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Power Generation Trends in Hungary: Solar Sail

Power Generation Trends in Hungary: Solar Sail

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In recent years, a principal aim of Hungary’s energy strategy has been to make the country self-sufficient in electric energy. In figures, this means reducing the import to 0% within ten years – as the country’s current dependency on import of approximately 30% is significantly above the EU average. The increasing price of gas and the decreasing price of electricity led to a decrease in the domestic production of natural gas, so the Hungarian energy policy had to turn to alternatives.

Hungary’s National Energy Strategy of 2011 set forth three different scenarios for primary energy use, from which the so-called “Joint Effort” plan, referring to nuclear power, coal, and green power as the pillars of electricity generation, was selected. The long-term preservation of nuclear energy in the energy mix (i.e., the construction of new units at the Paks Nuclear Power Plant) and the maintenance of the current level of coal-based energy generation for energy crisis situations are in the plan. 

To meet Hungary’s obligation to generate approximately 15% of its gross energy consumption from renewable sources no later than 2020, financial incentive schemes were adopted to promote electricity generation, primarily in the form of solar investments (other sources of renewable energy are less significant, with hardly any wind power projects created since 2008). 

These incentive schemes can be grouped into two categories: the “old” regime, with applications for entitlements needing to be made before December 31, 2016, and the “new” regime, which allowed for applications from January 1, 2017 until April 26, 2018). 

Under the “old” regime, the promotion of electricity generation from renewables is facilitated by a mandatory off-take (feed-in) system. Under this system, eligible producers can sell the electricity they generate to the Hungarian transmission system operator, MAVIR, at a fixed, statutorily-determined price (a price well above market price), for a definite period of time (22-25 years) set by the Hungarian Energy Authority, MEKH. 

The increasing efficiency and the decreasing prices of photovoltaic modules, in addition to the rather attractive mandatory off-take subsidy scheme, have led to nearly 2,000 applications in the second half of 2016 for licenses to construct Micro Power Plants (i.e., those with a peak capacity below 0.5 MW), resulting in a “solar boom” in recent years. However, since fund raising remains problematic for the majority of new investments, it has always been unclear whether the projects – with an aggregate capacity of approximately 1,000 MW – will actually be implemented.

At the same time, the legislator adopted certain laws and decrees in order to boost the implementation of ongoing projects (e.g. by providing an easier connection to the grid), and made it possible to apply for a three-year extension to complete the projects without any sanction (by, among other things, cancelling the previous 10% cut-back on the payback period). 

As a second step and based on the success of the previous scheme, the Hungarian Government replaced the supporting system with a “new” regime that went into effect on January 1, 2017, aiming to create a more structured supporting scheme for the promotion of renewables, with less generous but still attractive conditions for development. This scheme set out different rules for Micro PPs, Small PPs (with a peak capacity between 0.5 MW and 1 MW) and Major PPs (with a peak capacity above 1 MW). 

It is planned that Small and Major PPs will be obliged to sell the electricity each generates on a free-market basis. However, they will be entitled to a so-called “green premium” – a margin between the “reference market price” set by MAVIR based on the prices of the Hungarian Power Exchange (HUPX), and the “support price” defined by MEKH by considering the production costs and a fair return on the project for Small PPs. 

In addition, Major PPs will have to take part in a bidding process in order to define the best price (i.e., the most competitive and most effective project). The budget was also capped, initially at HUF 10 billion for Small PPs and HUF 15 billion for Major PPs, then later at HUF 0.5 billion for Small PPs and HUF 1 billion for Major PPs.  

Based on these new trends and the positive reaction of the markets at the end of 2018, the Government deemed it wise to ask the Minister of Technology and Innovation to reconsider Hungary’s energy strategy until September 1, 2019. It is expected that according to these new trends – and of course the still-open question of when (if ever) the Paks nuclear capacity will be extended – at least 30% of energy generation will consist of renewables, which will hopefully take Hungary into a bright and cost-efficient future, while satisfying the recently-adopted EU Clean Energy Package requirements.

By Laszlo Kenyeres, Partner, Wolf Theiss Budapest

This Article was originally published in Issue 6.1 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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