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Powering through the changes

Electricity providers today face various challenges, both in Hungary and abroad. While the Fukushima nuclear catastrophe has effected fundamental changes in the sector, recent measures by the Hungarian government are cutting into company profits.

Although the energy industry was hit less by the crisis than other sectors, market players are facing the twin challenges of decreasing demand and profits, as the extraordinary crisis tax bites into energy providers’ bottom lines. As household burdens mount, energy theft is also presenting a serious problem for providers. 

In the wake of the Fukushima nuclear catastrophe and the consequent shutdown of many nuclear power plants, fundamental changes are expected in power plant portfolios as well as in energy prices through electricity imports, German-owned power and gas company E.ON told the Budapest Business Journal. Other negative trends include a deterioration in clients’ willingness to pay, as well as increasing outstanding debts and even power theft. Besides retail customers, non-payment is also a critical problem at government institutions and municipalities, as they are unable to pay their energy bills without state support, E.ON noted.

Short circuit

As a result of the extraordinary tax and fierce competition, E.ON expects falling profitability in 2011. The company is trying to increase market share by offering innovative products that meet customer needs and by strengthening cross-sales. Several market players now see major synergies in cross selling. E.ON notes that innovative solutions like electric cars, pure green energy, decentralized energy production, smart meters and smart grids have already appeared on the Hungarian market, but are still at a very early stage. 

There has been no major change in the structure of the domestic electricity market, E.ON said, adding that the role of the Hungarian Power Exchange (HUPX) is slowly increasing. Besides the four universal service providers (USPs) – RWE’s Elmü and Émász, E.ON and EdF Démász – there are several companies with full or limited power trading licenses on Hungary’s electricity market. Universal providers are obliged to supply electricity to household end-users and small enterprises at regulated prices if they are not willing to enter the liberalized market. 

Electricity traders could theoretically provide their services to small household consumers, but such offers are so far limited, KPMG’s director in charge of energy sector advisory Csaba Kovács said. There are some plans on the part of providers to enter this market, but they would then have to be able to compete with the USPs’ prices, he added. 

Falling demand

The crisis hit the power sector less than others, because, as a necessity product, electricity is less dependent on income, according to a KPMG analysis of the electricity market. However, the decrease in industrial production and increased caution of households in their consumption resulted in falling electricity demand.

In Hungary, the decrease in consumption was mainly due to large industrial consumers, with only a marginal decline in households. In the short-run, electricity consumption is expected to fall further. However, according to the long-term strategic plan of Mavir, the Hungarian power transmission system operator, there will be an average annual increase of 0.5-1.5%. 

Lower electricity prices hurt profitability and resulted in the delay of several investment projects, Kovács said. In addition, financial resources have been shrinking, although the sector is still considered to be an attractive target by financial investors. He pointed out that conditions have become tougher and financing is available only for the best projects. 

Potential exits

Potential exits by market players providing services to end-users depend on the duration of the freeze the government imposed on USPs’ prices for gas and electricity delivered to households, small consumers and public institutions, Kovács said. “Providers swallowed the bitter pill in the short-run,” he noted. However, their long-term plans depend on the details of the new energy market regulations. 

The freeze on end-user prices is causing fundamental profitability problems at several players along the value chain, E.ON said. On the other hand, the restructuring of the feed-in tariff system presents a chance to set up a genuine renewable energy subsidy system.