The Market for Energy Efficiency in Hungary

Table of Contents
Country Profile
Energy Sector Profile
Legislation, Policies and Programs for Energy Efficiency
Demand for Energy Efficiency – The Major Players
Product Markets
Sources of Finance
Strengths, Weaknesses, Opportunities, and Threats Analysis
Contacts

COUNTRY PROFILE
Hungary’s transition from a centrally-planned to a market economy epitomises the gradualist approach. Some measure of economic reform actually started in the late 1960s and, by the time political reform started in 1989, Hungary’s economy already had a considerable head-start on its neighbours with regard to the introduction of market mechanisms. The process of continued reform therefore had relatively less disruptive effect on the economy.

Although economic growth was somewhat slow during the mid-1990s, Hungary’s GDP per capita (adjusted for purchasing power parity) is now the highest in the region. It was accepted for OECD membership in 1996, and has met virtually all the criteria for full EU membership, which is expected to within the next five years.

As a result of a the early introduction of limited private ownership of productive assets, Hungary has had a much longer history of attracting foreign investors than most countries in the region. Because of the relative familiarity of the country to investors, Hungary is the target for over one-third of all the foreign direct investment flowing into the region (including the former Soviet Union). All the major credit-rating agencies rank Hungary as investment grade. The extent of utility privatisation in Hungary exceeds that seen in many EU countries.

ENERGY SECTOR PROFILE
Hungary is an energy-poor country, relying on imports for over half of its primary energy requirements. Coal, oil and gas reserves are dwindling and, until the economic contraction of the early 1990s reduced demand, Hungary also relied upon imports for up to 30% of its electricity requirements.

Electricity
Over 40% of domestic power generation is derived from the Paks nuclear power plant, with fossil fuel plant accounting for virtually all the remaining 60%. Since the mid-1990s, oil and gas have accounted for more than half of the electricity from fossil fuel plants. Annual electricity consumption currently stands at about 32 TWh, of which about 12% comes from CHP / cogeneration plant. Total installed capacity is about 7.5 GW, of which it is estimated that about 3 GW is seriously outdated and inefficient.

Since the beginning of the privatisation of the power sector in 1995, the Hungarian Energy Office has been responsible for all aspects of power sector regulation. Any power plant larger than 20MWe (or 50MWe in the case of autoproducers) needs a licence from the Energy Office. The sector is organised around the single buyer model, so power plant has first to offer its output to MVM, the state-owned company responsible for the grid. Only if MVM do not need the power can generators then offer it directly to the regional distribution companies, of which there are six. The regional distribution companies are obliged to buy at least 85% of their power from MVM. No wheeling is permitted. Direct distribution by generators is permitted only in the case of industrial autoproducers selling within the same industrial complex

Electricity prices remain regulated, and are still below economic levels. It is estimated that industrial tariffs at the end of 1998 were at around 70% of the long-run marginal cost of supply, while the corresponding figure for residential tariffs was only about 35%. This led to some disillusionment on the part of foreign investors, who were promised an 8% rate of return, something which low tariffs made it impossible to achieve. A significant fraction of the regulated price is comprised of a capacity fee, which is payable only to dispatchable generators, and is therefore unfavourable to cogenerators.

Gas
Natural gas is widely available in Hungary and, although domestic reserves are dwindling rapidly, supply of natural gas is not expected to be constrained in the future. Demand is expected to increase by about 20% over the next 10 years, over which period domestic production will fall by some 30%. However, a pipeline from Russia via Ukraine currently plus links to Algerian gas fields via Italy and Austria are expected to provide sufficient capacity for the foreseeable future.

The latest changes to gas prices have finally eliminated the cross-subsidy which, for many years, had resulted in households paying tariffs well below the cost of supply. This change should help to reverse a trend whereby customers were deserting district heating systems in favour of individual gas boilers.

Heat and hot water
About 650,000 households in Hungary (17% of the total) are connected to district heating systems. A further 26% of households receive heat via single building or single apartment central heating systems, while 57% rely on individual room heaters and water heaters. The district heat and hot water industry comprises over 300 individual systems, supplying an annual 77 PJ of heat. Natural gas provides around 45% of the heat, coal about 30% and oil 21%. The remaining 4% is derived from miscellaneous sources including geothermal.

Hungary’s power generation sector is notable for the widespread use of combined heat and power (CHP). All except six of the power plants deliver more heat than electricity, so power generation can almost be viewed as a by-product of the heat sector. Such wide use of CHP would normally be associated with high levels of efficiency but, unfortunately, this is not the case in Hungary. The systems are generally in a poor state of repair, with distribution losses of over 20% occurring in some systems.

Heat losses are such that many households find they cannot rely on the district heating system to provide all of their space heating and hot water requirements. Until recently, cross-subsidies in gas pricing meant that district heat cost up to 30% more than heat from individual gas boilers. Many households have therefore switching to natural gas for their heat and hot water requirements. Industrial customers have also tended to switch away from district heat in large numbers, further damaging the financial viability of the heating companies. Urgent investment is needed in system refurbishment in order to reverse these trends, enabling heating companies to hold on to existing customers. However, the most recent changes in gas pricing should have eliminate the cross-subsidy to households.

Recognising the need for a united voice to represent district heat sector, the district heating companies have formed the Hungarian Association of Heating Enterprises (MaTáSzSz), whose members now account for of 60% of Hungary’s heat production. The Association has campaigned for improvements in regulatory and pricing structures, particularly with a view to creating a better environment for cogeneration.

POLICIES AND PROGRAMS FOR ENERGY EFFICIENCY
The most important policy instrument governing energy efficiency in Hungary is the National Energy Efficiency Improvement and Energy Conservation Programme, developed in 1994. The programme in turn led to the government adopting, in 1995, a ten-point Energy Saving Action Plan. Important elements in the action plan were the improvement and certification of building energy performance, and the raising of awareness of energy issues.

Hungary is a signatory of the Kyoto Protocol on Climate Change, as a result of which it has committed to a 6% reduction in greenhouse gas emissions between the base period of 1985-87 and the target period of 2008-12. Hungary completed ratification of the Energy Charter Treaty in March 1998.

Local authorities
Hungary is divided administratively into 19 counties and 3,156 municipalities. Budapest is divided into 23 districts, which are responsible for many local services. The municipalities are responsible for the provision of most local services, including street-lighting, kindergartens and elementary schools, housing and a wide range of public buildings. Many of Hungary’s district heating systems are also owned by municipalities. The counties are responsible for schools other than elementary, universities, hospitals and retirement homes. Counties also have the task of co-ordinating environmental policy.

Although there is a considerable decentralisation of power in Hungary, local authorities finances are heavily dependent on allocations from central state budget. Two-thirds of the spending power of municipalities comes from central government.

Energy Efficiency Business Council
The Hungarian Energy Efficiency Business Council was launched in May 1999 in Budapest. It is an NGO whose mission is to promote energy efficiency policies, programmes and technologies that create jobs, foster economic growth and reduce greenhouse gas emissions. One of its first activities will be to produce a directory of energy efficiency businesses in Hungary. The Business Council, which already has almost twenty members, is an initiative of the US-based Alliance to Save Energy.

Membership of the Business Council is drawn from manufacturers, suppliers and users of energy efficiency products and services, including lighting and heating products, insulation materials, industrial motors and drives, energy audits, performance-based financing and architectural design.

Cogeneration / CHP
The environment for cogeneration in Hungary does not appear very favourable. A previous obligation on MVM to purchase power from cogeneration plant was removed in 1997. The newly restructured power sector does not permit wheeling, so local generators have no option but to sell to local distribution companies if a long-term power purchase agreement with MVM cannot be secured. Furthermore, the price paid to cogenerators is less favourable because cogeneration plant is considered non-dispatchable.

However, much of the existing CHP plant is old and in need of replacement, which constitutes a considerable market for larger scale equipment. It is estimated that the replacement of obsolete plant plus future expansions of capacity will require about 4 GWe of capacity over the next 15 years.

The prospects for small-scale cogeneration in Hungary do not look promising. The Hungarian CHP Association estimates that only a few tens of MWe of additional capacity can be expected over the next few years. Most of this would be in public institutions such as hospitals.

Thermo-modernisation of households
The thermal properties of Hungary’s residential buildings are extremely poor, with annual specific heat requirements of 900 MJ/m². This is well over twice the level found in Western European countries with comparable heating seasons. One impact of this is that energy accounts for 10-20% of total household expenditures, reaching 50% in some of the poorest households.

Approximately 80% of apartment holders are owner-occupiers, and local authorities have insufficient funds available for building refurbishment. Apartment holders themselves are therefore largely responsible for any thermal modernisation investments, something that only very few could possibly afford. It has been estimated that the cost of refurbishment of apartment blocks (including modernisation of the section of the heat distribution system within the block) would cost about US$5,000 per apartment, equivalent to over 20% of the market value of the apartment.

The size of the potential market for apartment refurbishment is clearly huge. Even if only 10% of Hungary’s 2.3 million urban households can be cost-effectively refurbished, this still constitutes a billion dollar market. For this potential market to be realised, mechanisms have to be devised whereby households with very limited resources can finance energy efficiency improvements. Past experience suggests that the Hungarian government has been very active in making available funds to support these kinds of investments, so the prospects for thermal insulation of building look quite favourable.

Efficient lighting
Considerable attention has been paid in Hungary to the energy saving possibilities of replacing mercury vapour street-lighting with high-pressure sodium lamps. As long ago as 1989, a group of partner organisations including a lamp manufacturer, a luminaire manufacturer, a bank and an electrical contracting firm formed Credilux, capitalised with US$275,000, specifically to provide third-party financing for street-lighting upgrades. Credilux began implementing projects at the rate of about 10 per year, with an average investment cost per project of about US$30,000. Payback times were as short as 2.5 years. With a total of over 3,000 municipalities in Hungary, Credilux estimated the total market size for street-lighting upgrades to be about 500 – 1000 projects.

A further illustration of the market potential for street-lighting upgrades is provided by a joint Dutch-Hungarian study on one of Budapest’s 23 districts. The study identified a potential for US$166,000 worth of investment with a payback period of 5.5 years, resulting in an annual energy saving of 730 MWh. The city of Pecs has also demonstrated a substantial potential for energy saving through street-lighting retrofits, where the replacement of mercury vapour lamps with high-pressure sodium lamps cut power consumption by over half, with payback periods on some lamp types being as short as 0.3 years.

Efficient household appliances
With the highest GDP per capita in Central and Eastern Europe, Hungary’s population has reached a high level of ownership of the most common household appliances. Although high levels of inflation since the mid-1990s have eroded the spending power of households somewhat, the natural rate of turnover of household appliances should ensure an annual market of about 0.5 million units for each of the most common appliances. Hungary is in the process of introducing mandatory energy labelling of a range of household appliances, in conformity with the relevant EU Directives. The heavy burden that energy expenditures place on households should help to ensure that energy efficiency is a major criterion in selecting appliances.

SOURCES OF FINANCE
German Coal Aid Revolving Fund
Created in 1992 with an initial value of DM50 million, the fund has now grown to about twice this size with the reinvestment of interest payments. The aim of the fund is to support investments in energy conservation, principally by the private sector, although municipalities have also successfully borrowed. The fund is administered by the Hungarian Credit Bank.

Energy Saving Credit Programme
This fund is intended to support energy efficiency investments by municipalities in schools, hospitals and other public institutions. Loans of up to HUF30 million are provided at half the commercial interest rate, with the condition that borrowers put up at least 10% in equity. Technical management of the programme is handled by the Hungarian Energy Office, and project assessments are carried out by Raiffesen Unicbank.

Thermal insulation of apartments
Since 1996, grants have been available from the Central Environmental Fund to individuals wishing to improve the thermal insulation of their apartment. Grants of up to HUF 60,000 are available for investments that have a payback period of less than 10 years.

Hungary Energy Efficiency Co-financing Fund
This fund was created in 1997 with US$5 million of GEF (Global Environment Facility) money, administered by the International Finance Corporation. The fund will combine with local sources to leverage an estimated $30 million into energy efficiency investments in three target subsectors: lighting, district heating and industrial motors.

SWOT ANALYSIS

 CONTACTS

Energia Klub
P.O. Box 411
H-1519 Budapest
Tel.: +36 1 386 8090
Fax: +36 1 466 8866

Hungarian Credit Bank
Magyar Hitel Bank
Barczi Istvan u. 3-5.
H-1052 Budapest
Tel.: +36 1 266 6907
Fax: +36 1 267 2608

Hungarian Energy Office
Köztársaság tér 7.
H-1081 Budapest,
Tel.: +36 1 334 7777
Fax: +36 1 334 1330

Hungarian Combined Heat & Power Association
Kalotaszeg u.31
1116 Budapest
Tel.: +36 1 203 02 55
Fax: +36 1 203 02 53

Hungarian Association of Heating Enterprises
Magyar Távhöszolgáltatók Szakmai Svövetsége
Barazda u. 20 – 30
H-1116 Budapest
Tel.: +36 12 06 15 55
Fax: +36 12 06 14 00

Hungarian Energy Efficiency Business Council
For further details, contact Eric Carlson
Tel.: +36 1 327 4228
E-mail: ecarlson@ase.org

Prepared by the International Institute for Energy Conservation (IIEC)
September 1999

Support for this document was provided by the Export Council for Energy Efficiency (ECEE) and the US Department of Energy (award DE-FC41-94R110679). This support does not constitute an endorsement by the US Department of Energy of the views expressed in the article.

Updated: 03/29/02