Hungary energy liberalization: failing to make real progress

 

Jun 14, 2007 -- Datamonitor

 

Hungary highlights the problems faced by EU member states, especially the new accession countries that are trying to adopt EU energy laws. Like most EU members, Hungary's electricity market will be opened to competition from July 1, 2007. However, this may be compromised by the current nature of the region's energy sector, which suggests that the EU needs to improve its liberalized market agenda.

At present, Hungary's power market is structured between household/captive customers and non-household consumers who can choose their own power supplier.

Hungary's state-owned power incumbent MVM dominates the captive household market, and is a substantial player in the liberalized market. It controls about a third of Hungary's generation capacity, including the Paks Nuclear plant, which generates 40% of Hungary's power supply. Additionally, most of the generation output of independent power plants is sold to MVM under long-term power purchase agreements.

Furthermore, MAVIR, the Hungarian transmission system operator, was reintegrated into its former owner MVM in January 2006 as a legal subsidiary. Hungary has been the only EU country to do this, despite the ongoing debate regarding network unbundling.

MVM's dominance of the market, and its ability to cross-subsidize along the energy value chain, is compromising competition, and may lead to an exodus of firms out of Hungary.

Indeed, as the captive market has the priority over non-captive consumers in the domestic electricity sector, there is not enough power for the liberalized market. Furthermore, importation of power is limited by statute, which decrees that only 50% of power demand can be sourced from abroad. As a result, eligible consumers are limited in their ability to procure power, and there is no incentive for new investments or entrants into the liberalized power market.

The Hungarian government is slated to convert its golden share control of MVM into ordinary shares; which will allow it to maintain ownership of the company, along with its privileged position.

With the largest budget deficit in the European Union, Hungary's need to cut public spending and subsidies is critical. However, removing subsidies on energy tariffs is politically dangerous and will test the government's ability to truly liberalize the energy market.

Additionally, the issue of re-negotiating the long-term purchasing agreements and the subsequent stranded costs should have been dealt with before Hungary's accession into the EU. All of these factors suggest that a more cohesive agenda by the EU is vital in achieving its goal of a single energy market.

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