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Electricity traders question impact of Hungary CHP subsidies

06 Oct 2011 18:34:46 | edem

Hungarian power traders fear that the government's decision to subsidise combined heat and power (CHP) plants from the heat side as of 1 October will not be enough to prevent the plants from going bankrupt.

The subsidy call was confirmed last week by the national development ministry after the government labelled the previous system fragmented, confusing, and wasteful, adding that it imposed unnecessary costs on consumers and needed a radical transformation.

According to the old scheme, the CHP plants were subsidised on the power side above the market price, which meant that suppliers could make a healthy profit from selling surplus power on the open market. They could also make money from the heat side, but heat prices for end users were frozen as of 1 July by the government.

The Hungarian National Gazette announced the tariffs for district heating power plants last Friday. According to the journal, a 50MW power plant could receive around €579,000 towards operating costs, and receive a fixed price per gigajoule for heating on top of that, depending on how much they generate.

But market participants say the subsidy scheme is still very much uncharted territory.

"We really don't know if it's enough for the CHPs to make a profit or break even. We would need to know their operating costs. Many of them are fairly old so I assume that there would be a lot of grid loss as well," one said. Another agreed, and noted that this data would be useful for producers, but not traders.

"The temperature will be dropping this weekend and the people will need heating. We will see if the CHPs come on line or not," the second source said.

ICIS Heren understands that the CHP plants are traditionally switched on around 15 October.

"Looking at current gas prices, I am not sure they will break even on the subsidies promised by the government alone and the market price for heat and power," one trader said.

According to ICIS Heren data, low-efficiency, gas-fired plants generate power at an estimated price of €85.00/MWh, while the cost of gas for the same producers would be roughly €30.00/MWh (see EDEM 14 April 2011).

It is still unclear how much electrical capacity the CHP plants will bring to the open market, if any. Some power plants might decide to only produce a limited amount of power or only generate when prices are high enough, if the subsidies are not enough to cover the production costs.

On the other hand, the market could collapse if the subsidies are ample to cover production costs.

There has also been speculation that producers will receive relatively generous subsidies from the heat side, and have thus made bilateral agreements with local trading companies for the sales of power.

One company, which preferred to remain unnamed, said that they had a purchase agreement with a larger CHP plant, but refused to confirm at what price the power would be bought. SR

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