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Government giving mixed signals about green power

Governing party Fidesz has proposed to overhaul Hungary's renewable energy support system for the second time in as many months, setting off protests in the industry and also exposing a rift within the government side.

János Lázár, head of Fidesz's parliamentary group, has submitted an amendment proposing to cut subsidized electricity prices paid to combined heat-and-power plants (CHPs) and all other renewable generators. While this would result in lower electricity prices, it could also lead to soaring district-heating prices for more than half a million households and further alienate investors already wary of an ever-changing regulatory environment.

At the center of the debate is the KÁT regime (short for mandatory power off-take tariff), in which the output of renewable power plants and CHPs is purchased by utilities at a generous fixed price that is some 80% above the market price of electricity.

The original idea behind KÁT was to support renewable energy, such as wind or biomass, which could not compete at market prices due to the high cost of new technologies. CHP plants, while mostly running on natural gas, were also included in KÁT, as they operated more efficiently and produced lower emissions than if heat and power were produced separately.

Growing costs

Subsidies paid under KÁT – the difference between the KÁT price and the market price – surged in recent years, thanks to the proliferation of eligible renewable and CHP plants: KÁT grew from HUF 9 billion in 2003 to HUF 79 billion in 2009. Last year, KÁT subsidies reached HUF 75 billion already in January–November.

Lately, KÁT has been criticized for placing too much of a burden on electricity consumers – who underwrite KÁT via their electricity bills – and veering too far from its original mission of supporting fledgling "green" power plants. The cost of KÁT for consumers has reached HUF 3–4 per kWh, making up some 6–8% of the retail price. Last year, one-quarter of all power purchased by electric utilities was expensive KÁT power.

Of all KÁT funding, some 70% is paid to CHP plants, which, in effect, cross-subsidize local heating prices, keeping them low despite rising gas prices. Of the remaining 30%, most is paid to biomass plants, many of which simply burn firewood, a practice that has drawn questions over sustainability and environmental friendliness.

Feeling the heat

Policymakers have recognized the need to reform KÁT to ease the burden on electricity prices and better focus financial support on "real" renewable energy. However, the question of district heating prices, which CHP operators said would spiral out of control if KÁT subsidies were cut, have so far stayed politicians' hands.

At the end of 2010, many CHP plants were to be dropped from KÁT, as the support period granted by the Hungarian Energy Office had expired. Fearing a jump in district heating prices, sector players and the government reached a compromise last December, whereby these plants may remain in KÁT for two more years, while KÁT prices paid to CHP plants would be cut by 15% across the board – keeping KÁT spending in check but ensuring a still-respectable margin for CHP plants.

It is this compromise that Lázár is now challenging. He is proposing that KÁT prices – not just for CHP plants but all renewable plants – be cut by 25% instead of 15% this year, and by 35% (compared to end-2010) at the start of 2012. Explaining his proposal, Lázár said Hungarian electricity prices are "unjustifiably high" and the December compromise was just a "half-solution." KÁT remains "unfair" as millions of electricity-using households underwrite heating costs for a few hundred thousand homes, Lázár said, adding that the system mainly serves "lobby interests."

Lázár's proposal – backed by Fidesz MPs in Parliament's economic committee – divided not only the public and the energy industry, but also the government side. János Bencsik, state secretary in charge of energy, defended last December's compromise, saying it prevented a rise in heating prices, allowed plants to remain financially viable, and bought time to prepare new regulations for renewable energy support.

"The proposal of János Lázár upsets this compromise, and as such I find it professionally and politically unacceptable," Bencsik wrote in a Facebook post. As a former mayor of Tatabánya – an industrial city dominated by district-heated pre-fab housing – Bencsik is understandably sympathetic to the problems of the district-heating and municipal sectors, but a jump in heating prices could also cause real political damage for many Fidesz-affiliated big-city mayors.

Surging prices

Industry representatives said the changes proposed by Lázár could drastically boost district-heating costs for 650,000 households, or some 2 million Hungarians. According to Gábor Bercsi, president of the Hungarian Co-Generation Energy Society, more than 70% of CHP plants' revenues come from electricity, and the rest from heat, therefore a further 10% cut in electricity revenues could result in a 20%–50% rise in heating prices if plants were to avoid losses. And if heating prices aren't allowed to rise, plants may need to close down, resulting in the loss of thousands of jobs and forcing municipalities to reopen old, inefficient and polluting heating plants.

Bercsi also noted the potential negative effects on Hungary's investment climate. "The proposal took us by surprise, as it goes completely against what was accepted a month ago," he said. "If the regulatory environment changes every month, it is difficult to imagine why anyone would invest in this industry."

To resolve the dispute, Prime Minister Viktor Orbán has instructed his cabinet to draw up a plan for the future of KÁT, with the aim of eventually scrapping the regime but also preventing heating prices from rising. A new proposal is also now before parliament that would grant the national development minister the authority to set heating prices – allowing a moratorium on prices until new rules are in place.

It is unclear what direction government policy will take. Solutions may include removing CHP plants from KÁT, allowing other renewables such as wind to continue receiving subsidies, thereby providing incentives for investors to continue building renewable plants, helping Hungary reach its 14.6% renewable target by 2020. CHP plants may be allowed to buy gas from the regulated market, which would ensure stable profits without higher heating prices. But whatever the solution, Bercsi believes the damage is already done. "The message is: anything can take a 180-degree turn any time."


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