Hungary’s recently adopted long-term National Energy Strategy calls for strengthening the state’s role in the energy sector through the nationalized Hungarian Electricity Works (MVM). The government claims that this is the way to meet the goals of the strategy, such as guaranteeing the secure energy supply of households at affordable prices. The government also plans to help MVM expand on the natural gas market.

Market players are already seeing the signs of increasing government participation. “There is a sense of uncertainty on the market due to the planned strengthening of the state’s role,” said to Csaba Kovács, KPMG director in charge of energy sector advisory.

Regarding the planned new renewable electricity support scheme, on one hand, the government’s claim that the preparation of the new rules takes time is understandable. However, as other Eastern European countries also need new investments to achieve their renewable targets, investors might go elsewhere in the region in the case of further delay. 

MVM: changing role

Prior to energy sector privatization in Hungary, MVM was operated as a big trust unifying all electricity-related activities. After privatization, MVM retained activities like electricity generation, wholesale trading, and transmission system operation as well as some development activities, and expanded by setting up its own free-market energy trader. 

Privatization in the Hungarian power sector, which started in the 1990s, is now very advanced. Currently, the majority of power stations and all the electricity distribution companies are privately owned. The electricity market, which was split into a liberalized market and a public utility market, was unified into one liberalized, competitive market in 2007. Public-utility electricity suppliers became universal service providers (USPs) and the electricity public utility wholesaler MVM started to work as a free-market electricity trader. Besides their universal service activity, former incumbents are also active in the free market. 

However, wholesale competition is still not considered complete. Kovács of KPMG pointed out that many power plants had operated under long-term contracts in Hungary, thus were little affected by market forces. MVM’s dominant market position is based on the ownership of the Paks nuclear power plant, which accounts for about 40% of the country’s total power generation, as well as on its new free market-based contracts with the largest Hungarian power plants, even after the elimination of long-term purchase agreements (PPAs), Kovács said.

PPAs out

The European Commission called for the termination of PPAs, considering them to be one of the main obstacles against market development because of their effects on competition and the transparency of electricity pricing. PPAs were introduced in Hungary in the 1990s, with some valid until 2020, and they covered about 80% of the power market.

All earlier PPAs were thus eliminated and some of them replaced with market-based contracts in 2008. The Commission said the companies could be compensated for “stranded costs” that cannot be recouped from investments in assets that have become non-economical because of the termination of the PPAs.

Besides MVM, which is active primarily in the domestic market, the main wholesalers include regional or European companies, like Czech CEZ or the Swiss Alpiq, Kovács noted. MVM’s contracts with the USPs account for approximately one-third of the Hungarian market. 

A special-status member of the MVM group is the Hungarian transmission system operator (TSO) Mavir. Its status is in line with the EU rules of legal and functional unbundling. Mavir is responsible for maintaining the secure operation of the Hungarian power system, including the required reserve capacities for ancillary services. In addition, Mavir prepares the Hungarian Network Development Plan, which has to be in harmony with the European Ten-Year Network Development Plan. 

EU Energy Package

The implementation of the EU’s third Energy Package, which was announced in August 2009, is now underway. Member states had 18 months to implement the stipulations of the directives and 30 months for implementing ownership unbundling, should they opt for this possibility.