Power Market Outlook in Hungary 2016

Reference Code: GDAE0264VPT Publication Date: January 2017 1 Table of Contents 1 Table of Contents... 1 1.1 List of Tables... 1 1.2 List of Figures... 1 2... 2 2.1 Country Overview... 2 2.2 Current Power Market Status... 3 2.3 Key Issues... 6 2.4 Future Plans and Strategies to Meet Increasing Power Demand... 7 2.5 Way Forward... 7 3 Appendix... 7 3.1 Abbreviations... 7 3.2 Bibliography... 8 3.3 Methodology... 8 3.4 Contact Us... 10 3.5 Disclaimer... 10 1.2 List of Figures Figure 1: Power Market, Hungary, Major Domestic Power Plants, 2015... 2 Figure 2: Power Market, Hungary, Cumulative Installed Capacity of Domestic Power Plants (MW), 2011 2015... 3 Figure 3: Power Market, Hungary, Domestic Share by Power Generating Source (%), 2015... 4 Figure 4: Power Market, Hungary, Annual Thermal Power Production (GWh), 2011 2015... 4 Figure 5: Power Market, Hungary, Total Gross Electricity Consumption Share (%), 2015... 6 1.1 List of Tables Table 1: Abbreviations... 7 Market Analysis Alert 1

2 Power Market Outlook in Hungary 2016 Figure 1: Power Market, Hungary, Major Domestic Power Plants, 2015 2.1 Country Overview Hungary has a total area of 93,000 km 2 and shares its border with seven other countries. The country s landscape is mostly flat. The population was 9.9 million as of 2015 and the total gross domestic product (GDP) was $246.4 billion. The GDP growth rate has exceeded the European Union (EU) average making Hungary more attractive for foreign direct investments. Absorption of EU funds, subsidized loan schemes, decreased personal tax, and regulated utility price cuts were some of the reasons for the increase in the GDP. Higher output on the production side was mainly due to the expansion of the industrial, retail, trade, tourism, and servicing sectors. Increase in household consumption due to decrease in the personal tax from 16% to 15% and foreign trade surpluses are some other factors which contributed to the GDP. Due to geographical conditions, most of the country s power demand is met by importing the energy from neighboring countries. The gross quantity of electrical power consumed increased by 0.9% in 2014 and by an additional 2.7% in 2015. In 2015, the gross domestic consumption was 43.75 Terawatt hour (TWh), import was 13.687 TWh, and gross domestic export was 3.63 TWh (MVM, 2015). The majority of the power is imported from Slovakia, Austria, and Ukraine, and the main export countries are Croatia and Serbia. Source: GlobalData, MAVIR, 2016 The major utility player in Hungary is Magyar Villamos Muvek Zrt. which generates 40% of the total power generated in the country. The other power generating companies are Vertesi Eromu Ltd, E.ON Eromuvek Kft, and Budapesti Eromu Ltd., which are operating power plants of 50 Megawatt (MW) or higher capacity. The transmission operator is MAVIR Hungarian Independent Transmission Operator Company Ltd. while there are six privatized regional distribution companies responsible for operation of networks as well as supply for consumers. MAVIR deals with the operation, transmission, maintenance, renewal, and development and co-ordinates the operation of the power system with neighboring countries. The country s main strategy to meet the growing need of power is to reduce the energy dependency by increasing the energy efficiency, increased use of renewable resources, nuclear sources, and connecting to the European power infrastructure. Market Analysis Alert 2

Cumulative installed capacity of domestic power plants (MW) 2.2 Current Power Market Status Hungary currently does not possess the natural resources to support the increasing energy demand; therefore, it depends mainly on the power imported from other regions such as Ukraine and Slovakia. Hungary is actively developing renewable projects such as biomass and wind and is also upgrading the transmission networks to ensure secure and efficient power supply. The figure below shows the cumulative installed capacity trend for Hungary power market during 2011 2015. In 2015, the cumulative installed capacity was 8,558 MW, which decreased by 378 MW compared to 2014. The reason for decrease in the installed capacity is mainly due to the decommissioning of thermal plants over the years. Figure 2: Power Market, Hungary, Cumulative Installed Capacity of Domestic Power Plants (MW), 2011 2015 The total gross electricity consumption in 2015 was 43,749 GWh compared to 40,652 GWh in 2014. During the period January September 2016, total electricity production in the country was 20,499 GWh in the following breakdown: combustible fuels 8,563 GWh, nuclear 11,059 GWh, hydro 183 GWh, geothermal/wind/solar/others 694 GWh. According to the National Renewable Energy Action Plan the country s electricity demand is expected to grow by 25% by 2020. As the country depends mostly on nuclear energy, the changes in EU reforms with respect to nuclear power plants will make it difficult for the country to meet its increasing electricity demand. This in turn will lead to increase in power generation from alternative sources such as biomass. The regulations of reducing the greenhouse gases will also help other renewable energy resources to grow and contribute to the total primary energy supply in the coming years. 10,500 10,000 10,109 10,094 9,500 9,000 9,113 8,936 8,500 8,558 8,000 7,500 2011 2012 2013 2014 2015 Source: GlobalData, MAVIR, 2012; MAVIR, 2013; MAVIR, 2014; MAVIR, 2015a Nuclear power contributed 52% of the total domestic production in 2015, followed by lignite with 18% and hydrocarbon with 17%. Market Analysis Alert 3

Annual thermal power production (GWh) Figure 3: Power Market, Hungary, Domestic Share by Power Generating Source (%), 2015 Biomass 6% Wind 2% Coal 2% Waste 1% Hydro 1% Others (Biogas & Solar) 1% power plant in Hungary is Matra Power plant with an installed capacity of 966 MW, owned by RWE. Almost all power generated from coal comes from this plant. Figure 4: Power Market, Hungary, Annual Thermal Power Production (GWh), 2011 2015 21,000 Hydrocarbon (Gas & Oil) 17% 18,000 15,000 12,000 17,590 16,150 15,960 12,120 11,310 Nuclear 52% 9,000 6,000 3,000 Lignite 18% 0 2011 2012 2013 2014 2015 Source: GlobalData, MAVIR, 2015b Source: GlobalData, IAEA, 2016 * Thermal electricity production includes only fossil fuel, and non-renewable municipal waste and industrial waste Thermal Power: Thermal power was the major contributor to total electricity production since 1990. But in recent years (from 2012), the production from thermal power has been declining and the major reason for this is degradation of coal mines in Hungary. In 2015, the total thermal power produced was 11,310 Gigawatt hour (GWh), 7% less compared to the previous year. In 2015, the power produced from coal was 1.6% of the total domestic production. The installed coal power plants are very old and their operation license will end soon. On the basis of the European Commission s decision on shutdown of uncompetitive coal mine, Vertes Power Plant Ltd. stopped coal production at the Markushegy Mine in 2011, due to which the Oroszlany power plant with installed capacity of 240 MW was permanently shut down in 2016. The largest coal-fired Also, according to the Kyoto protocol, the international agreement linked to the United Nations Framework Convention on Climate Change (UNFCCC), countries are given specific targets to reduce greenhouse gases. The target set for Hungary was 20% reduction in the Carbon Dioxide (CO2) level for 2014, which was surpassed by 40.28% reduction in the CO2 level. Such commitment from the country to reduce CO2 emissions shifted the dependency from thermal power generation to nuclear and natural gas. Nuclear Power: The majority of the power supply in Hungary is fulfilled by nuclear power plants. The first nuclear plant unit was operated in 1982, and the remaining three units were connected to the grid in 1987. The total capacity of the power plant is 2,000 MW. In 2015, the nuclear Market Analysis Alert 4

power plant generated 15,834.4 GWh of electricity in total, the highest in the past 30 years. With the Paks Nuclear Power Plant, Hungary avoids about 6 million tonnes of CO 2 emissions per year in comparison with generating this quantity of energy with modern coal- or gas-fired power plants, thereby supporting the achievement of domestic climate protection goals and tasks. An agreement was signed in 2014 between Hungary and Russia on the peaceful use of nuclear energy and the extension of the Paks power plant with additional capacity totaling 2,400 MW. These new units will be put into operation in 2023. Paks accounts for 42% of Hungarian electricity generation. In 2014, the Hungarian Atomic Energy Authority gave the license to unit 1 and unit 2 of the Paks power plant to operate for an additional 20 years. Natural Gas: The majority of natural gas is being imported from Russia and due to the supply disruptions in 2006 the government has taken several steps like enhancing the storage capacity. In 2014, natural gas contributed 14% to the total electricity production in the country, a 24% drop compared to 2013. The major natural gas supplier to Hungary is Russia. It has only one direct pipeline from Russia and this increases the risk to Hungary s power generation. Any major issue restricting the supply of natural gas will obstruct the generation of electricity, meaning Hungary will not be able to meet the increasing power demand. In 2015, the Hungarian government signed an agreement with Russia, which represents a guarantee of security of supply and maintenance of natural gas supply to Hungary and MFGK (the largest gas trader) for 20 years. Renewable Energy Sources: Due to the stringent policies of using nuclear power and the Kyoto Protocol, nuclear power plants and natural gas power plants seem to have a shorter life span in the coming years. Thus, the chances for renewable energy resources such as geothermal, biomass, solar, and hydro will increase. In 2015, total gross renewable electricity consumption share was 6.9%; the European Directive 2009/28/EC requires Hungary s renewable generation to grow to 14.65% in relation to total energy use by 2020. In renewable energy sources, biogas, biomass, and geothermal power plants will be treated as priorities for meeting the energy demand. Considering the geographical conditions, along with the mentioned sources, wind and solar power generation are also expected to increase. The government supports the renewable energy production with a feed-in tariff obligation system and guaranteed price. This means that all electricity produced will be purchased by the transmission operator at a fixed price, which is indexed annually. Biofuel had the major share in the generation of electricity from renewable resources of 60% followed by wind with 20% and biogas with 9% in 2014. On the other hand, in 2015, 6.9% of the total gross electricity consumption came from the renewable sources in the following breakdown: biomass 3.75%, wind 1.53%, waste 0.65%, hydro 0.52%, and others (biogas and Market Analysis Alert 5

solar) 0.45%. In 2015, out of the 10.3% of domestic renewable energy production, 5.7% came from biomass, 2.2% from wind, followed by waste 0.90%, hydro 0.8%, biogas 0.6%, and solar 0.1%. There are 31 hydro generators in Hungary of which the largest are Kiskore and Tiszalok with capacities of 28 MW and 11 MW, respectively, and 170 wind turbines within the country. In 2015, with the use of EU funds the country established the 10 MW photovoltaic. The project has been implemented by using more than HUF4 billion ($0.013 billion) of EU and state aid. Figure 5: Power Market, Hungary, Total Gross Electricity Consumption Share (%), 2015 Hydrocarbon, 11.9% Coal/Lignite,13.7% Renewables, 6.9% Import, 31.3% Nuclear, 36.2% Nuclear Import Coal/Lignite Hydrocarbon Renewables Source: GlobalData, MAVIR, 2016 2.3 Key Issues The network tariffs are set by the Ministry of Transportation, Telecommunication and Energy and this limits the National Regulatory Authority to act autonomously. The cut in network prices in the year 2013 continued during 2015 which caused the network operators to suffer losses and also increased the price divergence between wholesale and retail markets. Hungary s energy sector is subject to an energy tax, a differentiated profit tax, and crisis tax. The government also has imposed an infrastructure tax on the length of the transmission and distribution lines and pipelines. In 2013 2014, the country s state-owned company MVM started acquiring private companies such as Fögáz, E.ON Földgáz Trade, E.ON Földgáz Storage, and Panrusgáz to become a vertically integrated company. It also created the non-profit utility company ENKSZ to supply energy to end users at lower prices. When the state-owned companies start selling the energy at lower prices, this may lead to reduced competition in the market. In spite of having a relatively strong energy infrastructure, due to the utility rate cuts witnessed in 2013 and extraordinary taxation on energy infrastructure, companies are discouraged from making further investments. The infrastructure development is mainly limited to the state-owned companies like MVM with support from EU funds. The government policy to provide energy to end users at lower prices may lead to lack of investments in infrastructure and services, thus deteriorating security of supply. For electricity generators, the important changes in the third period of the emission trading system of the EU was that free emission allowances might no longer be allocated to these companies in the period from 2013 to 2020. Based on this main rule, power plants fired by fossil fuel, which generate only electricity, are compelled to purchase the allowances covering their Market Analysis Alert 6

CO 2 emissions uniformly from the quota trading market in the EU. Electricity generators are required to cover the costs of such purchases by reallocating their resources. Such a situation will cause these owners to suffer losses and will be inefficient in operations and providing services. 2.4 Future Plans and Strategies to Meet Increasing Power Demand Currently, the domestic market is controlled by the EU regulations concerning energy supply, focusing on the connection of the energy markets, market liberalization, security of supply, reduction of CO 2 emissions, support of renewable energy generation, encouragement of increasing energy efficiency, and research and innovation. The country is considering the important propositions of the energy strategy in order to achieve a competitive, sustainable, and secure supply of power, such as modernization and expansion of the existing plans to ensure the reliable and safe supply of electric power, and energy savings by improving energy efficiency in the most efficient and effective method. In Hungary, the buildings consume 40% of the energy, with two-thirds of it used for heating and cooling. The government is devising energy efficient projects which will enable over 10% reduction of the overall energy demand in the country. Smart metering, to be introduced under EU regulation, collects real-time information about energy used by consumers, helping them to improve their energy awareness and contributing to the reduction of their consumption. Smart metering and smart grids may contribute to maintaining the balance between demand and supply, improving the quality of network services, increasing consumer awareness, improving trading activities, and devising increasingly customized products. 2.5 Way Forward In 2015, the proportion of renewable energy-based projects doubled the level of projects that utilize fossil fuel. Technologies based on renewable energy sources will start spreading quickly in smaller sizes, even as small as a household, due to the current and projected development in the area of decentralized energy generation solutions. Due to turbulent changes in energy markets, traditional energy business models have changed primarily due to changes in technological development, climate protection goals, and the regulatory environment. All this will result in increased competition, stronger than before, where in addition to the current competitors, a number of new dynamic entrants will have an opportunity to enter the energy market. 3 Appendix 3.1 Abbreviations Table 1: Abbreviations Acronym Expanded form EU European Union GDP Gross Domestic Product GWh Gigawatt hour MW Megawatt Market Analysis Alert 7

TWh UNFCCC Source: GlobalData Terawatt hour United Nations Framework Convention on Climate Change 3.2 Bibliography IAEA (2016). Hungary. International Atomic Energy Agency. Available from: https://cnpp.iaea.org/ countryprofiles/hungary/hungary.htm [Accessed on January 03, 2017] MAVIR (2012). Data of the Hungarian Power System 2012. MAVIR Hungarian Transmission System Operator Private Limited Company. Available from: https://www.mavir.hu/documents/10262/160379/m AVIR_VER_ 95ecaca5743e MAVIR (2013). Data of the Hungarian Power System 2013. MAVIR Hungarian Transmission System Operator Private Limited Company. Available from: https://www.mavir.hu/documents/10262/160379/m AVIR_adatok_ 8aec-c85a37dd19cc adatok_2012_final.pdf/77fc482b-c8dd-41f9-aee2-20140514_lapozgato.pdf/87a528ec-f959-4892- ER_2014.pdf/ a0d9fe66-e8a0-4d17-abc2-3506612f83df MAVIR (2015a). Data of the Hungarian Electricity System. MAVIR Hungarian Transmission System Operator Private Limited Company. Available from: https://www.mavir.hu/documents/10262/18851402 6/MAVIR_VER_ 2015_WEB.pdf/bc5e49de-7411-435e-a23b- 77e2b32119c7 MAVIR (2015b). Data of the Hungarian Power System 2015. MAVIR Hungarian Transmission System Operator Private Limited Company. Available from: https://www.mavir.hu/documents/10262/18851402 6/ MAVIR_VER_2015_WEB.pdf/bc5e49de-7411-435e-a23b-77e2b32119c7 MVM (2015). Integrated Report 2015. MVM Group. Available from: http://mvm.hu/download/mvm- Group-Integrated-Report-2015.pdf/?lang=en 3.3 Methodology GlobalData s dedicated research and analysis teams consist of experienced professionals with advanced statistical expertise and marketing, market research and consulting backgrounds in the energy industry. MAVIR (2014). Data of the Hungarian Power System 2014. MAVIR Hungarian Transmission System Operator Private Limited Company. Available from: https://www.mavir.hu/documents/10262/160379/v GlobalData adheres to the codes of practice of the Market Research Society (www.mrs.org.uk) and Strategic and Competitive Intelligence Professionals (www.scip.org). Market Analysis Alert 8

All of GlobalData s databases are continuously updated and revised. The following methodology is followed for the collection and analysis of data presented in this report. 3.3.1 Coverage The objective of updating GlobalData s coverage is to ensure that it represents the most up-to-date vision of the industry possible. We track hundreds of alternative energy news sources on a daily basis. Using this news flow and regular interaction with the industry experts, we identify the key trends being witnessed by the industry, such as market opportunities, industry consolidation, technological break-throughs and policy updates. Our articles and reports investigate these trends in detail and evaluate their market implication. 3.3.2 Secondary Research The research process begins with extensive secondary research using internal and external sources to obtain qualitative and quantitative information relating to each market. The secondary research sources that are typically referred to include, but are not limited to: Company websites, annual reports, financial reports, broker reports, investor presentations and SEC filings Industry trade journals and other literature Internal and external proprietary databases National government documents, statistical databases and market reports News articles, press releases and web-casts specific to the companies operating in the market 3.3.3 Primary Research Primary research further substantiates secondary research findings and information. It serves both as a means of obtaining updates regarding issues such as changes in alternative energy policy frameworks and renewable energy development, and as a quality control mechanism. GlobalData conducts hundreds of primary interviews a year with industry participants and commentators in order to validate its data and analysis. A typical research interview fulfills the following functions: Provides first-hand information on the market size, market trends, growth trends, competitive landscape and future outlook Validates and strengthens secondary research findings Further develops the analysis team s expertise and market understanding Primary research involves email interactions and telephone interviews as well as face-to-face interviews for each market, category, segment and sub-segment across geographies. The participants who typically take part in such a process include, but are not limited to: Industry participants: CEOs, VPs, business development managers, market intelligence managers and national sales managers Market Analysis Alert 9

Outside experts: investment bankers, valuation experts, research analysts and key opinion leaders specializing in the alternative energy industry 3.3.4 Modeling and Forecasting In-house models are used to forecast data and in the event of data gaps. Historic data and the analysis of trends within it form the basis of all forecasting methodology. A range of qualitative and quantitative factors are taken into account to estimate the future growth. The forecast data is validated by industry experts and in a back-of-envelope test. 3.4 Contact Us If you have any queries about this report or would like further information, please contact us. North America: +1 646 395 5460 Europe: +44 207 406 6789 +44 1204 543 523 Asia Pacific: +91 40 6616 6700 Email: info@globaldata.com The facts of this report are believed to be correct at the time of publication but cannot be guaranteed. Please note that the findings, conclusions and recommendations that GlobalData delivers will be based on information gathered in good faith from both primary and secondary sources, whose accuracy we are not always in a position to guarantee. As such GlobalData can accept no liability whatsoever for actions taken based on any information that may subsequently prove to be incorrect. This report is a licensed product and should not be reproduced without prior permission. The information in this document has been extracted from the Power Database by a registered user. GlobalData holds no responsibility for the loss of original context and for any changes made to information following its extraction. All information was current at the time of extraction, although the original content may have been subsequently updated. 3.5 Disclaimer All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher, GlobalData. Market Analysis Alert 10