A way for Hungary to curb its dependence on Russian energy

Since the last IEA review of Hungary in 2017, the country has increased its climate ambition by legislating a carbon neutrality goal for 2050 and adopted a long-term vision informed by the National Clean Development Strategy, which offers a scenario approach for energy policy decision-making. Several other IEA member countries are looking at it to inform their own efforts towards carbon neutrality, the IEA said in its latest report.

The IEA underlined that over recent years, Hungary has achieved "remarkable growth "in solar photovoltaic (PV), the extension of the lifetime of its existing nuclear reactors, and further diversified its supply routes, expanding its interconnectivity (gas and electricity).

To meet its ambitious target of 90% clean electricity by 2030, including through an early phase-out of coal use in power generation by 2025, Hungary will need to further increase its low-carbon sources of generation, the IEA said. (Until very recently, the cabinet was preferring 2025 as the possible deadline for phasing out coal use in power generation, and although the primary goal has not been amended, the closure of the Mátra Power Plant is now is expected to be completed by the end of 2029. 

This new review by the IEA presents a range of recommendations to the government of Hungary to help address its key energy policy challenges, notably

• the low levels of energy efficiency progress (buildings, transport),
• high vulnerability and reliance on Russia for gas, oil and nuclear fuel,
• regulated energy prices which may act as a barrier to clean energy investments, as well as
• the need for increased resources to deliver the transition.

The IEA does not evaluate the state of energy emergency declared by the government on 13 July this year, including the partial abandonment of the overheads reduction scheme (under which households pay market prices on above-average consumption), the increase of domestic gas and coal production, the fact that the cabinet secured additional gas imports and is increasing the output of the lignite-fired Mátra Power Plant, or a "potential ban" on exports of energy carriers and firewood.

Energy efficiency to come first

Hungary has seen rising energy demand reaching 753 PJ in 2020.

Efficiency efforts have not been able to decouple energy demand from economic growth, notably in transport and industry.

For this reason, Hungary's energy efficiency needs to increase strongly.

Although in its National Energy and Climate Plan (NECP) of 2020, the Hungarian government acknowledges the importance of energy efficiency to reach climate targets and ensure energy security, the energy efficiency first principle is not specifically recognised, neither in the NECP nor in the National Energy Strategy (NES), which has an outlook for 2040.

Experiences in other IEA countries show that energy efficiency not only brings substantial resource savings and security benefits, but also contributes to other targets such as improving health indicators and overall quality of life, creating employment opportunities, and supporting innovation.

The government has divided responsibilities for energy efficiency policy design, funding, implementation, and monitoring and evaluation among different government institutions and other responsible entities. Across ministries, governmental institutions and nongovernmental organisations, as implementing authorities, the key challenge is often the lack of skilled professionals. To bridge this gap, the government should support the administrative realignment of energy efficiency responsibilities through, for example,

the creation of a dedicated energy efficiency agency that would bundle the available technical skills and financial measures and facilitate access to energy efficiency programmes.

Such an agency could work with local authorities to support them in the technically complex implementation of multi-year deep renovation projects.

Household retail prices for electricity and natural gas have long been capped in Hungary, with the objective to keep prices for households affordable and to avoid exposing households to price volatility. The IEA objected, however, that such regulated energy prices are available to all household consumers and small businesses, not only vulnerable ones, and as such hamper decarbonisation efforts, consumer choice and retail competition. The electricity and gas price regulations are planned to be reviewed, taking into account the tools published in the European Commission’s Communication of 23 March 2022.

The regulatory framework needs to be revised to reach the highest possible retail market liberalisation in gas and electricity, including the elimination of administratively determined end-user prices. Protection measures should focus on vulnerable customers and less well-off households as part of social policy rather than energy policy.

In July 2022, the government decided to deregulate gas and electricity retail prices for households with consumption above average levels and increase them towards market prices.

Strong solar PV laudable, geothermal and wind power need more focus

The IEA noted that renewable energy has seen remarkable growth thanks to the introduction of the new renewable energy tenders (METÁR), with strong performance of solar photovoltaic (PV). The share of renewable energy sources in gross final energy consumption has increased rapidly since 2017, but going forward, efforts are needed to boost the share of renewables in gross final consumption. In light of higher EU-wide ambitions, Hungary is also considering raising its 030 target for renewables in final consumption to a higher level of 23% or even 25%, banking on strong solar PV.

Hungary still has untapped potential in developing geothermal and wind power,

the IEA said.

It added that a faster progress in renewable energy deployment may allow Hungary to close its last coal-fired power plant ahead of time by 2025. It would also mitigate possible delays at the new NPP project Paks II and support an alternative strategy for Hungary in the coming years.

The IEA also says that thanks to the recently completed lifetime extension of the existing units at the Paks Nuclear Power Plant beyond the initial 30 years for another 20 years (between 2032 and 2037), nuclear power can maintain its role in the mix. "The planned construction of two additional units at the Paks site based on Russian investment may face significant delays," it added, without labelling the project in any way.

However, as the IEA takes the view that nuclear energy cannot be ignored as a low-carbon electricity generating technology to achieve climate goals, the overall assessment of domestic efforts in this area is mixed, at least from the perspective of the organisation. The organisation also believes that further extension of the lifetime of existing reactors should be considered, which is also the intention of the government.

Electricity demand in Hungary has increased and will likely grow further given the government’s plans for electrification of the transportation system and the wider economy. While Hungary’s electricity generation capacity will likely remain sufficient in the short term, the installation of a significant quantity of additional generation capacity will be required in the longer term given both increased electricity demand and the planned phase-out of existing nuclear and coal-fired capacity, the IEA warns.

Preparing the electricity networks for the challenges posed by decentralised generation and variable capacity is the future challenge, requiring significant investment in the grid, balancing and storage capacities. The government has plans to increase energy storage capacity to at least 1 000 MW by 2026 and to add 100 MW capacity of demand-side response by 2030. However, Hungary’s existing legislative framework for regulating energy storage is inadequate to facilitate significant market-based commercial storage investments, the IEA says.

It also mentions as a positive development that Hungary has strongly invested in regional interconnections and will soon be linked to Slovenia and reinforce connections with the Slovak Republic, supporting regional power trade. Hungary’s electricity interconnectivity reached 55% in 2020, close to the targeted increase of cross-border capacity of 60% of gross installed capacity and substantially above the EU target of 15% by 2030.

Energy import dependency: alternatives need to examined pronto

Hungary’s dependency on energy imports has increased over the last decade as demand for fossil fuels has increased, the IEA says.

Despite greater diversification of oil supply, the country remains heavily dependent on Russian oil and gas. With little domestic production,

Hungary’s import dependency stood at 87% in 2020. Russia accounted for 64% of crude oil imports and 95% of gas imports.

However, with current government policies, oil will remain a significant part of Hungary’s energy mix through 2030, and well beyond. The Hungarian government does not have a target to reduce oil consumption, but only to limit consumption growth. This growth is unlikely to be met by increased domestic production, meaning that Hungary’s already substantial reliance on oil imports will likely grow.

Hungary is heavily dependent on the southern branch of the Druzhba (Friendship) pipeline for its crude oil imports. The government cited this reliance as a reason for requesting an exemption from the EU embargo on Russian oil imports, as decided by the European Council on 30-31 May 2022 and to be implemented by the end of 2022. Therefore, the EU embargo includes a temporary exemption for crude oil imports by pipeline, allowing Hungary to import crude oil via the Druzhba pipeline.

The 8th package of sanctions against Russia also exempts Hungary from the obligation to apply a price cap on both pipeline and seaborne Russian oil.

In the light of Russia’s invasion of Ukraine and uncertainties of future transit of Russian crude to Europe,

the Hungarian government needs to urgently review options to reduce this dependency of pipeline imports from Russia and strengthen the diversification of its oil imports, together with its regional neighbours,

the IEA said.

Natural gas is the most significant source in total energy supply (TES), accounting for 34% in 2020 and almost 60% of residential heating. Natural gas consumption is expected to increase towards 2030, when the last Mátra lignite-fired power plant will be closed and replaced with, among other sources, a 500 MW gas-fired plant.

Hungary has made significant progress since the last IEA in-depth review in diversifying its supply routes and now has six gas interconnection points. Another major development to strengthen gas security is the import of liquefied natural gas (LNG) from the Krk terminal in Croatia since the beginning of 2021. (Hungary’s N-1 indicator, an industry metric used to gauge the security of natural gas supply, has been above 100% for several years and reached 157% in 2021.)

However, the IEA pointed out that most of the new interconnections supply natural gas from Russia, so this is mainly a diversification of supply routes, not of natural gas supply sources. Hungary also holds strategic gas reserves at an underground storage facility owned by the Hungarian oil and gas stockholding agency.

Hungary’s e National Clean Development Strategy (NCDS) expects technologies, such as carbon capture, utilisation and storage (CCUS) and hydrogen, to become available after 2030 but before 2040. Hungary has a modest ambition to install 240 megawatts (MW) of electrolyser capacity by 2030, whereas EU countries on average target capacity at gigawatt (GW) scale.

Cover photo: Bill Ross vi Getty Images