The quickly prepared Hungarian energy emergency action plan, which comes into effect today on 1 August, is supposed to increase national energy supply security through seven measures. But as our assessment and those of other experts show, even if the plan runs only temporarily and in the short term, the consequences will be felt by Hungarian citizens in the longer term.
Alexa Botar, Climate and energy programme director, NSC-FoE Hungary | 1 August 2022
Many questions remain for each of the seven measures, including timeline, scope and monitoring. What is already clear is that the action plan delays and reverses the national fossil phase-out, energy transformation and just transition. It also puts too much of a burden on Hungarian households and taxpayers, jeopardises complying with national and EU climate and energy commitments, undermines targets for 2030 and challenges EU solidarity. It lacks energy-saving and energy-efficiency measures, renewable energy actions and increased state support to help achieve all of those goals.
In mid-July, the Hungarian government announced an energy emergency action plan as a response to the current energy crisis. The government claimed that this plan would address supply disruptions and rising energy prices in Europe. Amidst severe concerns from various Hungarian stakeholders and public outcry, further details have been clarified, announced and published as a decree in the weeks since. The implementation of the plan begins on 1 August, which means quite a shock for all affected households and other sectors.
The whole energy emergency action plan is seemingly centred on increasing Hungary’s energy supply security, but according to national energy experts, and in our view, it is not suitable for that purpose. Instead, it serves to decrease the state budget deficit and puts most of the burden on citizens, especially households. This action plan seems risky, as it would go in part against the EU-required national commitments to energy transformation and just transition, and potentially delay related actions in Hungarian spending plans. This could also affect negotiations between the European Commission and the Hungarian government on adopting national spending plans. For example, the Hungarian recovery plan still hasn’t been approved more than one year after the first deadline, which was in spring 2021.
In the meantime, on 20 July, the European Commission published its ‘Save gas for a safe winter’ communication, recommending a 15 per cent cut in gas use and ‘energy solidarity’ measures. Member States discussed it and a compromised version was adopted by the Energy Council on 26 July, with only Hungary opposing the plan (Hungary was also amongst the countries opposing the original communication).
The Hungarian action plan is ‘individualistic’, as it does not contain any EU collaboration or EU energy solidarity. The European Commission says it was not notified on time about the plan, despite the fact that such a notification was mandatory.
Following the Commission’s recent communication and the new REPowerEU plan, all Member States need to consider measures to address the ‘winter energy crisis’. The Hungarian action plan is not a good example for other Member States – it’s short-sighted and inadequate.
In this post, we analyse each of the seven measures of the Hungarian energy emergency action plan and their consequences. You can also read NSC-FoE Hungary’s quick analysis on some points here in English.
The energy emergency action plan decree text (15 July 2022) only says what is written in the titles of the seven points below, adding to each point who the responsible minister(s) is/are and that they need to come up with the details and start implementing the plan immediately.
1. Reform (reduction) of the state-fixed cap on household gas and electricity prices
The essence of the original Hungarian energy price cap is summarised here. You can see some further analysis here, or see a summary in this Bruegel article. Earlier this year, small and medium-sized enterprises (SMEs) and municipalities were already excluded from this price cap.
According to the new, reformed price cap’s decree and side-rules, the reformed energy price cap establishes a limit on the amount of gas and electricity that households can get at reduced prices. This limit for natural gas is 1,729 cubic metres per year, or 144 cubic metres per month; for electricity, it is 2,523 kilowatt hours per year (kWh), equivalent to 210 kWh per month.
Several Hungarian experts (including Bankwatch and other NGOs), the European Commission and the International Energy Agency have all raised critical voices against the Hungarian energy price cap since its 2013 launch, describing it as unjust, against energy transformation and detrimental to the phase-out of fossil fuels. It was primarily beneficial for those with high incomes and high energy users, and it provided incentives against energy efficiency and investments in renewables, especially in residential buildings. In contrast, low income lignite/coal/wood heating users were totally excluded.
A reform or a phase-out of this end-user energy cap has been long overdue, but in its current form, the reformed energy price cap fails to fix all the issues behind it, even if it introduces differentiated support based on consumption, which is a potential step forward. Experts say it will not substantially reduce domestic gas consumption, but it could improve the balance of the Hungarian state budget. However, if energy security is really the goal, then most of the burden should not be placed on the general public through residential restrictions, which in itself won’t be enough to address the deficit or ensure energy security.
As a consequence, low-income residents living in energy-inefficient flats/houses (especially in the countryside and other socially deprived groups) would need to pay many times more for their energy costs, which would make them even poorer, both financially and in terms of energy. In recent weeks, many people who had previously heated with gas have already bought up all the available firewood and lignite/coal for their winter heating, and stoves are in high demand. Villages and cities will be choking from air pollution and dust next winter.
On a positive note, the reform seems to finally encourage households (as well as SMEs and municipalities) to invest in energy savings and renewables urgently. There is a new rush for photovoltaics (PVs), building insulation and other building materials. But their prices are high and increasing, their stocks are depleting and there is a long waiting list for the relatively few experts, technicians and installers in the country. There have been some recent support schemes with mixed results.
In other Member States, there are other tools and policies to shield consumers from rising energy prices, but the Hungarian energy cap (old or reformed) still lags behind.
2. Increase the domestic production of lignite within an immediate deadline
The timeline and scope of this measure are still unclear. For example, how long will the domestic coal/lignite production increase last? What is the new timeline of the Hungarian coal phase-out? Which Hungarian coal and lignite mines will be expanded or reopened? Will this extra coal/lignite all be sold to fuel the Mátra power plant, or will it also be sold to households and other sectors, causing massive air pollution and health damage?
The measure will mostly affect the three Hungarian coal/carbon-intensive regions, delaying their just transition process. This action should be reconsidered and planned only for the very short term, since it goes against the phase-out of coal by 2025 and Hungary’s just transition commitments in the national energy and climate plan (NECP), territorial just transition plans (TJTPs) and other related 2030 climate and energy targets.
3. Ensure that all (lignite) units of the Mátra power plant are brought back into production and that production is continuous
This measure affects and most likely changes and delays the just transition plan (and the LIFE-IP North-HU-Trans project) of the Mátra power plant and the two related TJTPs of Borsod-Abauj-Zemplen and Heves counties, and the national target of phasing out coal-based electricity production by 2025. The action may jeopardise the timely launch of the Just Transition Fund in Hungary.
The Mátra power plant has five lignite units, but unit I (the oldest unit) is not currently operational, while the continued operation of unit II would require a derogation (relaxation of the law). The plant, operated by state-owned company MVM, already makes a loss (two units + plus reserve units generate a total of 450 megawatts, costing taxpayers EUR 113 million per year), and re-expanding the operation would cost Hungarian taxpayers much more still.
The timeline and details of the action have not been communicated yet; these must be clarified and discussed in consultation with the affected parties, including those in the TJTPs, in a transparent process, resulting in revised TJTPs and ensuring that this action too is temporary and short-term.
4. Increase the domestic production of fossil gas (including unconventional) from 1.5 to 2 billion cubic metres per year
Just like enforced coal/lignite mining, enforced domestic fossil gas extraction (either conventional, like at Orseg National Park, or unconventional, like at the Mako shale gas fields) would destroy the quality of life of the local people, their livelihoods, natural resources and biodiversity, which would lead to an economic dead end. A new shale gas fever would destroy the water supply of the Great Hungarian Plain (Alföld), which is already suffering heavily from drought and water shortages. Therefore, domestic fossil energy extraction should not be expanded or relaunched, especially in water- and environmentally-sensitive areas.
Even then, this action is very expensive and would require further support (taxpayers’ money, mining taxes cut) from the Hungarian state for MOL and other gas-extraction companies. The last time something similar happened, approximately a decade ago),Gazprom-backed NIS failed badly when trying to explore the Mako fields. Last year, MOL also backed away from expanding fossil gas extraction/exploration in Orseg National Park.
5. Extend the operating life of the Paks nuclear power plant
The already extended licences for the four existing Paks reactors expire between 2032 and 2037, so the idea that they might be quickly extended is not new. This also doesn’t mean that those units will or could continue to operate. The timeline and scope of this action is still to be defined by the relevant ministers. Instead, it looks like the Hungarian government is trying to use the present situation as cover in case the Paks II project (funded by a Russian loan, to be built by Roszatom) collapses. The extension of the plant’s operating lifetime could be a pragmatic move, but a second, renewed extension is another matter.
6. Arrange for the storage of natural gas reserves necessary to ensure the next Hungarian winter gas supply by 1 November, up to the maximum level of transport and storage capacities
The 15-year gas contract between Hungary and Russia, made in 2021, entails about 4.5 billion cubic metres of gas imports from Russia. Hungary has high gas storage capacities (6.5 billion cubic metres) compared to the national gas usage of 9.5-10 billion cubic metres per year and storages are currently around 45 per cent full. The action calls the responsible ministers (and in early July, the government also authorized the state-owned energy company MVM and the Hungarian Hydrocarbon Stockpiling Association) to arrange buying further gas from the market. However, in July, the Hungarian government already made two deals that seem to contradict this action point. Firstly, it sold 500 million cubic metres of gas to Serbia (from the gas reserve, as rented storage), while Hungary is now receiving most of its gas from the TurkStream pipeline, from Russia and via Serbia. Secondly, Hungary announced that it was starting negotiations with the Russian government to buy 700 million cubic metres from Russia, which is not the same as ‘buying from the gas market’.
7. Introduction of export restrictions on energy carriers
This measure is the most confusing one; it potentially goes not only against several EU energy and free trade rules or agreements, but also against energy solidarity. Hungary imports 30 per cent of its electricity and 85 per cent of its gas. It also has a lot of interconnectors, being a transit country for electricity and gas, while it exports 100,000 to 200,000 tonnes of firewood per year. In light of all this, there are several questions to be asked. Which energy carriers are meant? How and over what timeline will their exports be restricted? And will the EU be okay with it?
All in all, in our opinion, each of the seven actions of the Hungarian energy emergency action plan needs reconsideration, clarification, scope and timeline. If that doesn’t happen, it will hamper the energy transition in the longer term and isolate Hungary’s energy policy from the EU’s.
Now more than ever, a wide-ranging, multi-year, complex energy renovation support scheme is urgently needed for Hungarian households, with EU funds and state funds combined. The government needs to support average/middle income households’ energy renovations (minimum 30 per cent support and refundable loans) and contribute even more to low income households (80-90 per cent grants); both groups must be incentivised towards deep renovation to avoid the lock-in effect. The Hungarian operational programmes, the national recovery and resilience plan, the Territorial Just Transition Plans and other programmes should all contain elements of this scheme. See our analysis to gain a better understanding of the overall situation.
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