Investors interested but many bumps in the road -- Hungary's great future

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Installed wind power capacity in Hungary grew only marginally in 2007 with the addition of 4.2 MW, pushing the total to 65 MW. The slow growth is a legacy of a tender process in 2006 which attracted 1600 MW of bids but saw licences capped at just 330 MW because of fears the grid would be unable to support larger amounts of wind power. Most of this capacity is either still in the permitting process or waiting to build, with licence holders having to ask for an extension while they look for investors or following a change of ownership. This makes it difficult to predict how much will be added in 2008, though 65 MW is currently building and the Hungarian Wind Energy Association (HWEA) estimates the installed total could reach 265 MW by year end.

Looking further ahead, Hungary could produce 1700 GWh of wind power a year by 2020 according to the best-case scenario outlined in a new government energy strategy. The strategy is expected to be approved by parliament in the near future. The Hungarian Energy Policy 2007-2020 states that renewables could meet 14-16% of the country's energy needs by 2020, up from 4.5% today, if sufficient measures are put in place.

If the policy targets are adopted and supported with regulation, Hungary would be on track for renewables to provide 13% of its energy needs by 2020, the target set for the country in the EU's renewable energy directive proposal. Biomass is expected to provide 63% of the needed renewable energy by 2020, with wind taking second place at 18%, followed by biogas, geothermal, hydroelectric, waste and photovoltaic. Funding to the tune of some HUF 110 billion (EUR 149 million) is available to develop renewable energy under the EU-supported Environment and Energy Operational Program.

Peter Kiss, head of KPMG's Energy Sector in Central and Eastern Europe, believes 1700 GWh of wind power by 2020 is possible, "though the government needs to find a mechanism for achieving this." The tender system is too cumbersome and also the licensing system, which places developers in a Catch-22 situation of one permit depending on another, often taking up to two years. Other constraints are the country's relatively low wind resource, most of it in the west, the available frequency control capacity and an already decentralised generation base making it more difficult to integrate wind power.

Support mechanism

Hungary's renewables support mechanisms include priority access to the grid and a guaranteed purchase price adjusted annually for inflation, with the average rate currently standing at HUF 26.46/kWh (EUR 0.10/kWh). The contract term varies according to the cost effectiveness of the investment, but on average is six to seven years. The premium purchase price system is guaranteed to 2010, after which a tender system will take its place.

More contentious is the new requirement on producers to forecast output one day, one week, one month and one year ahead. If the predictions deviate by more than 30% the producer has to pay a penalty of HUF 5/kWh (EUR 0.02/kWh) and if they do not comply at all they pay HUF 7/kWh (EUR 0.03/kWh). Given the lack of accuracy of forecasts in Hungary, HWEA says this is an "impossible condition" and sees no logical reason for it given the imposition of the 330 MW cap. HWEA is lobbying the government to allow the more accurate monthly figures to be used for calculating the penalty.

Although the support mechanism is regarded as reasonably attractive overall, "it is not that which is driving international investors to Hungary," says Kiss. The country imports around 15-20% of its electricity needs and demand is growing. This, coupled with the EU requirement to increase renewables output and the reduced risk associated with EU membership, means there is an "unprecedented level of interest in the region," he states.

Investors from Austria, Germany and Spain, among other countries, are already dipping a toe in the market and "a big and growing trend," according to Kiss, is the arrival of infrastructure investment funds from London, Australia and the US on the horizon, all keen to invest in Central and Eastern Europe. Overall, Kiss sees "a great future for wind in Hungary." Whether the government's new energy strategy releases some of the bottlenecks remains to be seen.

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