The „Hungarian Case ”

István PatakiHungarian Energy Office

8th Baltic Electricity Market Mini-ForumRiga, Latvia, 24. April 2009

The „Hungarian Case”

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EInternet: www.eh.gov.hu

What is the „Hungarian Case”?

• Hungarian Energy Office (HEO) approved auction rules submitted by the former single buyer MVM Trade.

• Under the resolution of HEO MVM Trade was obliged to modify the auction rules

- a general price cap was ordered,

- domestic end-users and DSOs had priority.

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Contents

• Short Introduction of the Hungarian Power Market

• Antecedents

• Steps by the Office

• Statements

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Suppliers

MVM Electricity Trade Ltd.

(wholesaler)

Power Plants

TSO

1. Operation, maintenance and development of

transmission grid

2. Operation of system level

services

MAVIR ZRT

Universal Suppliers(USP)

Render of universal supply to

household- and other eligible small consumers

Distribution system operator

(DSO)

Operation, maintenance and development of

distribution grid

Supplier (trader)(subject to license)

Trader MVM Partner

: licenses: possession of assets: legally separate entities: unbundled accounts

Distribution assets

Power Plants•Paks

•Vértes•Gas turbines

•Power Plant shares

MVM Group

Transmissionassets

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EA SHORT INTRODUCTION OF THE HUNGARIAN

POWER MARKET (1)

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A SHORT INTRODUCTION OF THE HUNGARIAN POWER MARKET (2)

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Antecedents (1)

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Forward Base-load Prices for 2008• EEX forward base-load price: 55 EUR/MWh• Slovenska Elektrarne auction 400 MW Resulting Marginal Price:

2096 Sk/MWh (61 EUR/MWh)

Antecedents (2)

Changing Trading Conditions

• Polish and Romanian TSO did not allocate cross-border capacity for export for 2007 at yearly capacity auction

• The Czech and Slovakian TSO did not sign the inter-TSO compensation mechanism agreement

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Ordinance of The Government of the Slovak Republic of 317/2007• Section 6 Cross-border exchange of

electricity: The capacity allocated in the Auction is reserved as of the moment of satisfying the conditions specified by the Auction rules, in case of purchase of electricity generated in the designated area for the purpose to export, the electricity customer shall submit the electricity supplier a confirmation about the reserved capacity in the cross-border

profile. • Section 8 Conditions for supply of electricity

including supplies of balancing electricity and supply of electricity to households (7) The volume of electricity defined for export shall not threat the safety of electricity supply in

the designated area. • Section 12 Conditions for provision of

system services (9) The payment for system services shall be billed to the electricity exporter who cannot prove that the exported electricity was imported to the designated

territory.

Antecedents (3)

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Possible Consequences

• Higher than expected demand especially during the summer season might induce member states to make cross-border trading more difficult to achieve

• Deteriorating trading conditions might cause problem of security of supply

• Market integration will suffer

Antecedents (4)

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Change of Import Balance since Market Opening

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trend

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Antecedents (5)H

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• Hungary had a single buyer market model until 2003.

• After market opening the contractual structure remained the same. Former single buyer MVM Trade contracted the majority of domestic generation capacities.

• Hungary introduced the so-called SIGNIFICANT MARKET POWER (SMP) regulation in the beginning of 2008.

• By SMP regulation former single buyer was obliged to sell domestic generation capacities via public capacity auction.

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Short History of the Hungarian Power MarketShort History of the Hungarian Power Market

Antecedents (6)

PRESENT MODEL

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Green arrows show possible, but at

present non-operating

relationship

Generators (domestic)

Import - Export

MVM

Wholesale trader

Successor Organizations of Public Utility Suppliers

Universal suppliers

Traders )

Household and for

universal supply eligible

consumers

Free market consumers

Traders

Organized

Market

AuctionAuction

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rice

Power Procurement

Contracts

Long-term Contracts

Antecedents (7)H

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• June 2008: DG COMP issued a negative decision against Hungarian long-term PPAs.

• Legal uncertainties while starting purchase and sale for 2009.

• In average 10 EUR/MWh higher wholesale prices than EEX price level.

• In 2008 retail traders used price margin above wholesale-cost reason.

• Decreasing net import – from 6-7 TWh/year to 4 TWh/year

- narrowing sources,

- export-restriction in the north.

• Reduced contracted capacity at MVM Trade. 13

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Unexpected DevelopmentsUnexpected Developments

Antecedents (8)

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Unexpected developmentsUnexpected developments

Antecedents (9)

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Unexpected developmentsUnexpected developments

Antecedents (10)

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Expected Position of MVM Trade for 2009Expected Position of MVM Trade for 2009

• Despite of its reduced portfolio MVM Trade remains the most important wholesaler in Hungary.

• With the cheapest nuclear and coal power plants MVM Trade is the most competitive wholesaler in Hungary.

• All demand of Universal Service Providers (USP) will be met by MVM Trade at controlled tariffs.

• For lack of a power exchange MVM Trade auction price is the main price signal for Hungarian market players.

Purchase Sale

Domestic generation: 21,5 TWh USP: 13 TWh

Import: 0 TWh Auctions: 8,5 TWh

Antecedents (11)

What we didWhat we did

• With SMP regulation and auction obligation we ensured access to MVM Trade contracted domestic generation capacities.

• We did not put obstacles in the way of free cross-border trading (export).

• With priority rules we equalized chances of customers and traders of buying electricity at the auction.

• With general price cap on MVM Trade (dominant market player) we avoided unjustified wholesale price increase. It is used only for MVM Trade sales not for the total wholesale market.

• With priority rules we might have avoided some unjustified retail price increase.

• With priority rules we gave chance DSOs to cover some parts of 2009 network losses (network loss tenders were unsuccessful).

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HEO HEO resolutionresolution

Steps of the Office

• To protect transparent, clear market competition and to ensure secure supply for domestic users, HEO insisted on holding the auction against the legal steps promised by power plants with long-term contracts. HEO made this step in spite of the fact that the licensee, MVM Trade obliged could have concluded bilateral contracts with users and distributors.

• Under MVM Trade (calling for the auction) bidding guarantee the traders with larger capital most likely would have cut out domestic users and later would have sold the energy purchased at a higher price than the Leipzig (EEX) price with a significant profit to Hungarian users, to distribution companies or to southern suppliers outside EU with capacity shortages. The conditions in the relevant resolution issued by HEO ensured the same chances to access to energy offered at the auction for the different market groups (users, distributors, traders).

• To our evaluation, the Office, in accordance with EU and Hungarian regulations, took the interest of market players and users into account, settling with them repeatedly before issuing the resolution.

Statements (1)H

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HEO analyses market situation very carefully and uses regulatory tools to promote competition and

protect customers’ interest.

By resolution of the Office MVM Trade Zrt. held another (quarterly) energy and capacity auction on March 18, 2009. Considering the significant change regarding market conditions (due to financial crisis domestic and regional demand decreased significantly, while reference prices of the German Exchange dramatically fell) the market players could participate with the same conditions and the approved Auction Code did not include any clauses as to the use of purchased energy.

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FurtherFurther AuctionsAuctions

Statements (2)

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Thank you for your attention!

István [email protected]+36-1-459-7850

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The „Hungarian Case ”

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