The Electricity Industry in Hungary
The price of crude oil continued to rise throughout 2005, reaching 60
dollars a barrel by the end of summer. Despite a slight decline in autumn,
high oil prices are expected to persist in the foreseeable future
as current prices are influenced by the asymmetric growth of demand
and supply. Natural gas prices follow oil prices with a lag of around
three quarters due to pricing arrangements in long-term supply contracts.
Besides high fossil fuel costs, the rise in the price of traded
carbon-dioxide emission rights in Western Europe also exerts an upward
pressure on electricity prices. The price of emission quotes increased
by as much as 150% in the first half of 2005.
Electricity generation and foreign trade
Domestic electricity generation rose by 10% compared with 2004 with
renewables – especially biomass and the increasingly popular wind
energy - increasing their share in the generation mix.
Net electricity imports declined slightly. Import routes from Romania
and Serbia are gaining significance beside the Austrian and Slovakian
lines, which points at the increasing domestic utilisation of cheap Romanian
Evolution of the liberalised market
No new eligible consumers entered the liberalised market until the autumn
of 2005. On the other hand, the electricity consumption of this
market has been continuously increasing, reaching 1 TWh per month
in the summer. While consumption in the public utility sector decreased
by 13% in the first eight months of 2005, the electricity consumption
of eligible consumers increased by 69%.
Capacity auctions organised by MVM brought mixed results: participation
at the summer auction was low, but the autumn auction (of energy
to be delivered in 2006) was successful thanks to new products
and the good timing of the auction.
Changes in regulation
The independent system operator MAVIR has finally been merged into
MVM. This constitutes the first step towards the establishment of a
transmission system operator as required by EU regulations.
From autumn 2005 the mandatory offer price for renewable energy
increased to 23 HUF/kWh. On the other hand, producers of renewable
energy unable to deliver electricity according to their timetable are
subject to a fine. This measure was undertaken to improve system
Preparatory work and public debate on the re-regulation of the electricity
market has begun with all documentation available on the
homepage of the Hungarian Energy Office. The new regulatory model
proposes an organised electricity exchange and the renegotiation of
long-term supply contracts, but contains a large number of uncertainties
1. Trends in the European Union and in the region
A marked rise of oil prices in 2005
Amongst all factors influencing the electricity industry, high fossil fuel
prices are still of primary concern. The price of crude oil reached 60
USD per barrel in September 20051 before dropping back to 53 USD by
November. However, this still constitutes a 30% rise since November
2004. In 2005 dynamic demand growth, Caribbean hurricanes and political
uncertainty in Iraq proved to be the main culprits.
The price of oil is still influenced mainly by fundamental factors such as
soaring demand and bottlenecks in extraction and refinery capacity.
These pressures are not expected to dampen even in the longer run
because oil (and gas) industries require such amounts of investment in
the coming decades which can be financed only at a higher price level.
Favourable economic outlook for 2006 is also expected to keep prices
high in the short run.
Bad signs on the gas market
According to the forecast of the International Energy Agency, global
gas consumption will grow by 2.5 to 3% per annum for the next 15
years with supply unlikely to follow the trend. The threat of a gas cartel
(based on the model of OPEC) including Russia and Middle Eastern
countries could also evolve seizing control of two-thirds of global gas
Wholesale electricity prices in Europe
Wholesale prices stabilised around 35-45 EUR/MWh in the first half of
2005 in Western Europe. Following peak demand in the winter prices
failed to fall as a consequence of high fuel and emission-rights prices
and the relative mildness of the winter of 2004/2005. The market
price of carbon-dioxide emission quotes surged from below 7 EUR in
January 2005 to 30 EUR in July; since then it has remained in the region
of 20 to 25 EUR.
Futures prices on the German and French market stand at 45-46
EUR/MWh for 2006 and 2007, and reach 36 and 35 EUR/MWh on the
Nordpool for 2006 and 2007 respectively.
Developments in neighbouring countries
In the Slovak Republic, the Italian ENEL plans to invest 1.88 billion
euros into the Slovakian electricity system following the purchase of
electricity company Slovenské Elektrarne. Most of this sum will be
spent on the expansion of the Mochovce nuclear plant to cover the
loss of capacity after the closure of the Apátszentmihály nuclear plant
in 2008 under pressure from Brussels.
Hungarian energy industry company Transelektro signed a contract on
the 11.10.2005 to refurbish part of Tuzla power station in Bosnia. The
company had planned to enter the Bosnian market since 2004 and
won the tender over a number of competitors. The overall cost of the
two-year project amounts to 21 million EUR. In November Transelektro
signed another contract to refurbish the coal-firing Zilah (Romania)
plant and switch it to biomass; this contract is worth 36.5 million
A tender to sell the Macedonian electricity supplier ESM was issued in
November 2005. The Macedonian government plans to sell a 90%
stake after a failed tender offer of a 50% stake in May. Upgrading the
electricity system of the country is expected to require billions of euros.
2. Evolution of the sector in Hungary
Gross electricity consumption amounted to 25.5 TWh between January
and August of 2005, a 1.9% growth over 2004. 21.1 TWh was generated
by domestic power plants, 9.6% more than in the respective period
of 2004. The production of small (less than 50 MW) units grew by
28.2%; in 2005 these plants accounted for 8% of domestic electricity
generation. In the first half of the year 703 GWh of energy was produced
from renewable sources, constituting 4.5% of domestic generation
and 3.7% of domestic use.2 Domestic production covered 84.3%
of domestic demand between January and August.
Development of power plants
The contract to build a new power plant in Miskolc was signed on the
10.10.2005 between procurer MIFÛ Co. (an affiliate of MVM) and contractor
Siemens Co. This was the first time public procurement procedure
to build a power plant in Hungary. The investment, worth 14 billion
HUF, involves the construction of a combined cycle power plant of
at least 50 MW.
EMA-Power of Dunaújváros decided on the construction of a new, 200
MW gas turbine worth 32 billion HUF, after the long-term energy requirements
of Dunaferr Co. had been clarified. A further reason for
the investment is that the four furnaces currently in operation need to
be decommissioned between 2006 and 2008.
During 2005 there was great interest for small power plants and renewable
energy sources. TechCon Ltd. plans a power plant worth 6-7
billion HUF in Polgár, fuelled by junk tyres. The unit, while producing
an annual 40-45 GWh of electricity, could dispose of one-fifth of rubber
waste in Hungary. The project is currently under planning and authorisation
and the power plant could start operating early 2007.
MOL could build the first geothermal power station of the region near
Iklódbödörce in Western Hungary by 2007. The payback period of the
2-5 MW plant could be as low as 10 years according to estimations.
Should the project prove successful, MOL might be tempted to build
further power plants on its depleted oil and gas wellheads. These units
could provide the 12-15 MW geothermic capacity undertaken by Hungary
by the year 2010.
The largest wind station of Hungary was put into operation in the
mountains of Bakony near Szápár during the summer of 2005. The
610 million HUF investment was undertaken using 122 million HUF of
state and EU funds. The payback period of the investment is 8 years
while the total operating time of the station is 20 years. The 1.8 MW
power station built by the Denmark-based Vestas Wing Systems A/S
is estimated to produce 5 GWh electric energy per annum.
The city council of Bánhida said no to a biogas-firing plant because of
concerns about the air quality of the city. The investor, Biogas-Energy
Ltd. plans to build a total of 20 such units across the country.
Renewable energy in the Hungarian electricity system
According to the forecast of the system operator MAVIR, 6500 MW
new electricity generation capacity will be needed by 2015. Domestic
electricity consumption grows by 1-3% per year, therefore 2500 MW
needs to be added to the current capacity; meanwhile, 4000 MW of
old power plants need to be shut down due to obsolescence (the average
age of Hungarian power plants is 29 years).
The licenses of the blocks of Paks nuclear plant, covering 36 to 38%
of domestic electricity demand, run out between 2007 and 2012. Currently
this plant is indispensable for the safety of electricity supply;
furthermore, this plant has the lowest marginal cost of electricity generation
in Hungary. The cheapness of imported electricity is expected
to be a short-term phenomenon given the international trends of fuel
and electricity prices. As cross-border capacities are also limited, Hungarian
electricity supply should not become overly reliant on imports.
Using domestic brown coal does not pay off while coal imports from
Poland become more expensive as Polish state subsidies on coal mining
are abolished. Natural gas and renewable energy seem the most
feasible solutions to future energy shortages. As an EU member, Hungary
wowed to increase the share of renewables in electricity generation
from the current 2.5% to 3.6% by 2010.
In the first half of 2005 809 GWh of renewable energy was purchased
under the purchasing obligation; 89% of it was generated from biomass,
10.5% from water and just 0.5% from wind. Compared to the
first half of 2004 generation from biomass increased at the quickest
pace, by 150.5%; utilisation of wind energy rose by 21.4% while hydro
energy use declined by 21% due to spring tides.
Wind energy caused some controversy during 2005. The current capacity
of 7.4 MW could rise to a couple of dozen megawatts in 2006;
investors plan to build even more. On the other hand, the Hungarian
electricity system can accommodate no more than 200 MW wind energy.
The reason for this is that the average utilisation of wind wheels
is only around 25-30%, and their performance is subject to large fluctuations.
The Hungarian electricity system is very rigid even without
wind energy3; system operation would be better facilitated by power
plants firing biomass or biogas as the output of these units is more
easily controllable. The optimal solution to system management problems
would be a storage hydro plant, but such a unit exists only in
External trade After a large net electricity import in 2004, energy transit gained significance
in 2005: in the first nine months net imports decreased by a
quarter on the respective period of 2004.
The most important directions of electricity trade are the lines from
Austria, Slovakia, Romania, Croatia and Serbia to Hungary and from
Hungary to Croatia and Serbia. The Slovak-Hungarian and Austrian-
Hungarian directions were valued the highest at the 2005 capacity auction
with 13.2 million and 4.9 million HUF/MW respectively.
Monthly capacity auctions in 2005 were characterised by continuous
interest towards import routes from Croatia, Serbia, Romania, and the
export line to Serbia. The price of import capacities for Romania rose
sharply during the year; this was the most expensive import direction
on average, followed by the rarely organised Slovak and Serbian import
capacity auctions. Customers showed the largest interest in the
Croatian and Serbian directions.
According to its network development strategy, the transmission network
company MVM undertook the following investments in 2005:Establishment of a new 400 kV line between Gyõr and Szombathely; Completion of the reconstruction of the Litér 400 kV and Dunamenti
220 kV lines;Complete grid reconstruction (Zugló–Detk–Sajószöged–national
border 220 kV section),Start of the complete reconstruction of the 120 kV and middle
voltage grids;Preparations for new lines (Békéscsaba–Nagyvárad, Sajóivánka-
Rimaszombat, Pécs–Ernestinovo, Szombathely–Nagykanizsa).
3. Market structure
Eligible consumers Gross domestic electricity consumption rose by 1.9% in the first eight
months of 2005, in line with long-term projections of a 1-3% growth
trend. However, the structure of consumption has undergone significant
changes: free market consumption increased by 69% against
2004 and reached 1 TWh per month in the summer. Nevertheless, after
a dynamic expansion in 2004, no new eligible consumers entered
the liberalised market in the first eight months of 2005, leaving their
number unchanged at 187. The consumption of eligible consumers
hardly exhibits any seasonality since this group consists of industrial
customers. Consumption in the public utility sector fell by 13% according
to our estimation in 2005, partly due to favourable weather conditions.
In autumn 2005 17 electricity traders operated in Hungary, 11 of them
selling electricity to eligible consumers. The average buying price of
electricity traders rose by 16% between January and August 2005,
while their average selling price to eligible consumers increased by
11%. Buying prices averaged 8.5 HUF/kWh while selling prices averaged
9.3 HUF/kWh (9.8 HUF/kWh towards eligible consumers), therefore
the margin of traders relative to their buying price reached 9.1%
(15.5% towards eligible consumers).
Wholesale trade in the public utility sector
The public utility wholesaler MVM had a negative price margin
throughout 2004 as its purchasing prices exceeded selling prices by
0.5 HUF/kWh on average. In 2005 revenues broadly covered costs.
However, despite increasing market prices, traders only bought energy
from MVM at 4 HUF/kWh below its average buying price.
MVM capacity auctions
The MVM held its capacity auction for the second half of 2005 in June.
Interest in the auction was very low: the amount of energy sold fell
sharply compared to previous auctions while prices did not change.
Peak load (6:00-22:00) energy was also offered for the first time, but
no bids arrived for the new product.
The latest auction on 9. November proved much more successful. The
reasons for the success are manifold: annual products were also offered
besides the usual semi-annual ones, the auction preceded the
delivery period by a longer time, and it took place before the crossborder
capacity offering of MAVIR. A record number of 13 bidders
made offers although eligible consumers did not participate. 92.5% of
base load offers were contracted; bids for valley and peak load capacity
exceeded the original offer therefore the auctioned amount was
increased by MVM; prices surged thanks to more competition for offered
capacity. Another new product was offered: the right of capacity
use could be purchased. This deal involves a certain capacity of electricity
supply available freely at the disposal of the buyer throughout
the year. Only 3 megawatts could be sold for a 5 HUF/MW/year capacity
fee plus an energy fee of 12 HUF/kWh (payable as the capacity
is utilised); the 50% increase of gas prices and the novelty of the
product could be the explanation for such low sales.
Ownership changes In October 2005 the gas company El Paso sold its 50% stake in Dunaújváros-
based EMA Power Ltd. to the other shareholder, steel company
Dunaferr Co. Since 2001 EMA Power has been in a settlement
dispute over 3 billion HUF with its main customer and co-owner, the
steel works. In autumn 2004 EMA Power launched a bankruptcy procedure
against its owner. To minimise its losses, El Paso sold its last
stake in European electricity industries for 39 million USD. The deal
requires approval from the Competition Office and the Hungarian Energy
Office, and is expected to be finalised in the first quarter of 2006.
London-based Crossroads Capital sold its 85% stake in Pannonpower
Holding Co. to RPG, an international industrial investment company.
Hungarian privatisation office ÁPV Rt. Offered its 29.26% share in Vértes
power plant to the state-owned electricity company MVM. The prospective
buyer currently owns 42.91% of the company with 18 billion
HUF own capital. The deal is in accord with the strategic objectives of
Public utility suppliers
The largest public utility supplier remains Budapest-based ELMÛ. Buying
and selling prices of suppliers rose in 2005; their price margin increased
by 5 to 10% over 2004 (with the exception of DÉDÁSZ). The
most profitable company in 2005 was DÉMÁSZ with a 100.3% price
margin over its average buying price. Although public utility consumers
can only be supplied at higher costs, the 90.8% average margin of
public utility suppliers (compared with 9.1% of open market energy
traders) hints at the artificial protection of public utility suppliers.
4. Regulation and policy measures
Ownership change of MAVIR
The fate of the independent system operator was finally decided in
June as the Parliament approved the necessary modifications of the
Acts on Privatisation and on Electric Energy. According to these legal
changes, ownership of MAVIR falls to MVM with the exception of a
’golden share’ remaining in the hands of the Ministry of Economy and
Transportation. This constitutes a first step towards the establishment
of a transmission system operator (TSO) as required by EU regulation.
However, some analysts urged to point out that the independence of
the system operator may be harmed by this deal, threatening the
fairness of competition on the electricity market.
The modification of the Privatisation Act also laid down that the share
of MVM in the Paks nuclear plant, the transmission grid owner OVIT
and the system operator MAVIR may not fall below 99%, effectively
cementing state ownership of these assets as MVM is not for sale in
the foreseeable future.
Regulation of renewables and the obligatory purchasing system
A new regulation, in effect from the 1. September 2005, improves the
controllability of the electricity system by fining producers of electricity
unable to meet their declared supply timetable. The obligatory purchasing
system of renewable energy also changed: instead of a three-level
price system (differentiating between valley, deep valley and
peak load energy) a single tariff is in effect. Its 23 HUF/kWh level is
22.6% higher than the average of the old tariffs; this high guaranteed
price is expected to boost investments in renewable energy generation
Subsidised loansfor renewables
Miklós Persányi, environmental minister announced on 26. July that
the Hungarian Development Bank (MFB) offers subsidised loans for
solar, wind and hydro energy project besides environmental and energy
efficiency investments. Loans are available until 2007; interest
rates follow the EURIBOR rate and total interest subsidies are capped
at 800 million HUF. Any company can apply to subsidies for up to
three projects and up to 240 million HUF.
New market modelfor the electricity system
Preparations for a new market model of the electricity system have
begun in 2005. The re-regulation of the Hungarian electricity industry
is necessitated by the new 2003/54/EC Directive of the European Union
on one hand, and recent experiences of liberalisation on the other.
Besides complying with EU regulations, the new system aims to improve
the security of energy supply (through the encouragement of
power plant and network investments), and plans to raise subsidised
retail prices to (wholesale) market prices.
The proposal of the new regulation can be found on the homepage of
the Hungarian Energy Office;4 market participants are encouraged to
make comments and suggestions.
The need for reregulation
The current regulation is in conflict with the new EU Directive in the
following main points:Regulation of eligible consumers: industrial consumers are entitled
to purchasing electricity through public utility supply; there is no
universal supplier; public utility suppliers have limited options to
purchase energy.The state subsidises the energy sector through MVM: long-term
supply contracts guarantee that the MVM pays a non-market price
to power plants; this is compensated by switchover costs; these
may incur only until 2010 according to the new EU Directive.The unbundling of public utility suppliers and distribution network
companies has not taken place; their regulation is not in accord
with market principles.
The preparatory study highlighted the following shortcomings of the
industrial structure:Insufficient competition: the MVM is the dominant player of wholesale
and foreign trade, and it owns most of the generation capacities
to be offered on the liberalised market.Investors are hesitant due to inappropriate wholesale market signals
and regulatory risks.Excessive uncontrollable load due to the base load import of eligible
consumers, nuclear production and the obligatory purchase of
Features of theproposed new model
Public utility supply would be abolished in the new system. Households
and small enterprises could purchase electricity from universal
suppliers at regulated prices; these universal suppliers would be chosen
by the Hungarian Energy Office by open tendering. This tendering
procedure is one of the key uncertainties of the new proposal: it is unclear
whether nationwide or regional universal suppliers would be chosen.
Furthermore, tendering offers a suboptimal solution since the incumbent
universal supplier enjoys special benefits (resulting from
asymmetric information and sunk costs) over potential competitors.
Sunk costs (in the magnitude of billions of HUF) arise from the establishment
of billing systems, customer service, etc. once the tender is
won. First reactions of market participants suggest that this system
would lead to the undesirable conservation of the current structure;
complete liberalisation of final supply would be a more desirable alternative.
A supplier of last resort would be appointed should a universal supplier
go bankrupt or become inoperational for any other reason. Eligible
consumers could only buy energy on the market, they could not
return to supply at regulated prices.
The transmission system operator (MAVIR/MVM) would create an organised
market (energy exchange) for hourly day-ahead trade; bilateral
over-the-counter contracts would be freely available. The organised
market would be responsible for the obligatory purchase of cogenerated
and renewable electricity. The real-time market for balancing
energy would function as a special part of the organised energy
The position of public utility sector players would obviously change in
the new setup. The status of MVM is uncertain, depending largely on
the success of the renegotiation of its long-term contracts between
power plants and MVM. Furthermore, the proposal does not mention
the future of long-term supply agreements between MVM and the
public utility suppliers. The survival of these contracts, involving 70%
of all generated energy, could harm the energy exchange as the latter
could only operate adequately with amounts of supply and demand.
The hands of dominant market players (especially MVM) would be tied
by additional rules, for example obligatory capacity auctions, regulated
prices, and the compulsory electricity supply of universal suppliers.
Competition policy would play a more important role in the regulation
of dominant players and their performance would be assessed
in regular market analyses. This plan was understandably met by
fierce opposition from MVM.
5. Short term prospects
Price increasesThe price of natural gas for large industrial consumers rose by 7% as
of the 1. August 2005. Its impact could be felt in electricity prices
from January 2006; market participants and analysts anticipate electricity
price increases of 5 to 6%.
International electricity prices are also on the rise due to more expensive
oil, gas and carbon dioxide emission quotes, possibly leading to
higher prices for imported electricity as well. Expanding cross-border
capacities offer a larger energy import potential especially as network
development towards Romania will be finalised within a few years.
Renewable energyHigh obligatory purchasing prices, state-subsidised loans and EU funds
offer good opportunities for investing in renewable electricity generation.
Biomass shows exceptional potential; on the other hand, solar
and wind energy raises system operation difficulties, therefore their
expansion could be limited in the medium term. The new regulation
from September, fining producers unable to meet their timetable is
aimed at keeping solar and wind energy in control. The utilisation of
geothermic energy is still in its infancy, but a success of the pilot project
of MOL could give it a major boost.
Re-regulationThe planning of the new market model of the Hungarian electricity
system has started with the involvement of regulators and market
participants. 2006 is expected to bring more debates, details and the
clarification of uncertainties in the new regulatory model.
6. SWOT analysis of the Hungarian electricity industry
•Rising electricity demand, long-term
need for new power plants
•Operational regulator, high compliance
with EU regulations
•Market opening under way
•Long-term network development
•Insufficient supply on the liberalised
•Limited cross-border capacities
•Difficulties in system operation
•Dominant market player, strong
position of incumbents
•Uncertain regulatory environment
for long-term investments
•Regional electricity trade
•Spreading of market competition
•Development of MVM into international
player• Energy prices detrimental to economic
•Dependency on imports and fossil
StrengthsThe electricity demand of Hungary will rise in the coming decades;
additional demand and the closure of old plants will offer opportunities
for building new power plants of all sizes. The utilisation of renewables
is facilitated by the state through high obligatory offer prices and subsidised
financing. Regulation of the energy sector is adequate in an
international comparison, the regulating authority is already operational
and rules generally comply with EU directives. Market opening
has started even before the Hungarian EU accession. The transmission
and distribution network is under development according to long-term
WeaknessesInsufficient supply and import capacities limit the development of the
open market. Open market import has amplified difficulties in system
operation; the spread of renewables could aggravate these problems.
Incumbent market actors are strong lobbyists, their interests are in
OpportunitiesNetwork development can lead to intensified regional energy trade,
contributing to the development of the market. The new management
of MVM aims to increase the regional presence of the company;
changes in price regulations provide financial resources for a potential
(c) 2001Copyrights, Hungarian Trade Office, Taipei