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Hungarian heat producers say lower subsidies make them run at loss

24 Nov 2011 15:40:15 | edem

Hungary's biggest cogeneration (CHP) producer, the EDF-owned, 420MW Budapesti Erőmű (BERT), claims state subsidies are not enough to cover its production costs, which could make the plant unable to operate and compromise heat supply to Hungarian capital Budapest.

"The present district heat regulation system could cause a loss of almost forint (Ft) 6bn (€19.63m) to BERT in 2012," the company told ICIS Heren this week.

BERT's management is waiting for the Hungarian Energy Office (HEO) to revise the heat price regulation, which is expected to happen in early December, a spokeswoman said.

The Hungarian government changed the subsidy system for CHP producers on 1 October (see EDEM 6 October 2011). Under the old scheme, electricity output from CHP plants was subsidised above market prices, so suppliers could make a profit from selling surplus power on the open market. They could also make money from heat generation through a mandatory off-take clause, which forced local distributors to buy electricity and heat at regulated prices.

This system has changed under the new subsidy arrangement.

Peter Kaderjak, director of the Regional Center for Energy Policy Research (REKK), said many other heat producers had also claimed the new subsidy system would not cover the cost of production.

Hungarian CHP plants currently have two ways of earning revenue: by selling their electricity on the open market, and through indirect subsidies for heat generation. Heat distributors buy from generators and sell on to end-users at regulated prices. Because the end-user prices are too low to cover the heat purchase price, the distributors receive about €11.75/MWh in compensation.

But the producers complain that the price they get for heat does not cover the cost of production.

Kaderjak said it was hard to say whether BERT's claim was justifiable. Because CHP production costs are not transparent, it is hard to estimate whether the combined revenue from sales on the open market and to distributors would cover production costs. "I think this will be a long fight between the regulator and the CHP producers," Kaderjak added.

Many market participants said that because BERT produced about 60% of the heat consumed in Budapest, the plant owner's demands were likely to be met.

High gas prices eat into CHP production margins

BERT, like most CHP producers in Hungary, uses natural gas as a fuel and has been hit by high prices compared with current spot market values.

According to ICIS Heren information, Hungarian CHPs buy most gas from the dominant supplier, E.ON Földgáz, which, in turn, buys it from Russian producer Gazprom at oil index-linked prices (see EDEM 24 January 2011). A spokesman for E.ON Földgáz said most utilities with gas-fired generation had long-term take-or-pay contracts with the company on "fairly flexible" terms.

According to an anonymous source, Hungarian producers generally pay about €40.00/MWh to cover their natural gas needs, whereas front year prices stand at about €50.00/MWh. The December '11 contract at the neighbouring Baumgarten hub in Austria closed at €24.60/MWh on Wednesday, ICIS Heren assessments show.

Also, CHP producers that did not hedge their gas production at the beginning of the year will be making further losses because of currency exchange rates. In early 2011, one euro could buy Ft276.52, but this had risen to Ft304.71 by 22 November. "I think at least half the CHPs did not hedge their production in euros because they sell heat in forints," said one Hungarian trading source. "This means they will also be stung on the foreign exchange rates."

Even though Hungary's electricity spot prices have been high, with the Day-ahead Baseload contract at an average of €8.15/MWh above the German equivalent contract since the third quarter, sources think this is not enough to incentivise the country's CHPs to run at full capacity.

Question mark over capacity

Current demand means that CHPs would run at full blast only when this is profitable, sources said.

"We see them putting 200MW blocks on the power exchange to test the water and they would be willing to sell if the price is appropriate," one trader said.

He estimated that the Peakload contract would have to reach €85.00-95.00/MWh to spark the interest of CHP producers. "It's a weather game," he said. "If we see very low temperatures across the board for Q1, then the prices will be high enough."

The Day-ahead Peakload contract on Hungary's HUPX power exchange closed at €86.70/MWh on Wednesday, while the over-the-counter equivalent contract closed at €120.00/MWh.

Sources did not think the premium on front quarter was strong enough to justify running CHP plants at full capacity. One trader said: "[CHP producers] need to see a stronger premium on long-term contracts for a longer period for the plants to be able to plan ahead, which doesn't mean that the plants can't run with lower capacity if the spot prices are supportive."

Discounted spot prices could mean CHP plants running at only at 60-70% of their capacity, he estimated.

The trader thought the Hungarian Q1 '12 Baseload had to close more than €3.00/MWh above its German equivalent to start increasing CHP rates. The Hungarian front quarter Baseload premium to the German equivalent has risen from €3.95/MWh on Monday to €6.30/MWh on Wednesday.

Most market sources thought Balkan electricity prices would be strong for most of Q1 '12, which could also lift Hungarian prices.

CHP producers in tender

Traders also thought CHP producers were likely to have taken part in the tender organised by electricity transmission system operator Mavir to buy power at a system price. Market sources expect the results of the Mavir tender to be released on 4 December. Some expect Mavir to offer a system price around €140.00/MWh in the tender.

But ICIS Heren understands that many cogeneration producers have signed bilateral contracts directly with the distributors and trading counterparties, rather than selling on the open market, which has limited the impact on the power wholesale market. This means the CHP plants are likely to be locked into lower prices compared with the current spot market. According to ICIS Heren data, Hungarian Q1 '12 Baseload was trading at around €60.35/MWh at the beginning of October, compared with €62.60/MWh on Tuesday.

Closures since summer

Several Hungarian CHPs have made closures since the summer. For instance, Hungarian utility AES has idled its 90MW Tiszapalkonya coal-fired and 71MW Borsod biomass CHP plants, but it said this was linked to lower wholesale prices rather than lower subsidies (see EDEM 31 May 2011).

The Hungarian CHP association made no further comment on BERT's statement. The Hungarian energy regulator was unavailable for comment this week. SR

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