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Significant Changes on the Hungarian Renewables Market: New Limitations and Opportunities

Significant Changes on the Hungarian Renewables Market: New Limitations and Opportunities

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While no more applications for Micro Projects (those below 0.5MW) can be submitted under Hungary’s very generous mandatory off-take system since the end of April 2018, the Government  seems to have acknowledged that the projects already licensed under the subsidy regime may not be physically implemented within the strict deadlines set forth in the original legislation. Therefore, it is now possible for entities that applied for licenses after January 1, 2016 to ask for a three- years extension to complete their projects without any sanction. This is good news for license-owners and potential investors, as they have a reasonable amount of time to manage the relatively burdensome permitting proceedings and can also secure project finance. This is also good news for the Hungarian state budget because the first heavy payments to the projects under the mandatory off-take system will be delayed by a few more years.

In the second half of 2016, nearly 3,000 applications were submitted to the Hungarian Energy Authority for the support of Micro Power Plants (power plants with a peak capacity below 0.5 MW). The high number of licenses awarded led to a “solar boom” at the end of that year. However, it was questionable all along whether the projects – with an aggregate capacity of approximately 1,500 MW – would actually be implemented. Although the support was attractive and offered compelling business opportunities, the 20-to-25 year reference period and imperfections in the legislation created potential risks as well.

Subsequently, the Hungarian Government changed the supporting regime with a new system as of January 1, 2017. The new regulations aimed at creating a more structured supporting scheme for the promotion of renewables, with less generous conditions for development than under the previous regime. This led to a decline in the number of applications (only 264 – a tenth of the 2016 figures). At the same time, the legislator adopted certain laws and decrees in order to boost the implementation of ongoing projects, ranging from easier connection to the grid to free-of-charge building and development of cables, as well as easier reclassification of agricultural lands. These changes predicted a bright future for development in Hungary, especially for ongoing projects; however, the most recent actions by the Government cast some shadow on the potential new power plants.

On April 20, 2018, the Government announced that no more applications for Micro PP licenses in the mandatory off-take system could be submitted after April 26, 2018. The decision was adopted strikingly fast, and without any foresight. The underlying reasons are unknown; however, the conventional interpretation appears to be that the high number of applications posed a risk to the budget. Such a fundamental change can affect the market in many ways – for example it could lead to to an increase in the market values of the existing Micro PP licenses. 

With the mandatory off-take system coming to an end, the new tendering system for supporting renewables may become popular for developers. The green and brown premium tendering in case of Small PPs (power plants with a peak capacity between 0.5 MW and 1 MW) and biomass and biogas generation units, and the competitive tendering for Major PPs (power plants with a peak capacity above 1 MW) is going to be a hot topic for the near future, but there are uncertainties in the systems. Although the general rules of tendering became effective in the beginning of 2017, no tender has been issued since, and it is not clear when and under what conditions the first tender would be issued in case of a competitive tendering. It cannot be excluded that investors who have already taken certain project development steps (such as securing land, evaluating the grid connection possibilities, elaborating their business plans, etc.) may be in a better position to provide offers and file applications, taking into consideration the short period of the procedure and the fixed cap on financial support.

By Laszlo Kenyeres, Partner, Wolf Theiss

This Article was originally published in Issue 5.5 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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