Energy Policy and the Hungarian Economy

október 26, 2012 — gkienergia


After the political changes in the 90’s the Hungarian economy underwent  a significant structural change which was characterised by the gradual decline of energy-intensive industries, activities. As a result since the middle of the 90’s, with the significant increase of gross domestic product (GDP) the total primary gross energy consumption has been stagnating. It increased only in 2000-2005, when economic growth was the strongest. Since the economic and financial crisis began, a spectacular decline has happened, partly due to the decline in GDP, partly due to a dramatic decline in private consumption and also to the rise in energy prices. During these years the domestic energy production declined and this resulted in an increase in the net import of fossil fuels – the majority of the increment was natural gas – while total energy consumption was nearly stagnating. There have been no important changes in the structure of the energy sources during the past decade. The share of natural gas is around 38%, it has slightly been decreasing in the recent years depending on the weather conditions and gas prices.

Total primary energy supply and GDP, Volume indices, 1990=100

As a result of a wide range of qualitative changes in the economy and the energy sector the energy intensity of the Hungarian economy – measured by purchasing power parity – i.e. the energy consumption per GDP(PPP)  is about 15% higher than the EU27 average. Certainly, measured by current exchange rates the Hungarian economy consumes 90% above the EU average . This difference is showing the weakness of the Hungarian GDP.

In the future the most important task of the Hungarian energy policy is to contribute to improving the competitiveness of the economy. The energy sector can contribute to the improvement of the competitiveness of the economy by the formation of the structure of the energy sources, partly by improving efficiency, and the most important task is to promote a meaningful reduction in energy costs per the unit of output (GDP).

Energy policy

The Hungarian Parliament adopted resolutions on the country's energy policy in 1993, 2008 and 2011l . In our opinion, although the resolutions summarized the desired directions and views of the actual government on energy policy, they were not used as a guideline. As a whole, the energy-related decisions, laws or regulations were not approved on the basis of the valid energy policy principles, but mainly on the grip and constraints of the given economic and political situation. This is especially true about the current government's decisions, when decisions are made by the "fast-legislation", with no consultation of the stakeholders and sometimes these decisions are modified the “very next day”.

The "National Energy Strategy 2030” " is based on the commonly accepted three requirements - efficiency, sustainability, security of supply – it aims to increase the effectiveness of the whole production and consumption chain, it defines the energy saving requirements and gives a greater priority to the use of renewable and local energy sources. In this regard, the Hungarian energy policy goes hand in hand with the EU's current and future ambitions. Moreover, there is no significant difference between the energy policy of Hungary and that of the EU. They both aim to reduce dependence on imports and redefine the government's role in energy. Differences are in interpretation and in the degree how seriously they are taken, and in particular, what will be the role of the market, or private capital in achieving our objectives/goals which are more or less compatible with the objectives of the EU. In the last two years, in the legislation, the practical energy policy preferred both direct and indirect state ownership dominance, instead of market regulation preference was given to one-off and administrative intervention of the state, particularly in the universal service (residential energy consumption) where regulated prices are distorted from actual costs.

Companies in the energy sector are burdened with extra (crisis) taxes due to the economic and financial crisis, frequently causing huge losses to these companies. Partly due to the negative profit-levels, partly because of the unpredictable economic conditions in the energy sector, the future is severely uncertain, it is even doubtful that the necessary investments including those fulfilling the common EU objectives are implemented.

The specific Hungarian energy policy dilemma is that according to the official assessment the share of natural gas is too high in our energy consumption, thus reducing this rate can help in decreasing our import dependence. Indeed, the share of natural gas in the primary energy sources is outstanding among the EU countries, therefore all the diversification of sources or developing cross-border capacities, and taking part in the European regional gas market coupling enhance/ensure our energy security, and also, depending on market conditions, can stimulate price reductions in the imported natural gas. However there is only little emphasis on the fact that it is the final consumer who has to cover the costs of these investments.

The new energy policy often uses the term “energy-independency”, or more precisely "seeking ways out of the energy dependency”. The tools for "independency" in the case of natural gas import are diversification of supply sources and developing cross-border transport routes, while in terms of use, the longer term, beyond 2020, the strengthening of the role of nuclear energy and coal-based electricity. We believe that over the next few years global energy will be characterized by large uncertainties - including the uncertainty of energy prices as well - so it is important to develop an energy policy in which, despite the large inertia of the energy sector, enough flexibility ensures the adaptation to changing conditions taking into consideration the least cost principle.

The above plans, goals, taking into account IEA's medium-term gas market forecasts , are a race against time. Over the next 2-3 years, abundant gas supply will characterise the European gas markets with stagnating gas demand, therefore market (hub) prices will not increase, while the price of oil, which moves long-term gas contract prices, will stagnate at best, so the existing gap between the market and contract prices is likely to remain constant in the medium term. By the end of the decade European gas demand is expected to increase slowly and gradually, however, the evolution of gas prices is influenced by other factors than oil prices, such as how unconventional gas production and LNG in Europe will develop. In addition, in 2010, and this year Gazprom amended its contract prices for certain countries, which meant lower prices, and also, even if to a limited extent, the evolution of the market (hub) price was taken into consideration. The Russian-Hungarian long-term gas purchase contract will expire in 2015, we expect the renewal of it and hopefully, the above mentioned factors will play a role in the process of defining the new prices.

Published in Blue Fuel, Gazprom Export Global Newsletter, October 2012, Vol. 5., Issue 3. p.25-27.