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Hungarian CHP plants at the mercy of the government

14 Apr 2011 16:07:02 | edem esgm


The Hungarian government is trying to prevent 1.4GW of combined heat and power (CHP) capacity from exiting the generation market by releasing 200 million cubic metres (Mm³) of gas from stocks to CHP plants and their gas suppliers at 20% less than current market prices, a spokesman for storage operator E.ON Földgaz said on Thursday.

The move surprised some, but others said it was justified. "They don't want gas prices to increase, and this is really a logical step to keep them lower considering that they have a lot of storage available," a Hungarian market participant said. "Furthermore, this will ensure that district heating prices will stay low as well."

The Hungarian energy department did to comment when contacted on Thursday.

The government previously passed an amendment to the electricity law effectively cutting subsidies to all CHP plants larger than 2MW from 1 July (see EDEM 23 March 2011). But some believe that this could have a devastating impact on Hungary's CHP plants.

Jozsef Turai, chairman of the Hungarian traders association MVKE, said that CHP producers could be affected twice - being forced to the open market while gas prices could go up by as much as 20%.

"Not all of them can survive on the competitive market," Turai said. Most Hungarian gas-fired generators purchase gas from incumbent E.ON Földgaz, which in turn is supplied by Gazprom at an oil index-linked price. Turai estimates that the recent price hike of crude oil will move gas prices higher by up to 20%.

Hungarian gas-fired producers are currently paying an estimated €25.00/MWh for their gas according to market sources, but Jozsef Turai believes it could go up to nearly €30.00/MWh.

At Austria's CEGH, which is linked directly to the Hungarian gas market, the spot price for gas was assessed at €23.45/MWh, on Wednesday.


Turai believes that the CHP plants with low efficiency will be strongly affected by the gas price hike.

However E.ON's 433MW Gönyü combined-cycle gas turbine plant (CCGT), which is expected online in the third quarter, will not be affected because of its high efficiency level. US utility AES already took 161MW of CHP generation off line (see EDEM 31 Mar 2011) partly because the plants had very low efficiency. Gönyü, however, is estimated to have 58% efficiency.

Turai stressed that the subsidy cuts will apply only to the electricity produced, but not to the heat.

The government offered to take the power off producers at market price, but that would not be much help as low-efficiency, gas-fired plants generate power at an estimated price of €85.00/MWh, Turai said. The Hungarian fourth quarter '11 Baseload contract closed on Wednesday at €63.40/MWh.

The situation has been spreading uncertainty in the Hungarian market, and the fourth quarter '11 Baseload contract has been widening its premium to its German counterpart.

The contract has been assessed at a €1.36/MWh premium to its German equivalent for the last month, on average, while the Hungarian fourth quarter changed hands at €3.04/MWh below its German equivalent at delivery last year.

"It seems like people are panicking a bit when it comes to Q4 '11," one market participant said on Wednesday. Another noted that cutting the subsidies creates room for speculation.

The government's move potentially could force the Hungarian fourth quarter '11 price to spiral downwards. On Wednesday, the fourth quarter '11 Baseload closed with a narrow €0.75/MWh premium to its German counterpart, compared with a premium of €2.15/MWh at the close of the previous session. "I expect that the contract will go into freefall as soon as the CHP producers wake up," a Hungarian dealer said on Wednesday.

Hungarian cogeneration producers receive subsidies at forint (Ft)32,000/MWh (€117.01/MWh) under the green tariff feed-in system (see EDEM 16 March 2011). SR

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