We'll spend a record amount on Hungarian power grid upgrade, but we need fair tariffs

Portfolio
"Hungarian regulations allow the lowest return on investment in Europe" in the area of electricity distribution, while at the same time it requires network upgrades on a scale not seen for decades, so instead of the lowest one we want a fair tariff that is comparable at European level, E.ON Hungária Group's Chairman-CEO stressed in an exclusive interview with Portfolio. Guntram Würzberg pointed out that in the four-year price regulation cycle starting in 2025, they expect system usage charges to be raised high enough to bring tariffs to a level allowing a comparison with tariffs elsewhere in the EU, which would also also be a major issue for Hungary's utility bills reduction scheme. He made it clear that "if the regulations allow only a limited increase of the system usage fee in the residential segment, then the competitive market segment has to pay more." However, he also confirmed that they are ready to invest €1 billion from their own resources in the development of the Hungarian electricity grid, and will invest a record €390 million this year, among other things to continue to support the expansion of solar power.
Guntram Wurzberg cimlap 2024

The energy crisis is not yet over, and "prices will not drop to the pre-war level", you said in our interview last May, but now the gas price is hovering very close to the pre-war level on the European TTF. Do you still maintain your statement of May last year?

Guntram Würzberg: We were cautious last year and we are cautious now. Although gas and electricity prices are still higher than they were before the crisis, the situation has fortunately turned out better than expected, with wholesale prices falling sharply. The energy crisis has eased considerably. Not only are wholesale prices decreasing, bur the supply of energy is stable.

However, the situation is still extremely uncertain, and we cannot be sure at all that markets will remain as calm as they are now. We can’t sit back.

Guntram Wurzberg Interview1

You mentioned that consumers can be happy about the significantly dropping wholesale prices, but there has also been a considerable decrease in consumption, especially in the case of gas, all over Europe. How do you see it: the decrease in gas consumption is only a temporary phenomenon and it will rise again, partly due to the integration of renewable energies into the network, or are we witnessing a permanent decrease in gas consumption?

Europe aims to become the first of the continents to become completely climate neutral by 2050. The essence of the energy transition is that fossil energy carriers would be replaced by cleanly produced electricity. It is easy to see that in the long term this leads to a decrease in gas consumption and a significant increase in electricity consumption.

The two main reasons for the recent decrease in consumption were the energy crisis caused by the war and the resulting economic difficulties. We expect a stable curve in gas consumption and an increase in electricity this year. At the same time, the future will be determined by the energy transition in the decades ahead. We should also see that every country is in a different situation.

In Hungary, for example, gas consumption for heating purposes may remain with us for a longer time, while in Germany there is already a lot of political pressure to end it.

How do you see the situation in the European gas market in terms of security of supply and the issue of the separation from Russian gas? Recently, there have been indications from the Austrian government that OMV should withdraw from the long-term Russian gas purchase agreement, and many are also concerned about the termination of the Russian-Ukrainian transit contract at the end of 2024.

Because of the war, the whole of Europe wants to become independent from Russian gas, this does not happen at the same speed everywhere, as each country is in a different historical situation. Who would have thought two or three years ago that Germany could separate itself from Russian gas? No one thought that the LNG terminals necessary for this could be built so quickly.  In Hungary, this cannot be solved overnight.

Energy independence has become important for Europe, so I don't expect anyone to turn back to Russian supplies in the foreseeable future. Everyone learned their lesson.

The European parliamentary elections will take place much sooner than that, in a few months' time. Recently, we have seen farmers' protests all over Europe, which caused the European Commission to back down on certain rules in the agricultural sector. What do you expect in the EP elections in June: can there be a change in the political line-up to the extent that the European institution system will be forced to retreat on climate targets?

It is difficult to predict the outcome of the EP elections, I would not even attempt to do so. I do not expect a withdrawal from the climate targets.

I think the most important question that all politicians and governments need to take into account is how to make the energy transition affordable for people, how to find the right balance between climate goals and affordability.

The EU spends lots of money on the development of energy networks, which is very important and we are happy about it, since there is no energy transition without the development of the electricity network. E.ON plays a key role in this, both internationally and in Hungary.

We mentioned the situation of security of supply on the European gas market and the topic of the Russian gas diversification. What is your view on these two topics, and in the case of the latter, how do you see its speed in the case of Hungary?

Prime Minister Viktor Orbán spoke very clearly about it in his State of the Nation Address that the government's goal is to establish energy independence. As he also mentioned: the natural gas connection is missing only in the direction to Slovenia, so the country is able to diversify its gas supply. There are clear government plans; I think they can be implemented. Gas supply is currently stable; we do not see any problems.

Hungary also saw a significant drop in gas consumption last year, and parallel to that, the Ministry of Energy indicated that it was also surprised by the extent of the decrease in electricity consumption. How do you see last year's consumption processes and what do you expect in terms of electricity and gas consumption outlook?

The decline in gas and electricity consumption was only temporary, and it was due to economic difficulties. This year we expect the market to stabilise. As I said,

in the long term, gas consumption will not increase because of the energy transition, but electricity consumption will.

More and more solar and wind systems are being built in the country, electric vehicles are becoming increasingly common, and they will fundamentally transform our everyday lives. This is what the energy transition is all about: we will use more renewable electricity, so consumption will gradually increase.

Guntram Wurzberg Interview2

In connection with solar panels, the residential Napenergia Program Plusz was launched in January. The pre-registration numbers on both the residential and contractor sides seem quite high. How do you see that?

We welcomed the tender, as it provides customers with a good opportunity, while the Ministry of Energy has come up with a framework that cools the market as a whole.

Do you consider the cooling of the market to be favourable?

Yes, in the sense that if you look back on the past year and a half, there was basically constant uncertainty around residential solar panels, people didn't know what to expect, how the rules would change, and this caused difficulties for us, too.

The ministry has now made the market predictable, alleviated uncertainty, and that is very good.

With the current tender, another 15,000 families will be able to install a solar panel system and the related energy storage. We are confident that, as the market leader, we will be able to build at least 20 percent of this for the customers.

E.ON not only operates energy networks, it also sells energy products and services. How do you see the prospects for this segment?

Our so-called customer solutions business line focuses on providing products and services to our residential and corporate customers that enable them to implement a more sustainable business operation or lifestyle. Specifically: we install solar systems, we offer our customers up-to-date heating and cooling systems, but we even implement a home e-charger for charging electric cars. These are all products that contribute to the greening of customers.

There is a huge opportunity in this market segment, and last year we closed the year better than ever before.

As I have already mentioned: we believe in a decade-long growth in the electricity market, and this is true not only for the network, but also for the solution segment.

Larger industrial companies - for instance automobile companies - have a firm climate targets and intend to cover their energy consumption from renewable energy sources as much as possible. We can also help implement these. One of our most sophisticated solutions is Green Cloud, through which we offer customers the opportunity to buy green electricity at a fixed price from solar power plants installed in Hungary by our Hungarian partner. Such solutions will become more and more important for customers in the future, which is why we expect the market segment to grow.

In the acute phase of the energy crisis, the choice between fixed and variable price schemes caused a big dilemma for many companies. Since then, prices have fallen a lot, as we mentioned. How do you see the issue of fixed and variable price energy purchases now?

E.ON is also present on the market as an energy trader, and indeed, price fluctuations have caused a great challenge for both traders and customers. Some customers would always prefer a fixed-price contract, but when prices can change to such an extent, as we have seen in recent years, it is not an ideal solution for them or for us. That is why we offer contracts in which the prices to be paid by customers follow the changes in world market prices, so neither the customer nor the service provider can be trapped in a fixed-price contract concluded at the wrong price.

We can’t let volatility just disappear that’s the market structure.

Getting back to solar power plants, we have seen an immense expansion at smaller, household-scale, and also industrial-size solar plants. Network requirements are also necessary for the establishment of small and large PV plants. What are your experiences in this area?

That is why we say that we are building the energy network of the future, because

although this is often not spectacular, the electricity network needs to be upgraded on a scale not seen for decades,

that is, since the system was first designed. Solar energy plays a major role in the energy transition, but in order to be able to connect more and more solar systems to the grid, the infrastructure needs to be strengthened, since it was not designed for this, but to transport electricity from A to B from large power plants.

The expected solar cell capacity increase is enormous. The total peak load of the electricity network - that is, not only that of solar systems - set a record in January, at 7,441 MW. Compared to this, we currently see that according to the energy strategy up to 12,000 MW of capacity are planned to be built in the country. This is not possible without substantial network development and a new incentive driven approach including also more system flexibility.

In addition, not only money is needed to strengthen the network, it also requires a huge amount of manpower to carry out the investments, so the industry faces a double challenge. This is why I always say that this situation can only be handled together, with the cooperation of the industry players, the regulatory authority and the ministry. None of us have the perfect solution; we can only be successful by working together.

Guntram Wurzberg Interview3

One of the main messages of our interview last May and of your presentation at our Fall Energy Investment Forum was that you are ready to invest 1 billion Euro in the Hungarian electricity network, but you need predictable frameworks, as there is an intense fight for tight resources within the group. Do you stick to this commitment?

Yes, we are committed to spending EUR 1 billion, i.e. almost HUF 400 billion, on the development of the electricity network from our own resources in the coming years.

We plan to invest Euro 390 million this year alone. Although this includes EU subsidies and other resources, we have never spent so much money on this in one year.

You also mentioned the EU resources, and last January you launched your HUF 74 billion network development programme, partially financed by the EU recovery fund. What is its status now?

Since then we have increased the pool of the programme to HUF 115 billion and we are making good progress with its use, we are currently about at the half of it. The development is mainly aimed at improving the network in the Central and North Transdanubian regions to address the challenges and connect even more renewables to the network.

What is the current situation regarding the promotion of a predictable framework?

The decision on this year's tariffs was made at the end of last year, and we consider this a positive, predictable decision. So the really important question for us now is what happens during the four-year price regulation cycle starting in 2025. It is no secret that

the Hungarian regulation allows the lowest return on investment in Europe. This negative benchmark is a known fact in the energy sector and by the regulator, which needs to be addressed.

What could be the reason that we have the lowest allowable return?

I am not the person to ask.

But it is you who are having difficulties because of that.

This is true, but we do not set the regulatory framework. E.ON group operates in energy markets  in 15 countries across Europe, and although the settlement system is different everywhere, the situation in Hungary is the most unfavourable in terms of return.

Within the E.ON group, we also compete with each other for the resources for development, so if the return is low, it is more difficult for us in Hungary to obtain funds, so we would like this to change. Of course, it would not be fair if I were to say that only one number decides, but the regulatory system should be looked at as a whole.

Guntram Wurzberg Interview4

What do you expect in relation to the price regulation cycle starting in 2025, based on past experience?

I don't want to send a message to anyone through the press; we will make our position known during the negotiations.

We certainly want a predictable market environment and fair tariffs. By fair, I mean a comparable amount at European level.

The fair level of system usage fees and the household utility reduction system are obviously related to each other, as we saw in 2021: in order for the consumer price of electricity not to change while the system usage fees could be increased, the price of energy itself had to be slightly reduced even in the face of the energy crisis. Thus, behind the stable utility price, the tension between the individual fee elements increased. How do you think this growing tension can be handled?

This is a political issue; it is not for us to decide.

How much burden does this situation I mentioned impose on the corporate segment?

Obviously, if the regulations allow only a limited increase of the system usage fee in the residential segment, then the competitive market segment has to pay more.

How do you see the gross settlement system introduced in January?

We welcome the new system, and we find it favourable. It was created as a compromise, since we understand that customers who previously installed a solar system will remain in the balance settlement system for another 10 years. At the same time, change is important, since in the balance settlement it may happen that the customers ultimately use the network for free, since they do not have to pay the network tariff, while the energy received by them and the energy produced in excess must also be transported.

The gross settlement system will be more fair.

Staying a little more in the past, last May you said about the Dunaferr case that up until then, E.ON had incurred a loss of more than ten million Euros because it essentially had to provide electricity from its own network for free. Has the case been resolved since then?

After long negotiations, we found a compromise solution, and I am very grateful to Csaba Lantos Minister of Energy, who played a very constructive role in this.

We still see uncertainties, so my only request to all the participating players, after we have gone through a very painful process, is not to repeat it.

The regulatory authority, the Hungarian Energy and Utility Regulatory Office, recently imposed fines on distribution network operators, including E.ON, for several reasons. How do you comment on this and what was the background to the fine?

Every concerned company wants to be customer-centred, since our main goal is to serve them. Last year was extraordinary, as because of the changes in the regulatory environment, a situation occurred where our customer services received approximately one hundred thousand inquiries in a few weeks; the number of inquiries throughout the year was ten times the usual number of previous years.

It is not possible to prepare for such situations in advance, and for the solution we had to switch into emergency mode. I understand that not all of our customers were satisfied, but our team still did a good job, they did their best in a very challenging situation.

Guntram Wurzberg zarokep 2024

Cover photo and photos in the article: Ákos Stiller / Portfolio

 

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