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The Correlation of ESG and the National Energy and Climate Plan of Hungary

The Correlation of ESG and the National Energy and Climate Plan of Hungary

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The EU’s headline target for its Member States is to have a climate-neutral economy by the year 2050. To reach this goal, the European Commission have called on Member States to prepare their National Energy and Climate Plans (“NECPs”) as the first mandatory step towards the Energy Union.

As for Hungary, the key targets of its NECP are to decarbonize the energy production and to increase energy efficiency.

As part of the decarbonisation objective, the NECP aims to reduce greenhouse gas emissions by at least 40% by 2030 compared to 1990 levels. To achieve this, it identifies a number of strategic priority areas, both existing and to be developed in the near future.

• The NECP points out that the Hungarian Development Bank already offers a loan programme to provide funds for energy efficiency investments in residential buildings.

• It considers the maintenance of nuclear capacity a priority and points to the key role of the Paks-2 project.

• Reductions in agricultural emissions are to be achieved through the regulation of good agricultural practices and through various support instruments.

• In the field of transport, it aims to promote the uptake of electric vehicles and to shift traffic towards low-emission methods.

The second key element of the decarbonisation objective is the development of the electricity sector. In this context, the NECP aims to achieve a share of renewable energy sources in gross final energy consumption of at least 21% in Hungary by 2030.

Reaching this goal, the expandation of solar panel capacity is a key element. It is projected to grow from 680 MW in 2016 to 6,500 MW in 2030, according to the NEPC. It also intends to encourage the installation of solar panel systems to partially substitute the source of own electricity consumption. The aim is to have at least 200,000 households with 4 kW roof-mounted solar panels in average by 2030.

The NECP also supports the take-up of electricity in the transport sector. The aim is to achieve at least 14% of transport energy from renewable energy sources by 2030 by promoting the uptake of electric vehicles and increasing the share of first and second generation biofuels.

The NECP foresees the transformation of energy use and production to be based on the local use of electricity by consumers, with the establishment of energy communities as unique consumer-producer units and accounting entities. It sets a three-point objective in this respect. Firstly, it aims to extend balance billing to condominiums; secondly, it seeks to establish transformer districts as communities; and thirdly, it aims to develop “village heating networks” as energy communities.

Within the dimension of energy efficiency, the NECP promotes ESCO-type financing solutions, which refer to a contractual arrangement whereby an ESCO (Energy Service Company) upgrades and operates at its own expense the energy supply system of a customer with typically outdated heating or lighting systems.

The scheme is outstanding from an energy efficiency point of view because the refurbished systems enable the customer to operate the facility more cost-effectively using less energy, and the ESCO is only paid for its services from the costs saved, typically over a period of 5-20 years.

The NECP notes that this solution could minimize or even eliminate the need for budgetary resources and EU funds when it comes to the refurbishment of governmental institutions, and could thus contribute significantly to reduce government debt.

In addition to maintaining energy-intensive sectors, the NECP also sets as an energy strategy objective that further industrial investments should take place in low energy and greenhouse gas intensive, high-tech industries, thus supporting the sustainable and competitive development of the Hungarian economic structure.

Considering the aforementioned, it is safe to say that ESG related regulations will take place in the very near future, and these regulations will change the economic activities thoroughly. However, many questions arise. To what extent and when will the objectives be achieved? What type of legislative action will take place? Can economic operators expect to be penalized in the event of non-compliance? If so, in what manner and to what extent? These questions remain to be answered.

By Patrik Kiss, Junior Associate, act Ban & Karika Attorneys at Law

Hungary Knowledge Partner

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