IEA commends Hungarian energy policy for positive developments since 2003, but notes significant challenges on market reform and energy efficiency

(Budapest) — 3 April 2007

"The Hungarian government has made some good progress since our last review in the area of market reform, and it is now important to focus on the implementation of market opening in Hungary, delivering a framework that allows full competition to develop,” said Claude Mandil, Executive Director of the International Energy Agency (IEA), today in Budapest. Presenting the publication Energy Policies of IEA Countries – Hungary 2006 Review, Mr. Mandil praised the high levels of competence and independence of the Hungarian Energy Office and the Hungarian Atomic Energy Authority. He also commended the government’s decision to reform some of the market-distorting subsidies in the energy sector. He emphasized, however, that “it is now urgent to implement the market reforms in time for full market opening in July 2007”

“There is also room for improvement in Hungarian energy policies, particularly in the area of energy efficiency,” Mr. Mandil added. Hungary has a very high dependence on gas, but is not using this fuel in a very efficient manner. “The Hungarian government needs to focus on ensuring high levels of investment in improving the efficiency in all sectors of the economy, particularly home heating and power generation,” Mr. Mandil said. “Furthermore, direct financial support for renewables and combined heat and power plants (CHP) is very high in Hungary, and unlikely to be cost-effective.”

Security of supply and emergency preparedness
Hungary has one of the best organisations for emergency oil storage in the IEA, and contributed effectively to the IEA’s Joint Release following the hurricanes Katrina and Rita in the United States in 2005. Shortly after, the gas price dispute between Russia and Ukraine in January 2006 brought security of supply into sharp focus for Hungary, and the Hungarian government reacted quickly by voting for the establishment of strategic gas storage. While high political attention to this concern is appropriate, the Hungarian government would be well-advised to consider all options available to increase security of supply, some of which may be less costly and provide more long-term security than strategic gas storage. “Supply route and source diversification, and increased energy efficiency, could help to achieve greater security of supply,” Mr. Mandil said.

Moving ahead on market reform
While large parts of the Hungarian energy markets are in theory open to competition, in reality the development of competition has been slow. To prepare the country for the full liberalisation of the EU electricity and gas market by July of this year, further steps in market reform are urgently required. At this point in time, there is no clarity about the system under which the market should operate after its full opening, or about its date of introduction. Mr. Mandil stated that “The Hungarian government should move quickly to adopt a system that will allow customers to reap the full benefits from competition.”

Market-distorting subsidies
While significant energy efficiency potential remains, the government is offering a household gas subsidy, which reduces the price of gas use. At the same time, Hungarian electricity consumers are paying for substantial subsidies to the renewables and CHP sectors in Hungary through levies on their tariffs. To ensure that the most economically and energy efficient solutions are chosen for the future energy supply of Hungary, the government should consider reducing subsidies for households, replacing them with a different form of payment to avoid social hardship, and also avoid over-subsidisation in the renewables and CHP sectors.

Energy efficiency
Despite dramatic improvements in energy efficiency during the last 15 years, significant potential for enhanced efficiency remains in Hungary. Mr. Mandil pointed out that “particularly in the field of gas use, energy efficiency will continue to play a key role for securing future Hungarian energy supplies, and the government should make every effort to realise this potential”. The review has identified room for progress particularly in the gas-to-power sector, where old power stations need to be replaced, and in the residential sector, where improved thermal performance of Hungarian housing could bring impressive results in reduced gas use.

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