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Gas contracts squeeze Hungarian generators

24 Jan 2011 18:54:02 | edem

German utility E.ON is bringing its 433MW Gönyű CCGT plant on line by early summer, but market sources say that Hungarian generators are currently having to run gas-fired plants at a loss because of take-or-pay contracts for gas supply.

The Gönyű plant was expected to be commissioned at the end of July last year (see EDEM 24 June 2010), but the project has undergone some delays. With a 58% net efficiency rate, E.ON states that Gönyű will be the most modern and efficient plant in Hungary.

But most sources polled by ICIS Heren admitted that large gas-fired power plants producing only electricity are operating at a loss. "I wouldn't want to be in [gas-fired generators'] situation," a Hungarian market participant noted. Many gas-fired generators have a large customer base, which they try to optimise to offset the losses somewhat, he said. Around 30% of Hungary's power supply was gas-fired, according to 2009 figures from transmission system operator Mavir.

E.ON is one of Hungary's largest gas suppliers, and a spokesman for the utility confirmed that most utilities with gas-fired generation have long-term take-or-pay contracts with the company. He was unable to confirm contract specifics, but described the terms as fairly flexible. "Most contracts were renegotiated mid-recession, so the terms are more flexible," he said.

However, an independent analyst disputed that. "E.ON has take-or-pay contracts with Gazprom. They can't afford to give their customers more flexibility than they themselves have."

The E.ON spokesman stated that the company's gas-fired plants in Hungary have not been affected by the oversupply and take-or-pay contracts.

Subsidy offset

Low demand has led to a surplus of gas across Europe. In Hungary, the oversupply of gas is at least partly offset by the fact that gas-fired CHP plants are largely subsidised by the government. Furthermore, some governmental support is provided for gas-fired power plants to provide system reserves, an independent Hungarian analyst noted.

But another source commented that this support is not enough for utilities to cover the price of generation. "Hungarian CHP generation is very expensive, and the price is not offset by subsidies. If I was a gas-fired generator, then I would produce the minimum amount of heat required and buy all the power in," he noted.

Border tensions

However, this risk premium feeds in to power prices in Hungary, a trader noted. Gas-fired generators hedge power in Germany ahead of the summer months to reduce their exposure. "The situation can change very quickly, because Hungary is a transit country. The system can become very tight with very little warning, leaving the generators with open positions," he said. This is partly why Hungarian products usually trade with a risk premium to Czech Republic.

The country is currently under pressure from high levels of imports from Ukraine and the Balkans. "Hungary is oversupplied, but one has to remember that the country has seven borders, so they can just float it over to the neighbours," another market participant said.

However, the borders between Hungary and Slovakia and Austria can become congested, leaving power stuck in Hungary, which in turn collapses the prompt price.

The Hungarian Day-ahead Baseload averaged €0.04/MWh above the equivalent Czech contract for the last six months of the year according to ICIS Heren data, but in December, cross-border capacities to Slovakia and Austria were reduced. This led to the Hungarian Day-ahead price averaging €3.96/MWh below the Czech equivalent for the month.

Poor liquidity and the conditional offering system on Hungarian power exchange HUPX also make it difficult for producers to dump power on the exchange, traders say. Yet during a time of high demand and border congestion to the south of the country, however, Hungarian Day-ahead prices have spiked as high as €12.50/MWh above the Czech market, such as on 23 August last year. SR

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