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Energy mix: Renewables, Nuclear and Fossils

István Réczicza, Hungary managing partner at Dentons’ Budapest office, spoke to the Budapest Business Journal about developments in Hungary’s energy market, and the regional picture.

CEE countries within the EU are supposed to meet their national EU-designated renewable energy targets by 2020: Will they?

Generally, most EU-28 member states should meet their national RES (renewable energy sources) targets. With 20% of the EU-wide renewable energy target by 2020, each member state has its own national RES target set in the RES Directive. In the recent EC Renewable Energy Progress Report and according to Eurostat data, Hungary had a 9.4% share of renewable energy in its gross final energy consumption in 2015 vs 13% for its national target by 2020. Some CEE countries, such as Czech Republic and Romania, have already reached their national targets.

Significantly, CEE economies consume much less energy now than 10-20 years ago. Total consumption was further reduced by the global financial crisis. Together with renewable developments already implemented, this means CEE countries already almost meet their renewable targets.

However, with the recent regulatory changes in several markets, it remains to be seen if all CEE countries will eventually be able to meet their national RES targets by 2020.

What are the implications for other fuels?

Most probably, natural gas and, partly, nuclear energy will remain important in CEE. Although certain renewable technologies are growing rapidly, CEE countries will not be able to cover their needs fully or mostly from renewables for a long time yet, so much of electricity base-load will need to be provided by conventional facilities: nuclear and gas. Gas-fired facilities are also very suitable to balance out fluctuation caused by certain (weather dependent) renewables, so these will certainly remain important in the future energy mix, even if certain renewables are skyrocketing. Clearly, there are incentives in the CEE to include significant coal-firing in the future energy mix. However, the viability of this is uncertain due to increasing CO2 costs and growing social awareness and environmental sensitivity.

What do you think are the key regulatory and policy issues for Hungary?

A key topic nowadays is the amended support regime for renewables. As of Q1 2017, the renewable support regime has been reshaped in accordance with the relevant EU guidelines. Although this kicked off only recently, and its future impact on the Hungarian renewable sector and the various technologies is uncertain, some consequences are already clearly visible. For example, appetite for solar developments increased very significantly in the last months. This is partly because interested large scale solar project developers filed license requests for capacity in excess of 2,000 MW just at the end of 2016 to still be able to benefit from the previous, more favorable support scheme, and partly because smaller scale solar plants (i.e., below 0.5 MW) enjoy a rather generous support under the new regime. However, it is also clear that wind electricity generation is certainly not a winner under these changes, and it is practically impossible to develop further wind farms in Hungary.

How do EU policies impact on nation states, and how do you see the authorities meeting all these challenges?

Common EU policies work only if everyone aligns with them. In the past years we have witnessed that, in some policy areas, the Hungarian government has been testing its boundaries vis-à-vis the EU. In the context of the energy industry, this is exemplified by the public tariff setting rules. It remains to be seen where this path will lead Hungary, but previous experiences have shown that sooner or later the supremacy of EU policies prevails and member states adjust themselves.

What are the important issues around nuclear power for Hungary (and CEE)?

Disposal of used nuclear fuel, financing and safe operation in general.

What does Paks II mean for Hungary? Critics say it is too expensive, makes the country more dependent on Russian technology fuel sources and expertise, and is not needed, at least so soon.

The communicated aim of the government with Paks II is security of energy supply and energy at competitive prices. Hungary has an aging electricity generating infrastructure (although some old polluting plants were refurbished in the past decade), and, as experts say, some 7,000 MW of conventional generating infrastructure will cease operation by 2030, which must be substituted somehow. It seems rather unrealistic that, even with rocketing solar capacities, renewables alone would be able to deliver such volumes in Hungary, at affordable prices. The potential (weather dependent) renewable capacity is also limited by capacity and the balancing constraints of the grid. Considering that nuclear production does not involve CO2 emissions, it seems like a fair choice. (Of course, nuclear waste disposal must be taken care of in a reassuring manner).

How will Hungary sell Paks II’s base-load capacity if plans proceed? At what price?

Base-load prices will be determined by supply and demand. According to current plans, for a few years after the new Paks II blocks become operational in 2026 with a 2,400 MW capacity, they will operate simultaneously with some of the old blocks of Paks I, until these are ultimately switched off. However, significant delays are likely (as usual for projects of this magnitude in this part of Europe) in commissioning Paks II. As such, the period during which both the old and the new blocks would be operational with a large capacity may not be too long.

Demand for base-load electricity may also grow longer-term due to the foreseeable growth of electricity use in transportation and developments in battery technology.

István Réczicza Mini-bio
István Réczicza is a partner in Dentons’ global litigation and dispute resolution group and the Hungary managing partner. He focuses on the areas of telecommunications, energy, mergers and acquisitions, and intellectual property regulation, particularly as these relate to transactions involving foreign investment. In the course of representing clients in these fields, he has become one of Hungaryʼs leading figures in the analysis of industry regulation and the drafting of proposed amendments in connection with such legislation.