Executive summary

Since the last IEA review, Hungary increased its climate ambitions by legislating a carbon neutrality goal for 2050, adopting a long-term strategy, advancing the phase-out of coal by 2025, promoting a remarkable growth in the deployment of solar PV and upgrading its existing nuclear reactors.

The major priorities for Hungary’s climate and energy policies relate to energy security, reducing fossil fuel use and keeping energy prices affordable. This new review presents a range of recommendations to the government of Hungary to help address its key energy policy challenges, notably the low levels of energy efficiency progress (buildings, transport), high vulnerability and reliance on Russia for gas, oil and nuclear fuel, regulated energy prices which may act as a barrier to clean energy investments, as well as the need for increased resources to deliver the transition. 

Energy transition towards net zero

Hungary was among the first countries globally to turn its 2050 emissions target into a legal commitment with the adoption of the Climate Protection Law in 2020. Hungary’s medium- and long-term energy and climate policy is guided by the National Energy and Climate Plan (NECP) of 2020 and the National Clean Development Strategy (NCDS) of 2021.

The NCDS supports energy policy making with early or late action scenarios running up from 2030, 2040 to 2050. Reaching the 2050 target is possible, but will require developing clear policy road maps with key milestones set per sector, which will need to be monitored closely to allow early corrective actions to be taken, as needed.

Hungary’s Climate Protection Law also sets out medium-term energy targets: after 2030, increases in final energy consumption above the 2005 level need to be provided exclusively from carbon-neutral energy sources, and renewable energy sources should reach at least a 21% share of gross final energy consumption by 2030.

Hungary merged the governance responsibilities for energy and climate policies within the Ministry of Technology and Industry. Bringing the two policies under one ministry facilitates the integration of climate and energy policy planning. The creation of a dedicated Deputy State Secretary for Climate Policy reflects the growing importance of climate policy within the government.

In the context of the REPowerEU plan, reflecting Europe’s determined actions to end energy dependency from the Russian Federation (hereafter, “Russia”) by 2027, existing strategies and targets need to be reviewed. Moreover, the EU Climate Law and related measures proposed under the Fit for 55 package require almost all EU member states, including Hungary, to step up efforts to reduce CO2 emissions on a faster trajectory and boost energy efficiency and renewable energy.

In 2022, Hungary’s energy policy strategy focuses on strengthening the country’s energy independence. Russia’s invasion of Ukraine in February 2022 has created a new set of energy security challenges in Europe. In response, Hungary declared a state of energy emergency on 13 July 2022. To address the emergency, the government aims to increase domestic gas and coal production, secure additional gas imports and increase the output of the country’s lignite-fired power plant. A possible lifetime extension of the Paks Nuclear Power Plant is also under discussion while a potential ban on exports of energy carriers and firewood is considered. 

Placing energy efficiency at the centre of policy making

Hungary has seen rising energy demand reaching 753 PJ in 2020. Efficiency efforts have not been able to decouple energy demand from economic growth, notably in transport and industry.

Under Hungary’s NCDS, energy efficiency needs to increase strongly. By 2030, final energy consumption should be reduced to 734 PJ, assuming early action on energy efficiency, and ultimately to around 500 PJ by 2050. However, Hungary’s NECP of 2021 has less ambitious energy efficiency targets for 2030, capping the country’s final energy consumption to 785 PJ, which is the 2005 level.

In its NECP, the Hungarian government acknowledges the importance of energy efficiency to reach climate targets and ensure energy security. However, the energy efficiency first principle is not specifically recognised, neither in the NECP nor in the National Energy Strategy (NES), which has an outlook for 2040.

Experiences in other IEA countries show that energy efficiency not only brings substantial resource savings and security benefits, but also contributes to other targets such as improving health indicators and overall quality of life, creating employment opportunities, and supporting innovation.

The government has divided responsibilities for energy efficiency policy design, funding, implementation, and monitoring and evaluation among different government institutions and other responsible entities. Across ministries, governmental institutions and non-governmental organisations, as implementing authorities, the key challenge is often the lack of skilled professionals. To bridge this gap, the government should support the administrative realignment of energy efficiency responsibilities through, for example, the creation of a dedicated energy efficiency agency that would bundle the available technical skills and financial measures and facilitate access to energy efficiency programmes. Such an agency could work with local authorities to support them in the technically complex implementation of multi-year deep renovation projects.

Household retail prices for electricity and natural gas have long been capped in Hungary, with the objective to keep prices for households affordable and to avoid exposing households to price volatility. However, such regulated energy prices are available to all household consumers and small businesses, not only vulnerable ones, and as such hamper decarbonisation efforts, consumer choice and retail competition. The electricity and gas price regulations are planned to be reviewed, taking into account the tools published in the European Commission’s Communication of 23 March 2022.

The regulatory framework needs to be revised to reach the highest possible retail market liberalisation in gas and electricity, including the elimination of administratively determined end-user prices. Protection measures should focus on vulnerable customers and less well-off households as part of social policy rather than energy policy. In July 2022, the government decided to deregulate gas and electricity retail prices for households with consumption above average levels and increase them towards market prices.

Maintaining and boosting low-carbon power generation

Renewable energy has seen remarkable growth thanks to the introduction of the new renewable energy tenders (METÁR), with strong performance of solar photovoltaic (PV). The share of renewable energy sources in gross final energy consumption increased rapidly since 2017 to reach 12.6% in 2019 and 13.9% at the end of 2020, exceeding the 13% target that Hungary had for 2020, but below Hungary’s 2030 ambition of 21%.

In line with net zero ambitions, Hungary targets a low-carbon electricity mix of 90% by 2030, with new nuclear and renewables to play a major role.

Hungary has focused on maintaining its nuclear generation capacity. Between 2012 and 2017, all four units of the Paks Nuclear Power Plant (NPP) were granted 20-year lifetime extension licences, on top of the 30-year original design lifetime, bringing their scheduled closure dates to 2032-37. A new build project Paks II is under preparation with Russia and was granted construction licence by the Hungarian Atomic Energy Authority.

Going forward, efforts are needed to boost the share of renewables in gross final consumption. In light of higher EU-wide ambitions, Hungary is also considering raising its 2030 target for renewables in final consumption to a higher level of 23% or even 25%, banking on strong solar PV.

Hungary still has untapped potential in developing geothermal and wind power. A faster progress in renewable energy deployment may allow Hungary to close its last coal-fired power plant ahead of time by 2025. It would also mitigate possible delays at the new NPP project Paks II and support an alternative strategy for Hungary in the coming years.

Hungary plans to phase out coal use for electricity generation by 2030, or if possible by 2025 if the government can timely facilitate the “just transition” by shifting direct and indirect jobs in lignite mining and lignite-fired power generation at Hungary’s last coal station, the Mátra plant, to other energy supplies. The government also supports efforts to replace imported coking coal with low-carbon fuels in the future.

Hungary’s NCDS expects technologies, such as carbon capture, utilisation and storage (CCUS) and hydrogen, to become available after 2030 but before 2040. Up to 2030, Hungary plans to produce 20 000 tonnes (t) per year of hydrogen via steam methane reforming of fossil fuels and 16 000 t per year of hydrogen produced from solar PV, with some pilot projects under way, such as the Aquamarine project. Hungary has a modest ambition to install 240 megawatts (MW) of electrolyser capacity by 2030, whereas EU countries on average target capacity at gigawatt (GW) scale. Building on the IEA review and in the context of the REPowerEU, Hungary has shifted gear in 2022 and is advancing its hydrogen ambitions by one decade to develop hydrogen for its transport and hard-to-abate sectors.

In 2020, Hungary had 17.3% of electricity in its total final consumption, below the IEA average of 23%. Hungary’s energy policy anticipates a significant increase of electrification in many sectors of its economy to reach 50% by 2050, initially driven by the transport

sector. Looking forward, electricity security will require sufficient and diverse sources of flexibility to accommodate the increasing share of variable renewable electricity that is envisaged under the NECP.

In 2021, nuclear energy accounted for almost half of electricity generation in Hungary, followed by strong contributions from natural gas (28%), coal (11%) and solar (5%). Among IEA countries, Hungary has the third-highest share of nuclear, after France and the Slovak Republic. Thanks to the recently completed lifetime extension of the existing units at the Paks NPP beyond the initial 30 years for another 20 years (between 2032 and 2037), nuclear power can maintain its role in the mix. The planned construction of two additional units at the Paks site based on Russian investment may face significant delays. Hungary needs to increase its efforts to avoid an increase in power sector emissions after 2030 and ensure reliable dispatchable capacity. Lifetime extensions of existing reactors should be considered.

The next iteration of Hungary’s NECP is an opportunity to update these actions, including by:

  • reinforcing energy efficiency measures
  • accelerating deployment of diverse renewable energy sources and examining lifetime extensions of existing nuclear reactors
  • considering early action on CCUS and hydrogen during the 2030s with dedicated investment schemes. 

Maintaining energy security during the transition

Under Hungary’s energy strategy, the government’s stated policy objective is to reduce import dependency.

Hungary’s dependency on energy imports has increased over the last decade as demand for fossil fuels has increased. Despite greater diversification of oil supply, the country remains heavily dependent on Russian oil and gas. With little domestic production, Hungary’s import dependency stood at 87% in 2020. Russia accounted for 64% of crude oil imports and 95% of gas imports.

However, with current government policies, oil will remain a significant part of Hungary’s energy mix through 2030, and well beyond. The Hungarian government does not have a target to reduce oil consumption, but only to limit consumption growth. This growth is unlikely to be met by increased domestic production, meaning that Hungary’s already substantial reliance on oil imports will likely grow.

On the whole, Hungary has a solid oil stockholding system exemplified by a competent national stockholding agency that is legally obligated to hold oil stocks within the Hungarian territory at a level equivalent to at least 90 days of net imports. Hungary has been consistently compliant with its IEA’s minimum oil stockholding obligation, with total oil stocks covering well beyond the 90-day net import level. As of June 2022, total oil stocks in Hungary equated to 199 days of net imports, 84 days of which is publicly held emergency stocks. Hungary took part in the two IEA Collective Actions agreed to in March and April 2022 as part of a co-ordinated effort to respond to tight oil market conditions following Russia’s invasion of Ukraine, contributing a total of 796 thousand barrels of crude oil from its public stockpiles.

Hungary is heavily dependent on the southern branch of the Druzhba pipeline for its crude oil imports. The government cited this reliance as a reason for requesting an exemption from the EU embargo on Russian oil imports, as decided by the European Council on 30-31 May 2022 and to be implemented by the end of 2022. Therefore, the EU embargo includes a temporary exemption for crude oil imports by pipeline, allowing Hungary to import crude oil via the Druzhba pipeline. In the light of Russia’s invasion of Ukraine and uncertainties of future transit of Russian crude to Europe, the Hungarian government needs to urgently review options to reduce this dependency of pipeline imports from Russia and strengthen the diversification of its oil imports, together with its regional neighbours.

Natural gas is the most significant source in total energy supply (TES), accounting for 34% in 2020 and almost 60% of residential heating. Natural gas consumption is expected to increase towards 2030, when the last Mátra lignite-fired power plant will be closed and replaced with, among other sources, a 500 MW gas-fired plant.

Hungary has made significant progress since the last IEA in-depth review in diversifying its supply routes and now has six gas interconnection points. Another major development to strengthen gas security is the import of liquefied natural gas (LNG) from the Krk terminal in Croatia since the beginning of 2021. Hungary’s N-1 indicator, an industry metric used to gauge the security of natural gas supply, has been above 100% for several years and reached 157% in 2021. However, it should be kept in mind that most of the new interconnections supply natural gas from Russia, so this is mainly a diversification of supply routes, not of natural gas supply sources. Hungary also holds strategic gas reserves at an underground storage facility owned by the Hungarian oil and gas stockholding agency. In September 2021, the level of strategic stocks held was 1.45 billion cubic metres (bcm), around 13% of annual consumption in 2020.

Electricity demand in Hungary has increased and will likely grow further given the government’s plans for electrification of the transportation system and the wider economy. While Hungary’s electricity generation capacity will likely remain sufficient in the short term, the installation of a significant quantity of additional generation capacity will be required in the longer term given both increased electricity demand and the planned phase-out of existing nuclear and coal-fired capacity.

Hungary’s electricity interconnectivity reached 55% in 2020, close to the targeted increase of cross-border capacity of 60% of gross installed capacity and substantially above the EU target of 15% by 2030. Hungary has strongly invested in regional interconnections and will soon be linked to Slovenia and reinforce connections with the Slovak Republic, supporting regional power trade.

Preparing the electricity networks for the challenges posed by decentralised generation and variable capacity is the future challenge, requiring significant investment in the grid, balancing and storage capacities. The government has plans to increase energy storage capacity to at least 1 000 MW by 2026 and to add 100 MW capacity of demand-side response by 2030. However, Hungary’s existing legislative framework for regulating energy storage is inadequate to facilitate significant market-based commercial storage investments.

Under its new emergency legislation, Hungary seeks to increase gas production (to 2 bcm/y), secure additional gas imports from Russia, potentially ban exports of energy carriers and firewood, increase coal production and power output at Hungary’s lignite-fired power plant and extend the lifetime of the Paks Nuclear Power Plant.

Key recommendations

  • In line with the REPowerEU, the net zero target and Fit for 55 package, adopt increased ambitions on energy efficiency, renewables and low-carbon technologies and strengthen the 2030 greenhouse gas and sectoral emissions targets. Update the National Energy and Climate Plan and the policies and measures required.
  • Place energy efficiency at the centre of energy policy making by creating a dedicated body for the implementation of efficiency policies. Design a programme to reduce energy poverty with a focus on energy efficiency and social policy measures, reducing the scope of regulated end-user prices.
  • To strengthen security of supply, prioritise investments in energy efficiency and domestic low-carbon energy sources by removing all barriers to the roll-out of renewable electricity and its system integration through increased energy storage and demand response. Further reduce demand for and consistently diversify supply sources of crude oil and natural gas.
  • Review the regulatory framework to increase energy market competition, ensure a level playing field for market participants, strengthen the position of consumers, and open markets for new investors and services.