Earth Heat – a Hot Topic

Green Energy

An op-ed by Márk Köles, energy lawyer at RVD Partners.

Hungary's Recovery and Resistance Plan, put into social debate by the government, Chapter REPowerEU (the “Draft”) also contains ideas for geothermal energy in order to ensure the share of geothermal energy in the country's energy mix, especially in district heating.

The “Reform 12 – in the Draft Development of the Geothermal Regulatory Framework” intends to improve the legal framework primarily from a research/mining point of view, based on the experience gained in the meantime, while the Draft “Investment 11: In the utilization of ground heat” part intends to provide variable intensity support to reduce the risk of drilling for geothermal production, on the one hand, and a preferential credit line for ground-based equipment and power plant construction for the utilization of earth heat, on the other.

The neuralgic point is that although the Draft supports the investments, it does not take into account that after the completion of the investment, the district heat producer can sell its product at an official price, operating under-regulated market conditions, where, in today’s circumstances, there is a return that is not even modest, with a profit factor of 4.5% on the gross asset required by law, so this is not an attractive area for investors at all today.

The current situation in the energy market, which is not very rosy anyway, has a benefit that it would now be worthwhile, even for fiscal reasons, to encourage the extraction of geothermal energy more strongly than before, as it could take some of the natural gas’ place, which is four times more expensive in district heat production than before.

The question can therefore also be asked, "Which is the more fiscally rational decision, with a better focus on energy sovereignty: to maintain support for expensive, foreign exchange-accounted and uncertain import natural gas use, or would it be better to spend on domestic, weather-independent, decarbonization-friendly geothermal heat, that can be produced significantly cheaper than heat from natural gas and in HUF, through district heating regulation?"

Obviously, this issue is poetic, as the Draft also states that the increase in geothermal energy „is in line with the National Energy and Climate Plan, which set a target of 50% of the share of natural gas reduction in district heating production. However, in this case, it is not enough to support the implementation of the investments at some level, because this does not provide the investor with sufficient benefits.

In short, in a regulated district heating market, a market-like return must be ensured for this area to be attractive, however, in addition to current natural gas prices, this would be much more worthwhile for the state than ever before, as the total cost of geothermal energy has been a tenth in the last heating period, the total cost of district heating from natural gas. And there is no need to think about big things about changing the regulation either, as it would be enough to change the statutory profit factor specifically for geothermal district heat producers, for example, that the profit factor is variable per year and exceeds the weighted average yield on long-term government securities (10 and 15 years) denominated in EUR at a given balance sheet date with the normal business risk premium (6 percentage points). This would result in the benefits available on the regulated market already being attractive, but no extra profit could be made.

I also dare to risk that ensuring a return at a market level in this regulated market is only necessary but not sufficient to allow investment to start because it has not yet been mentioned, how many additional conditions (drill, availability of specialist) also depend on the implementation of the investments. However, we can safely say that if a geothermal investment is not able to benefit the investor from the outset through official district heating prices, that investment will not be realized, even though it is, that, at the moment, the earth heat that can increase our energy sovereignty is also the cheapest, a lucky combination that could easily achieve a win-win situation in terms of business interest and the public good.

The value of energy sovereignty is invaluable, it is worth all the money in the first place, and if, in addition, we even generate fiscal savings with the help of geothermal energy, we cannot put the little it costs in a better place.

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