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The Energy Mix in Hungary – An Overview

The Energy Mix in Hungary – An Overview

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Hungary has adopted the integrated energy policy guidelines of the EU, which aim to decrease greenhouse gas emissions by at least 40% compared to the ‘90s level, increase the proportion of renewable energy in energy consumption to 32%, increase energy efficiency by 32.5%, and further the increased interconnection of the EU electric energy system. In that context, renewable energy is currently a hot topic.

Solar. Since the conclusion of the favorable KAT (feed-in-tariff based mandatory off-take system) state support scheme at the end of 2016, photovoltaic projects cannot provide a secured profit based on a fixed off-take electricity price. However, the new METAR state support scheme, under which subsidies can be awarded at tenders, is increasingly popular. Projects with successful METAR tender applications are exempted from the Robin Hood Tax, which has been imposed since January 1, 2017, on the pre-tax profit of electricity generators. PV projects with long-term power purchase agreements can be profitable and are still quite popular, in light of the constantly increasing consumer electricity price.

Wind. In the early years of renewable energy investments in Hungary, from 2000 to 2010, wind seemed to be an attractive sector for investors. Despite local weather conditions and relatively ideal circumstances, in 2016 the law was changed to prohibit the installation of wind farms within 12 kilometers of built-up areas. That practically means there are few potential locations for wind farms in Hungary.

Thermal. Geothermal power generation requires a relatively high initial investment but is not dependent on weather conditions and can feed a stable volume of energy into the network. Hungary’s geological profile is ideal for geothermal projects. The reservoir under the country covers a large area, provides high water flow in many places, and is relatively close to ground level. The significantly greater costs involved in deeper drilling and the need for a time-consuming and costly concession can thus be avoided. KS Orka, a majority Chinese-owned company, is pioneering the first geothermal power plant in CEE, commissioned in 2019. In June 2021, the first state subsidy tenders issued specifically for geothermal projects were announced. We expect geothermal to be a significant renewable source in Hungary in the long term.

Hydrogen. In the last few years, hydrogen has been increasingly considered a viable renewable energy source. In February 2021, state-owned Hungarian Gas Storage announced Project Aquamarine, to transform excess electricity into hydrogen and store it in this form, and to experiment with different types of hydrogen use. Given Hungary’s focus on the automotive industry and the development of new automotive-related technologies, hydrogen can become one of the hottest sectors in the next decade.

Green transportation. Hungary has, for many years now, been an integral part of the CEE automotive production chain. The shift to electric vehicle production is taking place, with most of the OEM plants now producing electric motors and vehicles, and with significant investment in battery technology and production. SK Battery (in Komarom) and Samsung (in God) are among the major battery-manufacturing investment projects. We anticipate attracting more in the coming years.

Nuclear. Notwithstanding the significant increase and investment in renewables, traditional energy sources, including nuclear, continue to play an important role. The four currently operating blocks of the Paks Nuclear Power Plant provide 40% of Hungary’s energy supply, and they produce the cheapest electricity among all Hungarian power plants. The implementation of the Paks II Expansion Project is currently underway, through a Russian main contractor, under an Engineering, Procurement, and Construction contract.

Oil & Gas. Mainly imported oil and gas remain vital in the Hungarian energy scene. There have been press reports that an American-Hungarian joint venture, the Hungarian Horizon Energy group, has found the largest oil reservoir in the last 30 years, located in South-Eastern Hungary. The project did not attract much attention but, if these reports are correct, this discovery has the capacity to become a significant factor in the overall energy mix in Hungary.

There is no doubt that energy will continue to be a vital and strategic sector in Hungary, with a variety of resources and a need, as well as opportunities, for investment.

By Adam Mattyus, Partner/Head of Energy, and Viktoria Szilagyi, Counsel, Lakatos, Koves & Partners

This Article was originally published in Issue 8.8 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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