"Hungary's electricity wholesaler MVM is not anticipating a need to hike the price of electricity before the end of the year 2008, CEO Imre Mártha said in an interview on local news station InfoRádió. If, however, the surge of global fuel prices continues, the price-setting Hungarian Energy Office will be unable to avoid a price hike in the domestic market either, he added."The cost of electricity cannot be disengaged from the price of fossil fuels such as oil, natural gas, coal or uranium. Hungary is most exposed to the recent surge in the price of natural gas, which accounts for 30-35% of the country's electricity requirement," Mártha explained listeners in the radio broadcast.
If the price of fossil fuels continues to rise, the Hungarian Energy Office will be under tremendous pressure to approve an electricity price hike, he said, adding that this may be avoidable for the rest of the year.
Market liberalization in January did not alter the overall structure of energy production in Hungary, however it eliminated a long-established system in which corporate consumers could freely opt for or opt out of a state-regulated price scheme. Today, EU regulations do not allow national authorities to protect consumers other than households or SMEs from market impacts, Mártha clarified.
Parliament has recently approved an amendment to Hungary's Electrical Power Act, expanding this protection to all consumers using less than 63A in total. This consumer segment qualifies for access to state-subsidized prices, which are significantly lower than market prices.
Power games
According to the MVM chief executive, the company may suffer losses in the range of HUF 10 billion due to capped prices. With a license granted by the Electrical Power Act, the Hungarian Energy Office has established a price ceiling on the electricity sold by MVM, regardless of global fuel prices and production costs. As a result, the difference between the price ceiling and the free market price goes in the coffers of regional distributors that purchase electricity from MVM, Mártha highlighted.
This system of regulated prices is not causing a problem in the case of household consumers as the Hungarian Energy Office is able to control retail prices as well as the wholesale price, Mártha argued. Problems arise with consumers not qualifying for state subsidies, as the state has no control over the retail price they pay to distributors, he added.
As to the amount of deficit generated by capped prices at MVM, specific information will not be available until October's electricity auctions, which will reveal benchmark prices on the free market and the amount by which these differ from capped prices, Mártha said.
Brown coal field investment
MVM will be the majority shareholder of a new 400 MW lignite-fired unit at the Mátra Power Plant in northeastern Hungary, scheduled for completion in 2014, the chief executive said in the same interview.
The power plant, along with related mining rights, were sold by the state as part of large-scale privatization in 1995. The new project has special importance for Hungary as the lignite that can be extracted profitably for another 100-120 years in the Visonta-Bükkábrány area represent the most valuable fossil fuel source in the country, Mártha said.
The new power plant unit, of which MVM will hold a 75% share, will be built in compliance with high environmental standards and use cutting-edge technology to produce electricity at a competitive cost despite using lignite as a source, the CEO said.
The fact that the new plant will use existing energy industry infrastructure is a bonus, Mártha added. With a HUF 200 billion estimated capital expenditure requirement, the project will break even in 25 to 30 years; the power generated at the new unit will be sold on the free market."
Source: Portfolio Online Financial Journal
23.07.2008