Hungary must cut support for renewables, CHP: regulator

Hungary must cut support for renewables, CHP: regulator

Budapest (Platts)--6Sep2006

Hungary's system for providing subsidies for renewable power and
cogeneration is unsustainable and must be substantially modified in the near
future, officials of the Hungarian Energy Office (HEO), the country's
regulator, said Wednesday at the Energiamerleg conference of the Institute for
International Research.
Gyorgy Bekes, deputy director general at the HEO, said that a new
Electricity Act is on the agenda due to the EU's required 100% energy market
opening in July 2007, and that the rules of a new system would be explored
this autumn.
The central price support mechanism (KAP), which covers both renewable
energy and combined heat and power (CHP), is now heavily strained due to
"exponentially increasing" demands for support, said Gyorgy Bekes, deputy
director general at the HEO. "KAP payments almost doubled in 2005, and they
will almost double in 2006 as well."
Total payments in 2006 will likely be Forint 52-55 billion ($242-256
million), up from Forint 24.6 billion paid in 2005. Payments into the system
will barely cover this amount, and the system will have a cumulated deficit of
Forint 12-15 million at the end of the year. This is despite record-high
system fees to finance KAP support. These were hiked to Forint 2.07/kWh at the
beginning of August, up from Forint 1.13/kWh in early 2006 and Forint 0.2/kWh
in 2003.
CHP accounts for most of the growth in demand for subsidies. The recent
rise in gas prices has meant a "brutal increase" in payments, said Bekes,
particularly to the large number of small gas engine plants that have sprung
up in recent years. CHP will likely eat up 64% of total KAP support in 2006.
There has also been a strong increase in the volume of renewable power,
and the HEO is looking at ways to cut back, said director general Peter
Grabner. For example, Hungary offers generous guaranteed offtake prices for
renewable power for an unlimited period, at some Ft 24/kWh.
Germany limits high mandatory offtake prices to seven years, Grabner
said, and Hungary needs to consider a similar limit, in addition to the quotas
that have recently been built into the project-permitting process. Also, like
the UK, Hungary should consider limitations on support for mixed-fuel
renewables, such as plants running on a mix of coal and biomass.
"This sounds painful for investors, because nothing is better than
getting above-market prices forever. But in Hungary our finances for these
purposes are limited," said Grabner. Bekes added that Hungary also needs to
re-examine its high mandatory offtake price.
The system also depends on the existence of the current regulated "public
service" market, said Bekes, which will cease to exist in July 2007. This is
the market that currently absorbs all mandatory offtake. "The minute that the
public service market ends, [the KAP system] must also come to an end," he
said.
The HEO expects the changes to be the subject of dispute with investors,
but wants to encourage a dialogue in the industry. Bekes suggested a new
balancing circle including all renewables and CHP should be created, with
power sold to an appointed body responsible for managing supply and demand
among these generators. "Ceteris paribus, income levels for producers would
not change from current levels," he said.

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