For example, the nuclear electricity supply from Daya Bay Nuclear Power Station is extended up until 2034. This can help Hong Kong keep up with the energy crisis, Mike Thomas, a founding partner at energy consultancy firm, The Lantau Group, told Hong Kong Business.

Comparing Hong Kong to other markets, Thomas cited California, which has experienced difficulty meeting electricity demand due to massive heat waves in the state. European countries are also suffering from energy woes because they are reliant on imports, according to data analytics firm, GlobalData.

Thomas also talked about how Hong Kong could speed up its transition to renewable energy even as the market lacked solar and wind power.

In this exclusive interview, Thomas brings over 30 years of energy consulting experience to share his insights on why Hong Kong’s energy supply is faring better than other markets amidst rising costs.

Why is the Hong Kong energy sector in better shape than most global markets?

Based on the fuel mix in Hong Kong, it is taking some nuclear power, which is not exposed to coal or gas markets. It is taking some natural gas, much of which comes from Turkmenistan via the 9000km West to East pipeline and some comes from local gas resources near Hainan Island which comes from Turkmenistan. It’s not the same as the LNG that Europe, Japan, and Singapore, are paying extraordinary premia for. This is long-term contracted, pipeline-supplied gas. That’s kind of a different dynamic. Then there is coal, which is also still part of the Hong Kong mix.

Hong Kong benefits right now from its very diverse energy mix compared to, say, Singapore, which relies on imported gas for over 98% of its electricity generation. Singapore does a great job of keeping the lights on, but the cost has been very high. Singapore is not in the same category of risk as Europe which has experienced the unexpected loss of gas supply from Russia and has a particular need for natural gas for both electricity and heating in the winter.

At the moment, Hong Kong really doesn’t have that same kind of issue or problem so that’s good. Let’s just recognise that that’s a product of all of the things that got us to this point, which is a reasonable regulatory regime, well-run power companies, decisions made back in the 1990s concerning contracting for supply from the Daya Bay nuclear power station, and the good fortune of a diversified fuel mix.

Can you expound on what makes Hong Kong’s energy more resilient than California’s?

At the time we are talking [on 7 September in California], it’s 103°F, which is pretty hot by any standard, almost 40 degrees Celsius. People have been concerned about whether the lights will stay on in Northern California. In fact, everyone is being asked to conserve as much as possible.

Compared to California, Hong Kong has a more robust system and reserve margin for meeting peak demand. Our exposure to such surprising heatwaves is probably lower because it is always hot in Hong Kong each year – whereas Northern California is normally much more temperate. Surprise is what challenges complex systems. The scope for surprise is what you have to plan for. No one likes energy surprises. We have to plan for the ‘expected surprises’ and hope to be able to avoid or find a way to manage through the ‘unexpected surprises’.

Recently, we’ve seen the same sort of a surprise in August when temperatures when the Mainland experienced its most extreme heatwave ever combined with drought. Hydropower availability was greatly reduced – much more than expected – leaving the system with a shortage. Businesses went without electricity. It’s always a problem when complex systems are pressed beyond what they have been planned to accommodate. It can be expensive, however, to plan a system to accommodate extreme outcomes. It’s a question of needing

What Hong Kong has in terms of electricity and infrastructure is a particularly good mix of resources and technologies (Photo: Mike Thomas, Founding Partner, The Lantau Group)

Hong Kong has a very diverse energy mix, taking some nuclear power and natural gas

to be aware of what could go wrong and being willing to pay what it takes to be prepared for that kind of rare outcome.

With more extreme outcomes in fuel markets and in weather patterns, many systems in many countries will need to revise their planning factors, what kind of reserve margins are needed, and what kind of supply mix and technologies are most appropriate. Fortunately, Hong Kong has systems that are well-planned for the range of contingencies we are seeing right now. Tariffs must go up due to higher fuel costs, but lights, life, and business will go on.

Around the world, more generally, it almost seems that anything to do with temperature and water these days is a problem. The European problem is more tied to the sudden loss of Russian imported gas. But everywhere else, it’s been temperature and drought.

Why is Hong Kong better at mitigating rising energy costs and threats of brownouts?

It’s the same issue as before, the diversity of fuels and technologies that Hong Kong has.

There’s a saying you go to war with the army you have. What Hong Kong has at this moment in terms of electricity and infrastructure. It just happens to be a particularly good mix of resources and technologies to deal with. It’s not a carbon-neutral energy mix – that is a future challenge. But it is a resilient and robust energy mix. We can at least enjoy the benefits right now of that.

Hong Kong is not dependent on hydrology and rainfall. Hong Kong is not as dependent on imported LNG. Hong Kong has different kinds of capacities that can be used, if one thing is not available, something else can be made available.

For the energy war that’s going on right now, so to speak, the Hong Kong army is well situated.

But in the energy transition, moving away from some of the coal that’s in Hong Kong, will still be a challenge that will push us more towards depending on natural gas. Then, moving away from natural gas to renewables will be more challenging because we don’t really have the obvious resource candidates to support that.

We don’t have vast tracts of solar or wind resources. It’s not clear what you can do with the offshore wind yet to scale or for Hong Kong so that challenge, we haven’t started facing quite yet.

CLP, one of the largest power firms in the Asia Pacific region, revealed that it is ramping up its natural gas as it prepares to phase out coal-fired generation in Hong Kong amidst carbon neutrality goals. It is also seeking to shift to renewable energy.

With these goals, do you think it would pose risks to Hong Kong’s resilience to mitigate rising costs?

I don’t think anybody has an absolute answer to that. Willingness to pay is always going to be important here. Singapore can keep the lights on, but it requires more costs right now. Physically, the Singaporean system is very resilient. Financially, it takes more money right now. Resilience needs to be thought of in terms of what it takes to keep the lights on as one part of the equation versus how to pay for it as the other part of the equation. There’s a balance between what has generally been called affordability or reasonable pricing, or acceptable tariffs, and the timing and of building new things to display solid tech.

If you’ve got a perfectly good functioning, existing, generating unit that’s almost paid for, turning it off and replacing it with something that costs a lot of money will probably make your tariff go up. Hence the energy transition is a balance between willingness and ability to pay vs how fast you replace otherwise functional power generation assets with zero carbon alternatives.

What we’re thinking might start happening more now in many countries exposed to such volatile and high fossil fuel prices is that it will increase people’s appetite for renewable energy. Even if it’s a little bit higher in cost, but a lot more stable and predictable, people may start putting a premium on certainty and accelerate the reduction in reliance on fossil fuels, which are both volatile in price and sometimes there can be difficulties actually obtaining them within budgets.

This will be harder in Hong Kong but obviously easier across the border. The exchange of carbon credits may help. Longer-term power transmission may help. Nothing can or should change too quickly, but the wheels of change can be put in motion or even accelerated a bit.

Do you think Hong Kong is least attractive in driving energy-sector green foreign direct investments (FDI)? How can the city improve on this?

Hong Kong is attractive for foreign direct investments in the sense that the regulatory regime supports investment in projects agreed to meet the needs of Hong Kong. But what does this really mean?

To drive more FDI would require that Hong Kong find even more projects to do. Hong Kong is limited by size and resource base. Also, there is a question of timing and cost and need.

If you invest more today to stop using something you already have then, you may increase your price of electricity by more than if you waited and retired existing capacity resources as they aged. We could do that, but it isn’t a reason to track FDI. It’s more a consequence of accelerating zero carbon energy due to having a willingness to pay more for it. That’s just a different calculus. FDI is a consequence, but not a target or metric or lever here in Hong Kong.

It’s just better to not look at FDI. More FDI is not necessarily better if the FDI is going into things that are not needed yet or that would raise costs more than they are considered to be worth. It’s always better to look at the fundamentals and let Hong Kong’s openness to innovation and financial sophistication help after that.

Hong Kong is much happier paying a premium for certainty than to take the market swings

CLP is ramping up its natural gas as it prepares to phase out coal in Hong Kong (Photo: Black Point Power Station 1 by Minghong)

CASE STUDY: RETIREMENT INSURANCE How Hong Kongers fare in their retirement preparations

Two out of five are hoping to retire before their 60s, Sun Life reveals.

Hong Kongers are becoming more active in futureproofing themselves, as Hong Kong’s Retirement Index score went up from 56.3 in 2021 to 61.1 in 2022. To further understand this behaviour, Sun Life conducted a study amongst its consumers to learn about their perceptions and motivations in planning for their retirement.

Sun Life Retirement Mastery Index evaluated 30- to 45-year-old Hong Kong consumers’ degree of control over retirement planning through their performance in three pillars: “Intelligence”, “Momentum”, and “Positive Experiences”.

“Intelligence” assesses the individuals’ information and knowledge of retirement planning and retirement savings; “Momentum” looks at concrete actions taken to plan and save for retirement; and “Positive Experiences” considers personal experiences on the retirement journey, Sun Life Hong Kong’s General Manager for Life and Health Christine Yeung explained to Hong Kong Business.

Christine Yeung

The current macroeconomic environment is posing a challenge for Hong Kongers Positive Experiences rises

The majority or 63% of the respondents have worked harder to plan for retirement in 2022 compared to the previous year at 52%. Meanwhile, 62% believe they have worked harder to implement their retirement savings plan, showing an increase of 11 percentage points compared to last year’s 51%,” Christine explained.

Amongst the three pillars, Hong Kongers are doing best in the “Positive Experiences” aspect (44%). In comparison, 43% of the respondents claim they are doing very well when it comes to “Momentum”, representing an increase compared to last year’s 34%. In addition, 50% are very satisfied with the frequency of their personal finance review, whilst 48% maintain a positive attitude towards the management of their retirement savings portfolio.

The “Intelligence” aspect is where most Hong Kong consumers underperformed, with only 40% saying they did well in this segment.

People are more proactive in monitoring their retirement protection gaps, driving demand for products that can protect them from uncertainties in the future

Macroeconomic factors

Despite the enhanced control over all aspects of retirement planning, Sun Life’s Christine warns against complacency given high inflation and an increasingly uncertain outlook.

“The current macroeconomic environment is posing a challenge for Hong Kongers,” especially in wealth planning. 74% of respondents feel they are less capable of accumulating wealth compared to two years ago, whilst 88% prefer to set a mid-term wealth management goal due to the unstable macro environment, which indicates local people are tending to be more cautious about wealth management over the last couple of years.

In increasing awareness about retirement insurance, Christine said it is important to have a clientoriented approach.

Sun Life does this by launching products and campaigns, like its Change Into a Happier You brand campaign where they motivate consumers to be more proactive about their future planning which involved a series of out-of-home advertising and TV commercials that garnered over 21.3m views.

Sun Life also enticed consumers by offering brand products such as granting the top 130 customers who pay the highest amount of accumulated Annualized First Year Premium from 1 July to 30 September 2022 a limited edition non-fungible token, which is a part of its recent launch NFT collection as part of Sun Life’s 130th anniversary.

“Over the past few years, the pandemic has gradually raised public awareness of risk management. People have become more proactive in monitoring their medical and retirement protection gaps, driving the demand for products that can act as comprehensive tools for wealth planning with a stable income to protect them from uncertainties in the future. Although Hong Kong people now have greater health awareness due to the pandemic, one should not underestimate potential medical expenses after retirement. We should all get into the habit of reviewing our retirement plans and progress regularly to help ourselves and our families be prepared for the future,” Christine said.

CASE STUDY: GREEN FABRIC DBS Hong Kong shows off greener branch outfits

The bank is making a statement about the future not through a new product, but with its uniforms.

DBS Hong Kong’s new branch employee uniforms may be brown, but to them, it is a statement of how the future of its banking services is green.

Hong Kong customers will see local branch staff decked out in their new casual uniforms when they visit any of the bank’s Hong Kong branches every Friday and Saturday.

At first glance, the colour-blocked shirts may seem just like your typical shirts. But underneath the seams, the shirts represent everything that the bank wishes to represent: to be an environmentally friendly business with a more youthful yet professional look to appeal to the younger generation, according to Ajay Mathur, Head of consumer banking group and wealth management, DBS Bank Hong Kong. He added that the new outfits are an example of how the bank embeds environmentally friendly elements and sustainability in every aspect of its business practices.

“Customers may feel more relaxed seeing our colleagues in this casual uniform at our branches, knowing that the weekend is coming,” Mathur told Hong Kong Business.

“Such wardrobe refresh builds on our image as a forward-looking bank of the future, presenting our brand value proposition as encapsulated by the “Live more, Bank less” ethos,” Mathur added.

Such wardrobe refresh builds on our image as a forwardlooking bank of the future

Ajay Mathur

chemicals and utilises plastic bottles.

The practice began even before the new casual shirts came to life. Since 2020, DBS Hong Kong staff’s branch suits have also been made from fabric making use of 65% recycled polyester and 35% polyester blend, Mathur explained.

It may seem like a small deal given the financial transactions involved in running a bank. But Mathur pointed out that the new uniforms are part of its branding.

“We see this wardrobe refresh as an important initiative, not only portraying a young and energetic image of our frontline employees but also demonstrating the bank’s commitment to driving positive environmental impact to our community,” Mathur said.

Net-zero office

This is not the first time that DBS overhauled the non-financial aspect of its operations to make them more environmentally sustainable. Earlier in July, its Singapore arm unveiled the DBS Newton Green building.

The project saw DBS retrofitting

Green fabric

The polo shirts feature a colourblocking of the bank’s official colours, deep carmine and black at the collar and sleeves. For the bodice, DBS chose a comfortable brown shade that is easy on the eyes of the customers. The most notable feature of the shirts, however, is not their colour scheme but the fabric used.

The polo shirts are made from a sustainable fibre mix of organic cotton and recycled polyester. According to Mathur, cotton was grown and processed without pesticides and other harmful one of its oldest office buildings to transform it into the Lion City’s first net-zero development by a bank. This means that the bank has an office building that can count itself as one of the more or less just 500 net-zero commercial buildings worldwide.

Before retrofitting works began, the old building consumed about 845,000 kWh each year, equivalent to the annual energy consumption of about 200 four-room HDB homes in Singapore. To equal that energy, the bank has lined the building’s rooftop with solar panels, powering the operations of 400 employees that work within its walls.

The bank has also outfitted its other offices and locations with solar panels in order to reduce the consumption of non-sustainable energy.

“[This] is an important step forward in understanding how net-zero technologies can be scaled up to not only move DBS closer towards its netzero objectives, but to also help other organisations green their operations as we collectively realise a more sustainable future for Singapore,” DBS said regarding its net-zero office.

“It is our belief that a different kind of bank is needed in a postpandemic world – one that is more sustainability-focused As we work towards becoming the Best Bank for a Better World, we will continue to up the ante on addressing sustainability issues and devoting to be a purposedriven bank,” Mathur concluded.

Property market ends downcycle

Real estate experts said that the market will have a reset by 2023.

High yield assets have become the focus of the investors

Real estate investors may have shunned Hong Kong in the past two years, but experts’ 2023 outlook—particularly for the industrial and retail sectors—may entice them to reconsider the city as a property investment destination. The property market is poised to end its down-cycle in 2022 and enter 2023 with hopes of normalisation.

“With the gradual easing of the social distancing and travel restrictions, we would expect to see a moderate recovery across all the sectors with momentum gathering pace starting in the last quarter of this year,” Dorothy Chow, Colliers’ Executive Director of Valuation & Advisory Services for Asia, told Hong Kong Business.

Investors’ eyes on industrial

Amongst sectors, Chow said the industrial sector will remain the most attractive to investors come next year.

“High yield assets have become the focus of the investors nowadays, and these would include industrial properties, logistic, and alternative assets,” said Chow.

“We expect the industrial market to have an increase in the rental and the capital levels next year,” the Colliers expert added.

Chow said industrial assets are popular amongst inventors because they fetch yields of 3% to 5% compared with typical offices or commercial units, which fetch less than 3% yield.

To add, Cathie Chung, Senior Director of Research at JLL in Hong Kong, said prices of industrial assets are relatively and comparatively “on the lower side.”

These factors are also what made the industrial sector the bestperforming segment for 2022, said Chow and Chung.

Chow said transaction volumes for industrial assets doubled in the second quarter, compared with the first quarter and on a year-on-year basis. In the same period, industrial investment volume also increased by 37%, according to Chow.

“In terms of leasing and sale activities, industrial is the most active sector. Tenants are bringing demand for warehouses, and

In terms of leasing and sale activities, industrial is the most active sector

The industrial market is expected to have an increase in rental and capital levels next year

investors are looking for value-added opportunities,” said Chung.

“When investors acquire industrial properties, they convert them to a data centre or cold storage, or self-storage which also has good demand. There are repurposing opportunities for industrial properties,” she added.

Retail remains resilient

Like industrial, the retail segment showed some resilience during 2022, according to property experts.

According to Chung, the segment was supported by domestic consumption and government stimulus packages, amidst the lack of foreign visitors.

“All of us have sort of retained our expenses within the city. Therefore, the neighbourhood and discretionary retail became relatively stable,” Chung said.

Operators of food and beverage (F&B) establishments likewise took advantage of the lower rents during the pandemic and expanded, JLL’s Chung added.

“We believe that the market is stabilised resilient and retailers are interested to come back when the market opportunities open come back, especially when the borders fully reopen and rents become more affordable,” JLL’s Chung said.

Chow echoed this but underscored that rising interest rates are also a worry for the market, which is why she expects the retail segment—both in terms of rental and property price—to either be stable or have a very mild increase in the next six months.

‘Flight to quality’ lifts office market

With many real estate buyers hopping into a “flight-to-quality,” Chung and Chow said the office market was able to steer clear of any turbulence and remained stable in the first half of the year.

“The sector was driven by demand for premium office space as tenants are fighting for better quality and more flexible office workspace for their workers,” Chung said.

Chow explained that flight-toquality means tenants are likely to pay “slightly more” for more highquality premises.

Since premium offices are located in Central, the submarket might see some moderate growth in rentals moving forward.

“Many of the tenants who were occupying spaces in non-core areas are looking at new locations or new premises in Central. We see that trend in 2022 and we still expect that trend will continue in 2023,” Chow commented, adding that the “flightto-quality” behaviour from tenants will also remain to be the key theme in the office market next year.

Prudently positive

With challenges like rising interest rates likely to remain in 2023, Chow said she is “prudently positive” about the market’s outlook.

Chow said the opening of the border will help the market gain a bit of recovery or an increase in transaction activities in most of the sectors in 2023.

Chung echoed this, adding that if there will be no “moving backwards in social distancing and border control measures,” 2023 will really be the year of normalisation and resetting for the commercial property market.

A worse year for residential

Unlike the commercial sector, Chung the residential market will face another round of price correction in 2023, due to weak domestic economic growth, population shrinkage, interest rate hikes and poor stock market performance.

In 2022, the residential sector also had the worst performance out of all sectors, said Chung.

Chow said the market slowed down mainly due to unexpected events at the beginning of the year, particularly, the lockdown in China.

“Buyers from the Mainland have been quite limited nowadays, in the second quarter, we still see a lot of local buyers buying into residential projects as long as the pricing has been reduced,” said Chow.

“We actually see developers reducing the asking price of the firsthand projects in Hong Kong, and that has been receiving good response,” added Chow.

Dorothy Chow

Cathie Chung

The sector was driven by demand for premium office space