Renewable energy in Hungary

Significant changes have happened in the external environment of the Hungarian energy sector in 2022. Notwithstanding that the increasing price environment and the uncertainty of energy supply necessarily shifted Hungary's priorities on the security of supplies on the expense of sustainability and price, sustainability goals of the country have not been given up and Hungary remained committed to its short-term and long-term climate goals. With respect to the changed circumstances, diversification of primer energy sources and technologies is inevitable, therefore renewable energy sources of Hungary, such as solar and geothermic energy is intended to be utilized to a greater extent in the following years.  

In terms of internal environment, the focus is on the development of the transmission and distribution system, introduction of innovative and smart solutions for greater flexibility, as well as demand-side measures. Further to that, as quite a large scale of weather-dependent renewable generators (mostly photovoltaic) has been integrated into the Hungarian electricity system, their generation pattern addresses challenges to the network operators and therefore regulation capabilities (aFRR) and availability of energy storage facilities will be essential in case of future projects. The main tasks are determined as follows: 

• Significant cost-effective grid development is justified in order to integrate renewable energy; 
• Construction of electricity storage capacities (500-600 MW by 2026); 
• Transparency and economic efficiency in the allocation of grid connection capacities; 
• The introduction of innovative market organisation practices and the strengthening of consumer services; 
• Increase the digitalisation of the electricity system; 
• Improve the accuracy of the weather forecast; 
• Sufficient availability of power generation capacity should be ensured in a context of increasing power demand (including ensuring security of supply by maintaining spare capacities). 

Some of the main trends are detailed in the below. 

In Hungary, the total installed capacity of power generation plants is more than 12,000 MW from which more than 5,700 MW is considered renewables and the vast majority thereof, more than 5,000 MW is photovoltaic power plants (from which about 3,000 MW is commercial-sized). The volume of photovoltaic power plants is increasing rapidly, according to governmental plans, their total installed capacity will exceed 12,000 by 2030 which is not an unrealistic goal to achieve considering the volume of new generation capacities put into operation in the past few years. 

The Hungarian renewables generation market is photovoltaic oriented, almost 88% of the total renewable capacities are photovoltaic, while biogas and biomass have a 4,9%, wind has a 5.8%, other primer energy sources have a less than 2% joint share. According to the National Energy and Climate Action Plan, 29 % of the gross final energy consumption shall come from renewable sources by 2030 and this goal triggers extensive development of new power generation capacities, however according to the current governmental intent, photovoltaic capabilities remain pivotal for the purposes of the renewable energy mix, 90% of the planned 13,400 MW total renewable capacities will be photovoltaic by that time. 

The development of renewable (mainly photovoltaic) energy generation facilities was incentivized by the Hungarian state by two measures in recent few years: (i) the mandatory offtake system (known as KÁT system) and (ii) the CfD system (known as METÁR system). In the KÁT system, no new entitlement could be awarded from 2017, in the METÁR system green premium subsidy awarded as a result of a tender and brown premium are still available until 2026, however the amount to be awarded as a green premium new yearly subsidy has been decreased in 2021 by 45% for calendar years 2022-2026. 

To benefit from the increasing electricity price environment in 2021 and 2022, many generators of existing power generation units have left the support schemes they were involved in and stepped out to the free market transforming their projects to market based. Further to that, our general experience is that developers are less counting on subsidy schemes and are more willing to realize projects without them, even despite the increasing costs of securing grid connection and the volatile price environment. 

There is, however, a segment where support scheme may be significant in the mid-term future. The income compensation system of electricity storages which is a CfD regime for electricity storages the framework of which has been recently introduced, details to be regulated separately. The support will be awarded to energy storages by way of a tender procedure in which applicants submit offers on net revenue level that secures the return of their investment. 

The market-based project approach triggered the development of the agreements on the market: beside traditional physical power purchase agreements, corporate PPAs, virtual PPAs and route-to-market agreements became very popular in the renewable sector and they spread rapidly, not independently of the time to time volatile price environment. 

The spread of the market-based project has also been supported by recent large industrial investments (e.g. automotive sector investments, energy battery production plants, etc.) having high demand for electricity. These new industrial establishments utilize their free surfaces (e.g. roof, spare spaces) for on-site photovoltaic projects, the generation of which is typically entirely consumed by them. As such project do not inject any electricity into the public grid, it is a lot easier to secure grid connections for them. 

As mentioned, recent years were marked by a photovoltaic power plant boom in Hungary. The massive expansion of weather-dependent power plants challenged Hungary's public grid, which was unable to keep pace with the development of solar power. 

This has led to capacity constraints in certain parts of the Hungarian public grid, as well as to an increase in the grid connection timeframe set by the DSOs and the TSO. A large number of speculative applications for grid connection without any real desire for development behind them and cancelled project plans have also contributed to the capacity shortage. 

To manage capacity shortages more effectively, and to filter out speculative connection requests, as well as aborted projects, the government and the TSO have created a new connection regime which aims to solve capacity problems by introducing a standardised procedure for capacity application and financial securities to confirm the developers' commitment to utilize the granted grid connection capacity. 

Under the new regime, the right to connect weather-dependent power plants to the public grid can be acquired through a tender process launched in recurring six-months cycles in which the available capacity on the public grid is published. If in a given cycle there is no or insufficient capacity is available on the public grid, power plants wishing to connect can acquire sufficient capacity by participating in the so-called joint demand evaluation procedure which is an individual application process for a specific capacity demand beyond the available capacity published and which takes place in parallel with the tender. Connection rights can be obtained through the joint demand evaluation procedure if the weather-dependent power plant undertakes to fulfil certain conditions (i.e. exemption conditions), such as obtaining aFRR accreditation and installing a storage facility of certain capacity and if the power plant undertakes to pay deposits in total of HUF 4.5 million/MVA (approx. EUR 11,700/MVA). The deposits serve to ensure the credibility of the connection demand, as the deposits will be included in the connection fee payable at the end of the connection procedure or will be reimbursed. 

The trend towards the spread of on-site power plants is also reflected in the newly introduced connection regime. Self-consumption power plants may obtain the connection right in consultation with the DSO with no need to participate in the tender or in the joint demand evaluation procedure. 

Implementing the new regime has not been smooth. The first tender was launched in May 2022, under which 0 MVA capacity was available on the public grid, therefore the power plants could acquire connection right only through the joint demand evaluation procedure. Also, one of the key documents, such as the information on technical and economic conditions for connection, was issued after repeated postponements of almost a year and the next tender phase is currently expected to be launched in November 2023, after several postponements.  

The connection procedure has also been affected by the adoption of a temporary regulation, Government Decree 526/2022 which extended the obligation to provide deposits to power plants that have already acquired connection right, as well as imposing an additional financial security payment obligation for those power plants which have not connected to the public grid at the time of promulgation in excess of 5% of the benchmark investment value of the power plant. The benchmark investment value of photovoltaic power plants is HUF 325 million/MWe (approx. EUR 855,000/MWe). Another innovation of the new grid connection regime and of Government Decree 526/2022 was to require developers to specify the calendar year for their connection to the public grid. This was done to facilitate the planning of the development works of the public grid. 

As a result of the first connection procedure, a total of 1,588 MVA of renewable generation capacity were secured out of the total initial applications of 3,859 MVA. Under the first connection procedure, the guaranteed latest connection year for the power plants was the end of 2028.  

Hungary currently has 330 MW of installed wind power capacity, which accounts for around 3.9% of the country's electricity generation. As a result of the first tightening of the rules governing the installation of wind parks in Hungary in 2009 and the subsequent de facto ban on the installation of commercial wind parks in 2016, this figure has remained stable for the past 10 years and was not expected to change until the very end of 2022.  

Since 2016, the Hungarian regulatory environment practically bans the installation of new wind parks in two ways. On the one hand, the Hungarian government exercises a tight control over authorisation of new wind parks as it (i) sets the number of regulatory permits to be issued for the installation and commissioning of new wind parks and (ii) the capacity of new wind parks that can be permitted for a given calendar year, which was most recently set at 0 MW. 

The second legal barrier in the way of wind park developments de facto prohibits the installation of wind parks. In 2016, a law was passed prohibiting the installation of commercial wind parks located within 12 km of the boundaries of areas of the municipalities designated for development. Due to the dense urban structure of Hungary, such areas are practically impossible to find, but certainly not in areas with a high potential for wind parks. 

As the past few years have been dominated by the state-supported expansion of photovoltaic power plants, the market did not seriously expect that the ban on wind parks to be lifted. The energy crisis hitting Europe from early 2022 and European Union expectations have prompted lawmakers to diversify Hungary's energy mix and consider reopening to wind energy. 

At the end of 2022, the energy minister had repeatedly indicated in several energy industry events that wind energy policy was due for a review. After that, the government adopted a resolution in March 2023 to support investments in wind energy, which includes amending the legislation on wind energy and establishing favourable zones for wind parks. Under the resolution, the relevant legislation was supposed to have been adopted by the first quarter of 2023, after a public consultation, which still had not been completed by mid-September 2023.  

Although the intended legislative change has not been implemented, the government has demonstrated the seriousness of its intentions by taking a further step towards lifting the ban on wind parks. Later in the summer of 2023, Hungary submitted a revised version of its National Energy and Climate Plan to the European Union, which aims to increase installed wind power capacity. The installed wind capacity is expected to increase to 1200 MW by 2030 as a result of the planned expansion of wind parks. The government aims to achieve this by easing the regulatory restrictions described above in a way that the regulatory framework would be developed to achieve an optimal balance between social and investor interests.  

After almost a decade of prohibition, the industry is eager to see the ban on wind farms finally lifted, opening up new investment prospects beyond the current strong growth in solar investment.