Hungary: EU accession - energy issues

What changes have already been made to Hungarian energy law?

Hungarian legislation complying with EU requirements is incomplete. The new Act regulating the electricity sector (the "Electricity Act") has already been published, while only drafts of the proposed new Act on Gas Supply ("Draft Gas Act") have been publicly circulated.

The most important provisions of the Electricity Act are as follows:

• as a result of the gradual market liberalisation, certain electricity consumers will qualify as "eligible consumers" whom may be entitled to choose their electricity suppliers and negotiate market based electricity prices
• the supply of electricity may be performed upon market based agreements with eligible consumers or public supply agreements
• establishment of a transmission system operator ("TSO")
• third party access to electricity grids on a non-discriminatory basis of administrative access prices
• electricity trading activities, including the generation, transmission and distribution of electricity and operation of the electricity market are subject to licences issued by the competent regulatory authority, the Hungarian Energy Office
• unbundling of the activities and the accounting of all energy related undertakings
• cross-border electricity trade will no longer remain the monopoly of the national grid company
• more emphasis on environmental considerations through the introduction of a "green certificate" system in order to ensure market based subsidies to electricity generated by renewable sources
• re-negotiation of long term power purchase agreements, compensation for stranded costs from the sources of a special fund to be established for this purpose.

The most important provisions of the Draft Gas Act are as follows:

• gradual market liberalisation as of 1 January 2004 when approximately 40% of consumers will enter the free market and become "eligible consumer"
• co-existence between the liberalised market and the regulated public utility service
• third party access to gas pipelines and storages with the following principles: (i) access to such networks must be granted without discrimination; and (ii) the gas purchased and stored for the purpose of the supply of domestic, communal and public utility consumers must have preference
• gas traders and eligible consumers are entitled to import gas
• licensing, preparatory activities with respect to price setting, consumer protection, system and market supervision, data collection and sanctioning will fall within the competence of the Hungarian Energy Office
• re-negotiation or, as the case may be, unilateral termination of long term (10-15 years) fuel supply agreements between "eligible consumers" and regional gas distributors; and
• supply, distribution, storage and trade between the public utility wholesale trader and the public utility supplier and the gas supplied to public utility consumers remain subject to regulated prices.

What changes to Hungarian energy law will come into effect on accession?

From the date of the EU Accession, emergency oil reserves equivalent to 90 days average consumption must be stored in Hungary.

What can you do to ensure you comply with the new law and prepare for accession?

The most current ongoing matter in the electricity industry is the cost review and the re-negotiation of long-term power purchase agreements.

In the gas industry, the legal framework of the gas market (primarily the enactment of the Gas Act) must be established. The re-negotiation (or the unilateral termination of the long term gas supply agreements) may also constitute a crucial problem in the gas sector. In addition, several pieces of secondary legislation - including Governmental and ministerial decrees, commercial, operational and business codes - must be issued in order to ensure proper implementation of the Electricity and the Gas Acts.

Because of social and political reasons, regulated prices of gas supplied to household consumers have not properly followed the changes of wholesale prices of imported gas. The proper adjustment of such end user prices to actual market conditions constitute one of the most important challenges to the Hungarian gas industry.