Country Case Study for Market Restructuring: Hungary · Country Case Study for Market Restructuring: Hungary Prepared by dr. Gábor Szörényi ERRA . 2 3rd Training Course: Electricity

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Country Case Study for Market

Restructuring: Hungary

Prepared by

dr. Gábor Szörényi

ERRA

2 3rd Training Course: Electricity Markets

June 4 – June 8, 2018 • Nicosia, Cyprus

Disclaimer

“This document and the presentation have

been prepared for the CERA under the ERRA

service contract signed with the Structural

Reform Service of the European Commission.

However the presentation reflects the view

only of the author, and the Commission cannot

be held responsible for any use which may be

made of the information contained therein.

This training is not part of the European public

service.”



Market Structures and Models in Hungary

(Agenda)

General environment of restructuring in CEE

Development of Market Structures

Aspects determining the schedule of events

regarding restructuring, privatization and

competition

Operation of markets

Conditions of effective competition

Development of the Hungarian Electricity

Market


June 4 – June 8, 2018 • Nicosia, Cyprus 4

Political, Economic, Cultural and Social Environment in

Central/Eastern Europe in which Governments Established New

Regulatory Framework, Restructure and Privatize the Energy

Industry

SHORTLY AFTER POLITICAL CHANGES NO DETAILED PRACTICE in

DEMOCRATIC PROCEDURES (Balance between the interest of Economy, of

Energy Industry, of Customers, of Investors, of Trade Unions)

AFTER 40-50 YEARS of CENTRALIZED PLANNING GOVERNMENTS TRY TO

KEEP POWER of DECISION-MAKING (Lack of Regulatory Autonomy,

Influencing Investor Decisions through Regulation only )

NO DEVELOPED CONFLICT RESOLUTION METHODS Lack of Practice in

Public Hearings, Negotiate with Trade Unions, Lobbying Power of Investors)

CONTINENTAL LAW DETAILED LEGISLATION PRACTICE (Lack of

International Practice outside the Region in some specific question)

IN FRONT of DRAMATIC PRICE INCREASES POLITICAL CONTROL OF PRICE

SETTING (Less Pressure Today)



General Objectives of the Governments in the CEE

Region (1)

• improve management and upgrade the network

• improve sector performance (technical and

financial)

• increase operating efficiency

• increase bill collection for the electricity supplied

• provide revenue from the assets sale to the budget



Objectives of the Governments in the CEE Region (2)

attract foreign and local investment

enforce rational state policy upon restructuring of the

sector

separate regulatory and operational functions within

the sector

ensure reliable power supply to customers and improve

financial discipline in the sector

establish competitive environment

create electricity market and formation of related

enterprises

promote development of domestic market



Situation in which the Hungarian Government Decided to Privatize the Energy Industry:

• HIGH DEBT SERVICE OF HUNGARY

• PROCESS IMPLEMENTING MARKET ECONOMY

• OLD POWER PLANTS, DISTRIBUTION NETWORK

INVESTMENT NEEDED

• NEED FOR NEW CAPACITY

OBJECTIVES OF THE GOVERNMENT:

• IMPLEMENT MARKET CONDITIONS IN THE ENERGY INDUSTRY

• REDUCE RESPONSIBILITIES OF GOVERNMENT

• INVITE FOREIGN CAPITAL TO HUNGARY

• INCOME FOR THE CENTRAL BUDGET

• INCREASE EFFICIENCY, ENVIRONMENTAL PROTECTION OF THE ENERGY INDUSTRY

• FOLLOW INTERNATIONAL TREND (PRIVATISATION AND MORE COMPETITION IN THE ENERGY INDUSTRY)



Brief Background on Structure and

Restructuring of Energy Industry in Hungary

RESTRUCTURING – MAIN STEPS

TRUST (STATE OWNED)

TWO-TIER SYSTEM (1992)

MINE INTEGRATION (1993-94)

ABORTED ATTEMPT OF PRIVATISATION OF DISTRIBUTION

COMPANIES (1993)

ELECTRICITY LAW – HUNGARIAN ENERGY OFFICE [HEO] (1994)

GOVERNMENT DECREE NO. 1114 (1994)

NEW PRIVATISATION LAW (1995)

GOVERNMENT DECREE NO. 1063 (1995)

– MODIFICATION TO NO. 1114

PRICING REGULATION (1995)

SET UP OF HEO, REGULATIONS, PPA. (1995)

PRIVATISATION TENDER FOR STRATEGIC INVESTORS (1995)

FURTHER PRIVATISATION (1996-97)



Schedule of Preparation of Legal and Regulatory

Framework for the Electricity Industry before Privatization

Act, decrees 1994 1995

licences, codes, rules VIII. IX. X. XI. XII. I. II. III. IV. V. VI. VII. VIII. IX. X.

Establishment of the Hungarian

Energy Office

Coming into force of new electricity

act

Governmental Decree on

Enforcement of the Electricity Act

Public Utility Electricity Regulation

Ministerial decree on Protection of

Consumer rights

Decree on the Office’s fees

Clarification of the questions

relating to the Operational Licences

Operational Licences

Operational Code (Grid Code,

Dispatch Code, Distribution

Code…)

Standard Terms of Business of

MVM Rt

Governmental resolution on Pricing

Ministerial decree on obligation to

purchase

Ministerial decree on fuel stocks

Ministerial decree on connection

fee

Governmental decree on restriction

and interruption

Ministerial decree on export-import

Legend: under preparation discussion phase issued, approved, in force



Privatization Process in Hungary

Timeline in 1995

Data Rooms available Oct 18-Nov 29

Aug 28 Oct 16 Nov 3 Nov 6-14 Nov 22 Nov 24 Nov 30 Dec 6 Dec 8 Dec 22

PREQUALIFICATION COMMENT ON FINAL COMMENTS BIDS DUE SIGNING PSA

PSA ON PSA

PICK UP INFO MEETINGS ON FINAL VERSION ANNOUNCE CLOSING

MEMORANDUM PSA PSA AWARDEES

COMMENCEMENT

OF TENDER



Power Sector Reform Path in Hungary

1945

Vertically

integrated

1992

Legal Separation: - generation

- transmission

- distribution/supply

1897-1945 1995

Privatization

State-owned

Enterprise

State-owned

Corporation

Wholesale

Competition

Ow

ner

ship

Str

uct

ure

Scope for Competition

Retail

Competition

Single

Buyer

Monopoly

Private

Corporation 2003 Limited Competition

2008 Competition



Schedule of main Events during the Power

Sector Reform in Hungary

GENERATORS (EXCEPT NUCLEAR)

20031995/96

4-5 YEARS

1991/92

RESTRUCTURING

TRANSMITTER (1)

DISTRIBUTORS/SUPPLIERS (6)

COMPETITION

DISTRIBUTORS/SUPPLIERS

6-7 YEARS

PRIVATIZATION

GENERATORS (8)



Benefits and Disadvantages of the Hungarian Sequences of

the Actions from Liberalization Point of View

RESTRUCTURING, PREPARATION OF PRIVATIZATION:

SEPARATION OF ACTIVITIES, ASSETS (+)

PRACTICE IN COMMERCIAL BUSINESS BETWEEN COMPANIES (+)

PREPARATION OF REGULATION DETAILS (+)

PRIVATIZATION STRATEGY

PRIVATIZATION:

LONG TERM PPAs (--)

PRIVATIZATION INCOME (+)

KNOW- HOW, MANAGEMENT PRACTICE, INVESTMENT (+)

PREPARATION OF DEREGULATION (RE-REGULATION), COMPETITION:

PREPARATION OF MODEL DETAILS

PREPARATION OF MODEL DETAILS, NEW LAW, SECONDARY LEGISLATION, RE-REGULATION “AGREED” WITH PRIVATE INVESTORS (--)

FURTHER SEPARATION OF ACTIVITIES (ISO) (-)

COST CUTTING => READY FOR COMPETITION (+)



Power Industry Structure after the First

Restructuring Step (1992)

Szlovákia

Ukraine

Romania

Yugoslavia

Croatie

Slovenia

Austria

ÉMÁSZ RWE(50,00%)

EnBW(21,43%)

ÉDÁSZ Bayernwerk (27,38

EdF (27,38%)

DÉDÁSZ Bayernwerk (50,27%)

DÉMÁSZ EdF (54,11%)

TITÁSZ Isar

Amperwerke

(75,00%) Csepeli Erőmű Rt.

PowerGen (100%)

EMA-PowerKft.

El Paso Energy (50,0%)

Mátrai Erőmű Rt.

RWE/EVS (71,0%)

MVM (25,49)

ELMŰ RWE(50,00%)

EnBW(25%)

Borsodi Energetikai Kft.

AES (32,09%)

Tiszai Erőmű Rt. (67,91%)

Dunamenti Erőmű Rt.

TRACTEBEL SA (73,75%)

Pécsi Erőmű Rt.

Mecsek Croesus Kft

(68,45%)

Budapesti Erőmű Rt.

Ivo-Tomen (87,68%)

Vértesi Erőmű Rt. MVM Rt.(42,92%)

Bakonyi Erőmű Rt. Trans-Eur Kft.(65,10%)

Paksi Atomerőmű Rt. MVM Rt.(99,92%)

Power Stations

(August 1998)

Tiszai Erőmű Rt.

AES (95,77%)

OWNERSHIP OF THE GENERATORS AND ELECTRICITY SUPPLIERS



Hungarian Power Market Concentration

after Privatization

TITÁSZ

12%ELMÜ

27%

ÉMÁSZ

16%

DÉDÁSZ

12%

ÉDÁSZ

22%DÉMÁSZ

11%

RWE

43%BW

35%

EdF

22%

Tiszai

18%

Vértes

5%

Paks

26%

Mátra

11%

Egyéb

10%Dunamenti

30%

AES

18%

Egyéb

10% Tractabel

30%

RWE

11%MVM

31%

MARKET SHARES OF POWER

SUPPLIERS AND THEIR

BIGGEST OWNERS ON THE

BASIS OF ELECTRICITY SALES

(1999)

MARKET SHARES OF THE

BIGGEST POWER PLANTS

AND THEIR STRATEGICAL

OWNERS ON THE BASIS

OF PRODUCTION

CAPACITY (1999)

Operational (Grid) Code Business Conduct

Rule

Business Conduct

Rules

Power Plant

Companies

Electricity

production

Transmission

Company

- Dispatching,

- Transmission,

- Capacity balance,

- Export, Import

Distribution

Companies

Distribution

Supply

Consumers

Basic Idea of the Former Electricity Law (after first

restructuring) Operational model of the electricity system (1994-2002)

Producer

price

Wholesale

price

End-user

price

Import Export

Operational

licences Operational

licence

Operational

licences

Electricity flow



Lessons Learnt from the Preparation of Liberalization (Free Costumer Choice) + Suggestions (1)

– Clear Market Structure and Operation Model

(Responsibilities, Rights, Duties)

– Taking Into Consideration Domestic Constraints (Ownership

Structure, Market Power, Given Commitments, PPAs, Price

Structures, Political Support or Unconcerned Environment,

Lobbying Power of Market Players and Trade Unions, etc.)

– Preparing Feasibility Studies (Possibility of Effective

Competition; Impact on Prices and on new Investment)

– Clear Future Role of the Government

– Privatization Income versus Future Prices




– Clear Market Structure and Operation Model

(Responsibilities, Rights, Duties)

– Market Dominance

– Regulatory Power (Customer + Investor Confidence,

Stability, Continuity, Predictability in Decisions,

Fairness)

– No Hurry but Clear Signals, Right Decisions

– Someone (who is willing to and can Restructure /

Privatize) to take the Lead




– Without; Political Will, Clear Model and Chance to have

Effective Competition - the Time and Manpower Consuming,

and Painful Process is Questionable

– „Negotiation” with Investors on the accepted level of New

Risk Elements could help

– Clear written Procedure on the Stranded Cost Issues

regarding Renegotiation of PPAs is important

– New Type of Regulatory Attitude is Necessary

– Statutory Power, Legal Support for Adaptive Regulatory

Changes could be Useful

– No Hurry but Clear Signals, Right Decisions; Step By Step



Some „results” after restructuring and

privatization

-Fulfilled end-user price commitment of the

Government (during 3-4 years step by step reaching

cost covering prices)

-Efficient management of privatized companies:

Profitable operation

-Reduced network losses

-Network development

-Readiness for market opening



Price adjustment

End-user Prices of Electricity 1980-2000

0

2

4

6

8

10

12

14

16

18

20

HUF/kWh

Household Electricity Price End-user Average Price of Electricity

End-user Price Change of Electricity : 10%/year 25%/year 8.2%/year

Price Change of Industrial Domestic Sales : 15%/year 23%/year 12%/year

Consumer Price Change (inflation) : 25%/year 23%/year 8.5%/year



Regulated electricity prices 1

– 2001 March (without VAT)

Generators Transmission Distribution

G1

G2

G3

G4

T

D1

D2

D3

D4

D5

D6

nuclear

lignite

e

oil-gas

coal

HUF/kWh ¢/kWh

10,40 10,23

3,64 3,58

continued

15,55

5,44

1) Capacity: thousand HUF/MW/year; 2) Mining:

million HUF/year; 3) Energy: HUF/kWh

Capacity: thousand USD/MW/year; Mining: million

USD/year; Energy: ¢/kWh

40247 1)

; 2)

; 0,83 3)

140,71; ; 0,29

44988; ; 5,23

157,29; ; 1,83

12027; ; 9,96

42,05; ; 3,48

51000; ; 12,50

178,31; ; 4,37



Regulated electricity prices 2

– 2001 March (without VAT)

continued

industry

household

15,55

5,44

14,61

5,11

17,48

6,11

on peak

off peak

21,00

7,34

9,70

3,39

by voltage level

High voltage (average) 9,82 3,43

Medium voltage (average) 13,14 4,59

Low voltage (average) 18,80 6,57

by tariff types

Capacity paymet (average) 12,60 4,41

Public lightning (average) 25,60 8,95

Everything else (average) 20,43 7,14

HUF/kWh ¢/kWh



Regulated end-user Price of Electric Energy

in Hungary, 1985-2005 (EURO cent/kWh)

0

1

2

3

4

5

6

7

8

9

10

11

12

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Average enduser price Average non residential price without VAT Average residential price without VAT Average residential price incl. VAT

-10,00

-5,00

0,00

5,00

10,00

15,00

Per

cen

tag

e

Power Plants -2,41 -3,39 -7,61 7,40 10,14 13,11 Supply Companies -4,64 -5,23 -4,36 3,90 7,37 7,66

Electricity System -3,36 -2,77 -4,60 4,31 6,34 7,55

1994 1995 1996 1997 1998 1999

-10,00

-5,00

0,00

5,00

10,00

15,00

Per

cen

tag

e

Power Plants -0,76 -1,40 -4,64 5,56 9,10 12,76

Supply Companies -2,53 -3,83 -4,09 4,85 10,78 12,44


1994 1995 1996 1997 1998 1999

Profitability

1.,Profit as a proportion of sales revenue=100x(Ordinary business profit/Turnover

2.,Profit of ordinary business as a proportion of equity=100x(Ordinary business profit/Equity

2000

10,64 7,85 7,37

2000

11,55

13,73

10,28

-10,00

-8,00

-6,00

-4,00

-2,00

0,00

2,00

4,00

6,00

8,00

10,00

Pe

rce

nta

ge

Power Plants -1,70 -1,97 -4,97 2,73 4,41 5,41



1994 1995 1996 1997 1998 1999

-15,00

-10,00

-5,00

0,00

5,00

10,00

15,00

Perc

en

tag

e

Power Plants -2,01 -2,44 -6,48 3,61 6,01 8,76



1994 1995 1996 1997 1998 1999

3.,Profit as a proportion of assets=100x(Profit after tax/Total assets)

4.,Profit as a proportion of equity=100x(Profit after tax/Equity)

2000

4,13

7,79

5,24

2000

7,53

11,96

8,20



Efficiency increase of distribution/ supply

REAL(DEFLATED) COST OF ELECTRICITY SUPPLY

40

60

80

100

120

140

160

1994 1995 1996 1997 1998

%

Sold energy [changes (%)]

Cost of licensed activity [changes (%)]

Cost of licensed activity without depreciation [changes (%)]

Real cost of licensed activity without depreciation (without inflation) [changes (%)]



Distribution network (120 kV=>) losses (calculated)

% 1997 1998 1999

Technical 9.5 9.1

Commercial(non payment,

stolen energy)

3.7 3.9

Total

average13.5 13.2 13

Total(min. - max.)

10 - 17.5 11 - 17 10 - 15.5



Accepted distribution losses

in the price preparation

% 1997 - 2000 2001 -

Technical 8.9

Commercial(non payment, stolen

energy)

1.9

Total average 12 10.8



Who Forces the Idea of Competition and

Why?, or Why Not?

LARGE INDUSTRIAL CUSTOMERS, IF THE END-USER PRICE LEVEL WAS HIGH

to reduce price (advising them to strengthen their lobbying power)

POLITICIANS, IF THEY WERE CONVINCED; COMPETITION DEFINITELY

REDUCES PRICES AND INCREASES SERVICE QUALITY to collect votes

(someone has to convince them)

LICENSEES, PRESENT INVESTORS WOULD LIKE TO FREEZE PRESENT MODEL

maintaining their monopoly, “save” position (compensation is necessary=

stranded cost )

NEW INVESTORS, NEW POTENTIAL PLAYERS WOULD LIKE TO REDUCE ENTRY

BARRIERS they want to enter into the market (invite them into the model

building)

COMPETITION COULD HELP FOR THE REGULATOR TO REGULATE they want

to reduce the need for control (need effective competition, but consensus as

well full of compromise)



Model Alternatives I.

Compulsory

pool

Trader

Free consumer

Exports

Captive consumers

RAS RAS RAS

UW

Genco

1

Genco

2 Genco

3Imports

Option A: Compulsory for all volumes

Shows direct ionof energy flow

Financialhedging

contract

Financial hedging

contract

Spot trade

Spot trade

Spot trade

Spot trade

Spot trade

Spot trade

Financialhedging

contract



Model Alternatives II.

Net pool, compulsory

for free market

volumes

Trader

Free consumer

Exports

Captive consumers

RAS RAS RAS

UW

Genco

1

Genco

2Imports 2Imports 1

Option B: Compulsory for all free market volumes

Shows direct ion

of energy flow

Spot trade

Financial

hedgingcontract

Spot trade

Financial

hedging

contract

PPAPPA

Spot trade

Spot trade



Model Alternatives III.

Voluntary net pool

Trader

Free consumer

Exports

Captive consumers

UW

Genco

1

Genco

2Imports 2Imports 1

Option C: Voluntary net pool

Shows direct ion

of energy flow

Spot trade

Spot trade

PPA

Spot trade

Spot trade

RAS RAS RAS

OTC

PPA

Spot trade

OTC

36

Preparation of the Law Introducing Regulated TPA

(market opening)

• 2000 April: Government Approval

• 2000 May: Discussion Starts in the Parliament

• 2000 June: Government Asked Grace Period for Further

Development

• 2000 July - September: Model Discussions (PWC)

• 2000 November -2001 August: Modifications on the Draft

Bill

• 2001 September: Government sent back to the Parliament;

• 2001 Autumn Session of the Parliament; (scheduled)

Approval

• 2002 Preparation of Secondary Legislation, Transient Rules

• 2003 January 1st: In Force



Main Characteristics of the Bill Introducing

Competition (2002)

• Eligibility levels: Future Government decision

• Tariff setting: HEO prepares prices for network use

and for the Public Service; the Minister sets the

prices

• Public Service Obligation: Power plants with long

term PPAs are obliged to offer their capacity to the

Public Service Wholesaler (MVM)

Import-export

Regulated

price (-2004)

Electricity Supply Chain in the partially liberalized

Hungarian Hybrid Model (2003 - 2004)

Public

Service

Generators

Generators

Public Service

Wholesaler

Public Service

Supplier (s)

Public Service

(„captive”)

Customers

Eligible

Customers

Energy

Trader (s)

Regulated

energy

market

Regulated

price

Regulated

price

Eligible consumers entering the Hungarian

free market in 2003 - 2004

4,01%

0,80%

1,88%

0,81%

6,31%

0,04% 0,30% 0,17%

1,88%

0,72%0,05%

0,46%-3,36%

17,26%

3,20%

7,21%

8,01%

16,81%16,76%

20,12%

19,40%

17,52%17,35%17,05%17,01%

9,89%

10,70%

-5,00%

0,00%

5,00%

10,00%

15,00%

20,00%

25,00%

Febr.-

tény

Márc.-

tény

Április-

tény

May June July August Sept Oct Nov Dec Jan Febr MarchDe

ma

nd

Ra

tio

of

Eli

gib

le C

on

su

me

rs E

nte

rin

g i

nto

Fre

e M

ark

et

Demand ration of New Eligible Consumers Entering into Free Market

Total

New Consumption Site:

5 3 2 13 3 51 2 5 2 1 10 2 -35 1

1041 + 1303 + 260 + 611 + 262 + 2050 + 14 + 98 + 55 + 610 + 101 + 202 + 76

GWh/év

1041 + 1303 + 260 + 611 + 262 + 2050 + 14 + 98 + 55 + 610 + 233 - 1106 + 15 + 150

GWh/év

8



Public Service

Wholesale Trader

Import-export Public

Service

Generators Generators

Public Service

Supplier(s)

Public Service

Customers Eligible Customers

Energy

Trader(s)

Regulated

energy

market

Regulated

price

Regulated

price

*

*

*

* Dark green lines

reflect potential,

but not current,

connections

*

*

Electricity Supply Chain in the partially liberalized

Hungarian Hybrid Model (2004 - 2007)



Main Problems of the introduced Hybrid

Model (1)

• No liquid free wholesale market

• Lack of free capacity on wholesale level

• Limited number of players on wholesale level

• Structure of PPAs

• No indicative wholesale market price (hinder

new generation investment)



Main Problems of the introduced Hybrid

Model (2)

• No real conditions for balancing market

• Contractual congestion at the borders (priority)

• Too attractive support scheem for renewable

• No free choice of suppliers (single buyer model in regulated segment)

• Regulated end-user price for industry (deviated from market price)

• Free movement between regulated and free market



Proposed new market (in 2007) and the main players

• Traders supply their customers on a market price (no regulated price)

• Limited circle of users of universal service (household + small others) (regulated or market based supply price)

• Universal Service Providers obtain their energy on free market

• To establishment of Organized Market (OM) (with the objective of creating indicative market price signal ) (with state role – MAVIR affiliated company)

• To ensure liquidity of the wholesale market in event of SMP existence (selling obligation) (bilateral contracts market, OM)



Measures helping competition (liquid competitive market) – Suggested by HEO

• Renegotiation of PPAs (capacity release)

• Establishment of Organized Power Exchange (Organized Market), assisting regional trade

• Limited number of consumers under „regulated” Universal Service

• Real market for Ancillary Services

• Special rules for those, who has Significant Market Power (SMP): – Obligation for capacity release

– Limited supply obligation to Universal Service Provider(s)

– Pro-form offer as obligation at Retail Market

• Selection of Last Resort Supplier(s) (later on) on tender



Regulated

Price

Proposed Free Market Model (2007)

Capacity & Energy Flows

Generators

Energy Traders

Import-export

Organized

Market

(OM)

Universal Service

Provider(s) (USP)

Household & Small

Enterprise Customers

(Universal Service)

Eligible Customers (Excludes Households prior to 1 July 2007)

/ Only affected legal entities and licenses are shown /

Trader

(Currently possessing

significant market power;

thus subject to special

additional obligations)

Transmission

System Operator

(TSO) 1. Operation, maintenance

and development of

transmission network

2. Operation of Ancillary

Services Market

(incl. Real-Time Balancing)

Transmission

assets

MVM MAVIR

Trader

– present MVM Partner

(Subsidiary)

Present Public Service Supplier(s)

Universal Service

Provider(s)

(USP) Provision of universal

service to Household

Customers and selected

Small Enterprises

Distribution

System Operator

(DSO)

Operation, maintenance

and development of

distribution network

Trader (if requested)

Distribution

assets

: licenses

: ownership of assets

: separate legal entities

: legally separate entities from July 1, 2007

Market Operator

(MO) Operation of Organized Market

(Day Ahead Activities)

(Subsidiary)

(Option preferred by market players):

Option One: MAVIR owns transmission assets

Proposed Industry Structure (2007) - Option 1.

MVM MAVIR

Trader


significant market power;

thus subject to special




Universal Service

Provider(s)




Small Enterprises

Distribution

System Operator

(DSO)


and development of



Distribution

assets

: licenses




Transmission

System Operator

(TSO) 1. Decision-making rights in

respect to the operation,

maintenance

and development of



Services Market

(including

Real-Time Balancing)

Transmission

assets

Market Operator

(MO) Operation of Organized Market


(Subsidiary)

Trader

– present MVM Partner

(Subsidiary)

Option Two:

MVM owns transmission assets which are controlled by

MAVIR through a Transmission Control Agreement



Universal Service

Provider(s)




Small Enterprises

Distribution

System Operator

(DSO)


and development of



Distribution

assets

: licenses





MVM

Trader

MVM Holding (Newly created, with minimum three subsidiaries)

MAVIR

Subsidiary ( of MAVIR)

Market Operator (MO) Operation of Organized Market


Transmission

System Operator

(TSO) 1. Operation, maintenance

and development of



Services Market

(incl. Real-Time Balancing)

Transmission

assets

MVM

Partner

Trader


significant market

power; thus

subject to special


Option Three:

MAVIR owns transmission assets and

is a subsidiary of MVM Holding




Scheduled Steps and Considerations Influencing

the Implementation

• New market relations at the time of full market opening in 2007 (unofficial announcement)

• Governmental approval of new market relations, as precondition in the middle of 2006

• Consultation with stakeholders in more steps and finalization of HEO proposal in 2005

• Potential signal, based on the Benchmarking Report of the EU Commission (issued at end of 2005) could give new aspects

• The analysis and investigation of EU Commission regarding State Aid and potential abuse of market power could give new aspects and could determine the time-frame



Schedule of Law making for the new

step of market opening

Instead of amendments of the previous law new draft was necessary (former concept of public service changed substantially)

Schedule of legal/regulatory framework approval: 2007. June - Parliament: approval

2007. July, August – preparation of enforcement (governmental) decrees

2007. September – Government: enforcement (governmental) decrees

2007. October – enforcement (governmental) decrees partial putting into power

2008. January 1. Electricity Law and enforcement (governmental) decrees are in power



Some information on the Hungarian

Electricity Market between 2008 and 2018

• Effective wholesale and retail competition

• Cheap import against the local generation

• Regulated household end-user price (with

governmental interaction)

• Some foreign private investors sold their

shares to the Government

• Established new state owned regulated

tariff supplier (with country wide license)



Some information on the Hungarian

Electricity Market between 2008 and 2018

• Four country (Cz-Sk-Hu-Ro) Market Coupling

• Effective wholesale and retail competition

• Cheap import against the local generation

• Regulated household end-user price (with

governmental interaction)

• Some foreign private investors sold their

shares to the Government

• Established new state owned regulated tariff

supplier (with country wide license)



Regional market results

(market coupling of 4 national Day/ahead markets)

Price convergence in the 4M region



HUPX DAM – an international mixture of

already 58 market players

54



HUPX DAM – constant increase of liquidity



HUPX PhF market – primary reference price



Both retail market size and wholesale liquidity

increased since market opening

> Significant increase of non-

regulated retail market in

2008 (market model change)

> Since then retail market size

highly dependent on relative

price levels of regulated

market and open market

> Wholesale market turnover

as a sign of liquidity/market

activity more than tripled

over 10 years

> 2013 with a slght fallback,

probably due to regulation

and/or relative price stability



Market dynamics 2008-2014

By 2014 due to stable market potential and regulatory interventions, no

dynamic de-concentration anymore. CEZ, Telekom and MVMP as clear

winner of the 2nd phase of liberalization.



HHI index* shows a near un-concentrated market

since 2007, but no new entrants anymore

0

500

1000

1500

2000

2500

3000

3500

0

5

10

15

20

25

30

35

2003 2007 2008 2011 2014

Number of players HHI

*The Hirschmann - Herfindahl index is a widely accepted measure of market

concentration (sum of squares of market shares multiplied by 10000); A HHI

<1500 is an indication for a well functioning un-concentrated market.



Development of market shares of players

on the Retail Market in Hungary



Market shares of players on the Retail Market

B2B segment in Hungary in 2017

W

THANK YOU

FOR YOUR ATTENTION!

3rd Training Course: Electricity Markets


Dr. Gábor Szörényi

E-mail: [email protected]

Web: www.erranet.org



Country Case Study for Market

Restructuring: Hungary

Background information for detailed

analysis



Governmental Privatisation strategy and its

implementation (1)

The socialist-liberal coalition came to power in May 1994 and announced

immediate objective: selling the ‘hard core’ of the industry (economy)

Work started on three fronts;

•• a new privatisation law to obtain political legitimisation

•• the two privatisation agencies merged into a single corporation;

Hungarian Privatisation and State Holding Company (ÁPV Rt.).

•• formulation of the most appropriate privatisation strategies for the ‘hard

core’ companies

In December 1994 the government approved six resolutions, in which

sector-specific techniques and methods were identified for more than 30

large companies in the; – electricity industry (16 companies),

– gas distribution industry (5 companies),

– oil refining and distribution industry (1 company),

– telecommunications (1 company),

– broadcasting (1 company) and

– banking (ca. 10 companies)




implementation (2)

The privatisation strategy of the Hungarian Republic between 1994-1998 is

based on four equal priorities;

The privatisation must serve the long-term economic policy, the

foundation of the economic growth, the protection and the

establishment of work places.

The privatisation must be established under market rules, with

regard to the demand and supply, but within this the acceleration of

ownership change is an objective.

The privatisation must serve the efficiency of the economy,

including the supply of appropriate capital.

The scope of the state’s assets to be privatised must be expanded.

The resolution on the privatisation of electric energy is worded as follows: The

main objective is the sale of shares and the privatisation with the involvement

of capital, concurrently considering the viewpoints of the Central Budget’s

revenues and the demand of the electric industry to increase capital with the

involvement of strategic investors in the first phase, later with floating these on

the Stock Exchange and with the participation of financial investors.




implementation (3)

(Some hesitation in the implementation process in 1994-

95)

The new law did not come into effect until 16 June 1995

The merger did not take place until May 1995

Challenging the company-specific privatisation strategies, rather than

implementing them

Political forces, the Trade Unions concerns were raised;

•• national prestige,

•• job safety,

•• the protection of the environment

Local authorities (municipalities) look at privatisation with some

ambivalence

The public turned against privatisation as well (common radical

changes in the same time): the radical elimination of price subsidies




implementation (4)

The real start of the privatisation was launched, when it was obvious for

the Government and the coalition that the need of the State Budget’s

revenue is of an urgent and extensive nature.

The most important elements of the privatisation strategy regarding

electricity were;

the introduction of market and economic relations into the energy industry,

the establishment of conditions for attracting capital necessary for new

capacities,

the implementation of western know-how, technology and management

studies,

the decrease of the state deficit by revenues from privatisation.

One of the most important element of the strategy was to aim at

investors with large capital (strategic investors) because of the

necessary technology transfer.

The most important element of implementation is the political will

accompanying the process along. The foreign investors felt this and

they had trust.



Fulfilment of expectations of the Hungarian

Government

The expectations of the government, namely that the revenue from the

privatisation, the involvement of private investors into developments of the

energy industry, the establishment of market economy have been

accomplished.

Often raised question; if a two-phased privatisation would have realised more

revenue. > A counter-argument is that the protraction of the process would

have only intensified the chance for adversaries to stop the privatisation

process with different arguments.

It is frequently declared by the Opposition that due to necessary investments

only the power plants should have been privatised and the supply companies

possessing exclusive rights should not have been sold until the introduction

of free access or granted only for concession.

The Government’s expectation regarding MVM Rt. and one coal-fired power

plant were not fulfilled; (uncertainties regarding the environment protection,

the closing and the uncertain political and financial risks of the nuclear power

plant and the coal-fired power plants with mines resulted in lack of interest

and low bid. Electricity industry privatisation income: ~ 1,5 Billion USD



Motives of the Investors

(why to invest in the Hungarian power sector) (1)

The motives of the financial investor (the only one as of today in the

electricity sector; a restructuring fund) were;

•• low risk investment (relative low profit expectation),

•• start to invest in the energy industry in the region,

•• create a stable position (energy experts at the acquired company) for further

investment in the region,

•• good basis for future life extension, new capacity at the site of the acquired

power plant

The strategic investors (energy companies from Europe) in the distribution,

supply field had motivation, as;

•• captured customers today (through the today’s exclusive supply-right) and

potential new customers in the future common energy market in Europe,

•• potential benefits of the synergy effect; owning gas and electricity

distribution/supply companies in the same region (potential cost cutting),

•• potential benefits of the future by-pass of the grid company; owning regional

distribution/supply company and power plant(s) with competitive electricity

output situated in the region,

•• potential benefits of the synergy effect; owning more regional

distribution/supply companies (potential rationalisation, cost cutting)



Motives of the Investors

(why to invest in the Hungarian power sector) (2)

Some of the strategic investors preferred majority shares in one hand. Some of

them (others) wanted to own majority shares together with another strategic

investor as a partner or as a member of a consortium.

The investors interested in the power generation – without any enforcement by

the government – were very much interested in the potential new capacities.

Most of the Anglo-Saxon (companies from Britain and from the USA) Investors

were more sensitive on the profit & return on project basis. (They were happy

to invest in new regions, but only if every single acquisition and project is

profitable in itself.)

Some of the utilities in Europe and overseas with strong financial situation and

with over-capacity would like to use their practice, their managerial skills

experienced in the energy, power business and their available financial sources

as well for foreign investment in the same type of energy industry – this is the

basic motivation of the big strategic investors.

The IPPs (Independent Power Producers) (mainly in the USA) have already very

good skills to build, operate, maintain power plants in a very efficient way or

acquire old plants with low efficiency and then upgrade them, increase their

efficiency, extend their life.



Points, factors considered by the Investors (1)

The most important issues, factors what they analysed during the

preparatory phase and bidding procedure were points as follows;

- Size of the project and the market, and the size of the investment;

- Geographical and geopolitical location of the project;

- Cultural factors (e.g. negotiating and business habits, traditions);

- Political stability;

- General economic, energy, tax and privatisation policy;

- The infrastructure;

- Role of the ownership structure (concession, leasing, management

contracts etc.);

- Proportion of ownership;

- Participation in decision-making, gold share of Government;

- Clearness of evaluation process;

- Technical condition of the company to be privatised and that of the

energy sector (both equipment and staff);



Points, factors considered by the Investors (2)

- Legal environment (in the energy sector and in general);

- Responsibility and autonomy of regulating organisations;

- Present regulations, licences and the opportunity for new

regulations (e.g. introduction of competitive market);

- Regulations regarding the protection of environment;

- Price policy, price revision;

- Government duties regarding price and other obligations, risk in

regulation;

- Employment and trade union factors;

- Foreign exchange questions (e.g. conversion restrictions, foreign

exchange risk);

- Preferences towards producers, supply and service companies;

- Relations with other participants of the energy industry (e.g. gas,

heat and other areas within the energy sector);

– Former relations, co-operation with the company to be privatised.



Fulfilment of main expectation of the

Investors

The investors realised that in a transparent, fair privatisation

process they could acquire those companies, in which they

offered a competitive price for the shares.

At the time of the proposed price setting at 1. January 1997

all the investors did try to press politicians to determine

price levels at a relative high (appropriate) level.

Due to significant increase of efficiency and cost reduction

in the spring of 1998 dividends were paid after the profit of

1997.



Aspects of the Management’s

of the Privatised Power Companies

The government secured the position of the company

management’s for the first years after the privatisation,

included in the privatisation tender. These agreements

were kept by the investors and in 1998 almost all

contracts with the former management were extended in

the companies.

After 3-4 years the investor restructured the companies

and changed some of the managers.

Financial interest (shares, high salary)



Aspects of the Trade Union’s

of the Privatised Power Companies (1)

The trade unions’ alliance of the electric energy industry and

the mines are well organised alliances with a large number of

members and with union leaders well-informed on the

international scene. These trade unions, in 1994 and 1995,

assessed the expected effects of the privatisation with regard

to their membership and alliance. - after the professional (strategic) investors of different nationalities competing

with each other became owners the alliance of the trade unions of the

individual companies will probably weaken,

- the private owners will press for reduction in prime costs, decrease in number

of employees, outsourcing, which might result in dismissal of some trade

union members,

the private owners are considered to be stronger negotiators than the state

when it comes to the salary level of employees and the social benefits.

Threats to go on strike





The government and the investors aimed to lesson the

political tension and secure the peaceful work during the

privatisation and after, therefore the government was willing to

conclude an agreement with the trade unions’ alliance

containing the following fields: - the obligation to publish information,

- forums for interest reconciliation,

- collective general contract,

- employment,

- earnings and wages,

- social benefits,

- education,

- acquisition of property by employers,

- operational conditions of trade unions,

- fund for re-employment, re-training.





Those contained in the agreements between the trade unions and the

Government, signed by the minister of privatisation, were included in the

Purchase and Sales Agreement of shares, therefore these are binding for

the new investors.

The trade unions evaluated the privatisation as follows:

- the management rights submitted to investors along with the minority

shares package was a false step,

- the fund for re-employment (which is funded through the revenues from

privatisation, 5%, and which is to support the re-training of trade union

members without jobs and which is to further the work places) is tardy,

– during the “soft” decrease in number of employees after the privatisation

(early retirement, voluntary leaves supported by the re-start programs,

outsourcing) the number of employees in the industry (power plants,

mines, MVM, Supply Companies) 48.-49.000 was reduced by 9.000 by the

spring of 1998.



Aspects of the Customers

of the Privatised Power Companies

Different consumer groups made different expectations as to

the privatisation.

Consumers think the efficiency would grow, environment-

friendly technologies would be introduced and as other

already privatised services the quality of supply and service

level would improve.

Intending to increase efficiency made the consumers expect

that the real prices (price level without inflation) would not

increase but decrease for a long term.

Household & Small


(Universal Service)

LT PPA 1 LT PPA 2

MVM (as a SMP Trader

on the wholesale market)*

Universal Service

Providers (USP)

LT PPA x

Monthly auction

Yearly auction

LT PPA Generators

Organized Market (OM) – Day Ahead

* Detailed rules of the additional obligations imposed on MVM

(supply obligation, mandatory auctions or other, different

regulations) shall be determined by the HEO in the course

of its market surveillance activity (see Chapter V.)

The portion specified by the HEO of the C&E

in excess of the quantity required

to fulfill the obligation to supply USPs

shall be sold, mandatorily,

in the following ways (e.g.):

/Prior to the renegotiation of LT PPAs or in case

the renegotiations do not lead to a substantial decrease in the

significant market power (SMP) of MVM on the wholesale market/

The Role of MVM with respect to LT PPAs I. (Proposal in 2007)



MVM (as a SMP Trader on the wholesale market *

and a Clearing House)

Universal Service

Providers (USP)

Bilateral transactions

LT PPA Generators **

The present physical C&E delivery obligations

(LT PPAs) are partially transformed into payment obligations

Modified

LT PPA x

Modified

LT PPA 2

Modified

LT PPA 1

Household & Small


(Universal Service)


Free sale of C&E:

Mo

ney f

low

* Detailed rules of the obligation to supply USPs (or of other additional

obligation) that is imposed on MVM as a SMP license holder shall be

determined by the HEO in the course of its market surveillance activity

(see Chapter V.)

** In case as a result of the renegotiations another market player also

qualifies as a SMP licensee, HEO shall have the power to impose any

reasonable special obligation (e.g. capacity auction) thereon as well.

/In case the LT PPAs are partially renegotiated or transformed

so that the amount of contracted capacity is reduced but,

at the same time, MVM still maintains its significant market power/

The Role of MVM with respect to LT PPAs II. (Proposal in 2007)



Page 81

Budapest, Hungary, 22 - 23 July, 2003

MVM***

Clearing House

LT PPA Generators **

Free purchase

(to replace previous obligatory supply by MVM)

Transformed

LT PPA 1

Transformed

LT PPA 2

Transformed

LT PPA x

Universal Service

Providers (USP)

Household & Small


(Universal Service)

The present physical C&E delivery obligations

(LT PPAs) are transformed into payment obligations

* The termination of LT PPAs would yield a similar system of market relations.

** In case as a result of the renegotiations another market player (e.g. the Paks

Nuclear Plant – Paksi Atomerőmű Rt.) also qualifies as a SMP licensee, HEO

shall have the power to impose any reasonable special obligation (e.g.

capacity auction) thereon as well.

*** As regards its other contracts, MVM , naturally, shall continue to function as a

Trader licensee.

Free sale of C&E:

Mo

ney f

low

Bilateral transactions


/In case the LT PPAs are renegotiated and transformed into payment obligations*

so that the contracted capacities are released and MVM is exempted

from the special obligations due to the termination of its SMP status/

The Role of MVM with respect to LT PPAs III. (Proposal in 2007)

Documents

Country Case Study for Market Restructuring: Hungary · Country Case Study for Market Restructuring: Hungary Prepared by dr. Gábor Szörényi ERRA . 2 3rd Training Course: Electricity