Decoupling from Russian energy would triple utility bills? Even if the math adds up, something else doesn't seem right

Over the past year, the future of the utility bills reduction, known as 'utility protection' or 'rezsivédelem' by the Hungarian government and introduced in 2013, has become a central issue. Both the EU decoupling regulation, which was proposed in April and submitted in June, and US sanctions are aimed at reducing Russia's share of the oil and natural gas market. Hungary is in a vulnerable position as it still relies heavily on imports of Russian fossil fuels for its domestic supply.

Right from the outset, it is worth clarifying a common misconception: although oil sanctions are often mentioned in connection with utility bills, fuel is not actually covered by utility tariff protection and is therefore irrelevant in this context.

For this reason, over the past six months, several calculations have been carried out to determine how much complete separation would increase residential utility bills. The potential increase has been estimated to be between two and four times the current amount. But how is this amount calculated? To date, we have not received a clear answer to this question.

However, the Századvég Institute has previously published an analysis estimating a 3.5-fold price increase if Russian energy sources were to be abandoned, which is very close to government estimates. New to this analysis is the inclusion of a methodological description, which allows us to examine how this estimate is arrived at.

In this analysis, we only examine the impact of gas prices, since EU sanctions do not apply to electricity imports (there are essentially none). While the merit order system means that natural gas prices also have a significant indirect effect on electricity prices, analysing this would exceed the scope of this article.

The numbers add up

Let's start with the basics: what does the current utility price cap framework look like? Consumers using less than 20 cubic metres per hour (i.e. the majority of the population) receive natural gas at a discounted price of 99.9 forints per cubic metre up to 1,729 cubic metres. Above that, the price is the 'market price', which, according to MVM's official announcement, is 767.2 forints. However, this price includes VAT at 27% and the system usage fee.

As the energy portion of residential bills accounts for only around 40%, the price of a cubic metre of gas in the utility price cap scheme is HUF 40.

Interestingly, the price of HUF 767 (€203/MWh) is very close to the average cost of the special natural gas reserve created in response to the energy crisis of 2022, which was €255/MWh.

On the Dutch TTF exchange, which sets the benchmark for the European gas market, the price of natural gas is currently €31.20 per megawatt hour (MWh) for contracts due to be fulfilled next month. To compare this with the natural gas prices offered under the utility cost protection scheme, we need to convert to a single unit of measurement, since natural gas is usually quoted in several different ways: MWh, GJ, cubic metres and MMBtu.

Without going into detail about the calculation (see below),

the current wholesale market price of one cubic metre of gas is around HUF 118.

According to MVM's announcement, one cubic metre of gas contains 34.87 megajoules (MJ) of energy. Since 1 MWh corresponds to 3,600 MJ, one cubic metre is roughly equivalent to 0.009685 MWh. Multiplying this figure by the current stock market price of €31.2/MWh gives a price of approximately 0.3 euros per cubic metre of gas. Converting this to an average annual exchange rate of HUF 390 gives us the above figure.

As a technical clarification, it is worth noting that TTF prices are based on the calorific value of natural gas, whereas MVM uses the heating value. The latter is approximately 10% higher than the former, but this does not significantly affect the calculations.

This means that the European market price of gas is

• almost three times higher than the regulated energy price, which is the most comparable.
• It is only 18% higher than the discounted gross price of HUF 100.
• However, it is a fraction of the 'competitive market' price of HUF 767 applied in the utility price cap scheme and is actually six and a half times higher.

Another important factor is demand elasticity, which measures how much demand changes when prices rise. Demand is inelastic if there is no viable substitute or if the consumer is in a situation of necessity. For example, in a gas-heated apartment in winter, the heating must be turned on even if gas prices rise because there is simply no other solution.

However, if there are alternatives, such as heat pumps, demand responds much more flexibly. In such cases, consumers simply choose the cheaper option, such as switching to electric heating, which results in a much greater reduction in consumption.

The referenced study specifies a demand elasticity of -0.2 (0.2), meaning that

European gas demand is extremely inelastic and price increases have little effect on consumption.

For example, a 1% price increase would only reduce consumption by 0.2%. In other words, consumers will have no choice but to buy more expensive gas for some time to come.

Finally, the aforementioned analysis cites Eurostat data to estimate that around 19% of the EU's gas imports come from Russia. According to annual data for 2024, this is indeed the case, meaning that this amount would theoretically be lost from European supplies. As demand is highly inelastic, the new equilibrium resulting from the shortfall can only be achieved through a significant rise in prices.

According to the demand elasticity formula, the TTF price would double to around HUF 236 per cubic metre. Adding the proportional VAT and fixed system usage fee to this base price

results in a fee that is roughly three times higher.

But is this really the case, and can we expect higher utility bills?

Not entirely, because there are many logical inconsistencies in it

Let's see why:

• One of the most important differences is that residential prices in the utility bill reduction scheme are regulated by the Hungarian government, whereas the natural gas price on the TTF is entirely market-based and follows changes in supply and demand in real time. Therefore, the two are not really comparable; it's a bit like comparing apples and oranges – there are similarities, but they are not the same.
• It is also worth noting that residential tariffs would not rise directly as a result of decoupling from Russian energy. Rather, they would rise primarily because the state's financial burden of subsidising utility services would increase dramatically. The 2025 budget allocates HUF 792.5 billion for utility cost subsidies. However, if natural gas prices were to triple, pushing up electricity prices in the process, demand for subsidies would rise to such a level that the budget would be unable to cover it within normal limits.

• The structure of residential gas bills further complicates matters. Around 40% of the bill covers the cost of the natural gas itself, i.e. the energy component. The remaining 60% or so is made up of VAT and the system usage fee, both of which are independent of global market price movements. For this reason, even if the TTF were to triple, the total residential bill would not increase threefold, but by no more than the energy component. Therefore, including VAT, the end consumer price would increase by no more than twofold.

• Assuming that Russian gas will disappear overnight does not seem realistic, either. Not only is this not technically feasible, but the EU's proposed transition schedule is also gradual for this very reason. First, short-term, small-volume spot transactions will be banned, followed by large-volume, long-term contracts. This phasing is intended to ensure that security of supply is not compromised and that the market is able to find alternative sources.

• However, all signs point to the expansion of US and Qatari LNG exports, alongside Norwegian and North African pipeline deliveries, providing sufficient leeway for the EU. There is no cause for panic on the gas market due to decoupling. This is also supported by ICE futures prices, which indicate a stable price range of around €28–30/MWh over the next two to three years, with no indication of the aforementioned threefold price increase.

Overall, it can be said that, while decoupling from Russian energy may indeed increase Hungary's natural gas procurement costs,

a significant rise in household utility bills does not appear justified at this time.

In a previous analysis, we addressed the question of how much more expensive natural gas could become. Our findings suggest that the wholesale gas market, infrastructure and available alternative sources are likely to result in only moderate and manageable price increases.

Cover photo: cyrillegibot@hotmailcom via Getty Images