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Hungary unveils second round of CHP subsidy cuts

23 Mar 2011 16:15:45 | edem

The Hungarian government has passed an amendment to the electricity law effectively cutting subsidies to all combined heat and power (CHP) plants larger than 2MW from 1 July.

"The change in the act means that all larger gas-fired CHPs will go to the open market from July this year," one market participant told ICIS Heren.

The level of subsidies for CHP plants was set at forint (Ft) 32,000/MWh (€118/MWh) under the green feed-in tariff system for 2011. The Hungarian government recently proposed slashing the tariff by 25% after 2011 and by a further 35% after 2012 (see EDEM 16 March 2011). However, even deeper cuts have now been announced.

"These power plants have never been to the open market, therefore they are facing both financial and market access problems," the source told ICIS Heren. "On top of this, CHPs' heat off-take price is frozen by the government in order to prevent drastic heat price increases," he added. Heat prices will also be fixed from 15 April, according to local media reports.

The changes will hit gas-fired cogeneration units particularly hard, because most of them have take-or-pay contracts with E.ON, which reportedly has a similar contract in place with Gazprom (see EDEM 24 January 2011). "Nearly 80% of the gas imported into Hungary comes from the long-term Gazprom contract with E.ON that is oil indexed and thus significantly more expensive [by 30%] than the spot prices in the Baumgarten hub," the Hungarian source noted.

Another source told ICIS Heren that the gas-fired cogeneration plants are already producing power below market prices. The difference was thus far compensated for by the government.

Market impact

Participants are unclear on the impact of such an amendment on the wholesale power market. "I can foresee a bullish impact on wholesale prices if the subsidies are cut," one Hungarian source mused.

A second Hungarian trader added that "the heat prices should increase significantly, but the power prices should be a bit lower. However I am not sure how they will make up for the loss now that the government has fixed the heat prices." He insisted, however, that power prices would not increase.

According to the source a large chunk of the subsidies were funded in the first instance by the market because traders were obliged to buy a certain amount of power from the CHP producers, with the costs then passed on to end users. But market participants say that this obligation no longer stands.

The Hungarian development ministry was unavailable for comment on Wednesday.

Cogeneration plants produce around 25% of electricity in Hungary (see EDEM 4 October 2010). SR

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