Ferenc Geist and Istvan Havas, Ernst and Young
December 26, 2011 | 0 Comments
Developers, manufacturers, investors and other renewable energy industry stakeholders need to know where the next big market is going to be so that they can adjust their business decisions accordingly.
Since 2003, global consultancy Ernst & Young has released its Country Attractiveness Indices, which gives a numerical ranking to 30 global renewable energy markets by scoring renewable energy investment strategies and resource availability. The indices are updated on a quarterly basis and the most recent report can be found here.
Here is the firm’s assessment of Hungary.
As an EU Member State, Hungary is subject to a binding target of 13% of energy from RES by 2020. However, in its Renewable Energy Action Plan (REAP), approved in December 2010, the Hungarian Government set an even more ambitious target of 14.65%. The 2010 target of 3.6% was actually achieved in 2007, mainly due to biomass, which accounts for around 80% of the country's renewable energy. Hungary is still highly dependent on energy imports from Russia; however, with natural gas and nuclear representing >90% of the energy mix. In seeking to achieve its EU target, Hungary has evolved its FIT scheme, known as “KAT” and first introduced in 2003, to incentivize ongoing RES development through the purchase of electricity at higher than market rates.
The volume of electricity for which the KAT rate is paid, as well as the duration, is limited by the Hungarian Energy Office (HEO) based on the project payback period. There has been some political opposition to the current KAT system amid claims that electricity prices are “unjustifiably higher” as a result of cross-subsidization of local heating prices. Around 70% of KAT funding goes to combined heat and power (CHP) plants and the majority of the remaining 30% goes to biomass and wind plants. The Government is working on the reform of the KAT to ease the burden on electricity prices and better focus financial support on “real” renewable electricity.
Indeed, a draft plan published on the Government’s website indicates Hungary is considering replacing the current mandatory purchase system with premium subsidies under a FIT mechanism. The new scheme, known as Metar, which is scheduled for approval in early November, sets upper and lower capacity limits for eligible generators, guarantees 15-year subsidies, and awards premiums for heat and power offtake or projects in under developed regions. The Hungarian energy sector will be eager to find out whether the new scheme will provide the boost required to meet its 2020 target.
Grid connection and permitting
Despite these incentives, insufficient grid capacity, high connection costs and a very difficult permitting process represent significant barriers. Grid connection takes an average of 45 months to secure and an estimated 10.6% of total project costs are spent on obtaining it. Installation capacities for wind power are currently capped at 330 MW (end of 2010) to reflect grid availability, severely hampering wind power development.
Further, in Hungary, 40 different authorities are involved in the permission process and a vast majority of all applications are denied at present. The EU average is five authorities and 30% rejection. Both financial investment and bureaucratic overhaul will be required if Hungary’s RES market is to meet its potential.
The potential for wind power development is relatively low in Hungary as most wind speeds do not exceed 5m/s. However, wind conditions in the northwest of the country are sufficient and it is hoped the attractive FIT will support ongoing developments.
The REAP sets a relatively modest target of 750 MW by 2020, which is half of the 1.2GW EWEA believes can be easily achieved. MAKE is also more optimistic and forecasts additional capacity of 80-100 MW per annum over the next five years. However, installed capacity totaled only 295 MW at the end of last year and, in mid 2010, the HEO canceled a tender for 410 MW of wind capacity, which had already drawn preliminary bids totaling 1.1 GW. This has created some uncertainty on the Government’s commitment to wind energy and future growth.
Hungary boasts a relatively strong solar resource compared with other European countries, with an average annual irradiation of 1,300kWh/m2. It is estimated the theoretical potential could amount to several tens of thousands of MW. Current installed capacity was only 6 MW at the end of 2010, although a number of larger projects (50-80MW each) are currently in planning. The main reason behind the slow market expansion is likely to be the low FIT level, roughly equal to the average electricity price and therefore offers little incentive.
Hungary possesses excellent agro-ecological conditions for generating energy from biomass, and to date it has been the main driver of the country s RES performance main driver of the country’s RES performance. Based on the REAP, the theoretical potential of bioenergy could exceed as much as 20% of the country’s estimated energy demand for 2020. Installed capacity at the end of 2010 totaled 378 MW and it is estimated that only 10% of the resource is currently being utilized, although the REAP sets a relatively modest 2020 target of 600 MW. There are at least seven new projects in the pipeline, ranging between 20 MW and 210 MW in size.
Hungary boasts one of the largest reserves of geothermal energy in Eastern Europe; however, the low-to-medium temperature makes it far more suitable for heating than electricity generation. Hungary is also one of the less mountainous countries in central Europe and therefore has only limited hydroelectric potential.