Obstacles and potential for grid connected RES-E implementation in Hungary

1. Obstacles and potential for grid connected RES-E implementation in Hungary Gabriella P�l Hungarian Energy Office REPROMO Seminar Budapest 18. October 2003.

2. Gabriella Pal Hungarian Energy Office 2 Outline Current support scheme Further potential for price support Major issues relating ratification of 2001/77/EC Directive Conclusions

3. Gabriella Pal Hungarian Energy Office 3 Current support scheme and price regulation Feed-in obligation Single (non-differentiated) price Peak: 24 HUF/kWh Off-peak: 15 HUF/kWh Price support cross-financed by captive and free-market electricity customers (as a surplus to system charge)

4. Gabriella Pal Hungarian Energy Office 4 Legal reference Act on Electricity No. 110/2001. Ministerial Decree No. 56/2002. Legal context of price setting: secondary legislation by the Minister of Economy annual review until 2010 Indexation by CPI forecast of Central Bank no efficiency factor of <0 applied Competing with CHP

5. Gabriella Pal Hungarian Energy Office 5 Technical requirements of grid connection Ministerial Decree No. 47/2002: Secondary legislation by the Minister of Economy on technical and financial requirements Grid Code: further enforceable technical standards for connection and disconnection criteria � supervised by the Independent System Operator, dispute settling by the Hungarian Energy Office Download: http://www.mavir.hu/magyar/uzemi_szabalyzat.html�

6. Gabriella Pal Hungarian Energy Office 6 Eligibility of RES-E to support Feed-in obligation AND price premium Eligible renewable sources: wind, solar, geothermal, biomass, biogas, hydro Lower capacity threshold: 0.1MW Excluded technologies: waste incineration Feed in obligation WITHOUT price premium hydro >5MW

7. Gabriella Pal Hungarian Energy Office 7 Potential for further price increase on an avoided external-cost basis EU-ExternE principles + methodology Result for RES-E: 22.80 � 24.61 HUF/kWh ~ 100 euro/MWh (peak and off-peak averge) Total price (market price plus price support) Indifferent of support instrument (direct tariff support or indirect market mechanism, like TGC) This is a social no-regret price, it constitutes no support in the welfare-economist�s sense of the terminology: at this price the society is breaking even � paying equal for RES-E and conventional

8. Gabriella Pal Hungarian Energy Office 8 Estimated supply effects in the Hungarian RES-E market HUF/kWh technology GWh GWh accumulated 12,00 hydro 40 40 12,40 - 14,00 waste incineratn. 90 130 14,00 - 16,00 sewage gas 110 240 16,00 - 17,00 waste gasifictn. 140 380 17,00 - 24,00 wind power 477 857

9. Gabriella Pal Hungarian Energy Office 9 Estimated supply effects Current share of RES-E: Supply as of total electricity consumption: 0.3% Cost as of total electricity account: 0.65% Estimated effect of avoided-cost based price support scheme: Supply as of total electricity consumption: 2.7% Cost as of total electricity account: 4.28%

10. Gabriella Pal Hungarian Energy Office 10 Compliance with EU Guidelines �...have to use a method of calculation that is internationally recognised, ... and the amount of the aid thus granted to the renewable energy producer must not ecxeed EUR 0.05 per kWh.� (Article 63.) market price: 10.93 HUF/kWh + 11.87 HUF/kWh (<0.05 EUR) = 22.80 + 13.68 HUF/kWh (>0.05 EUR) = 24.61

11. Gabriella Pal Hungarian Energy Office 11 Recent boom in biomass Coal power plants face stringent environmental regulations Full fuel switch to natural gas or biomass Co-firing of biomass with coal Agricultural production quota for arable lands has been cut during EU accession negotiations Approx. 1 million hectare, 1/3 of all arable land will be left without production quota Huge potential for energy crops and biomass plantations

12. Gabriella Pal Hungarian Energy Office 12 Implementing Directive 77. Definitions: �hydro� Is a hydro plant over 5 MW capacity producing renewable electricity? Existing definition in Hungarian legislation is in conflict with the Directive. Large scale hydro is dominating RES-E in countries of Central and Eastern Europe Mostly existing installations

13. Gabriella Pal Hungarian Energy Office 13 Renewable electricity by country and technology (GWh, 2000)

14. Gabriella Pal Hungarian Energy Office 14 Implementing Directive 77. Definitions: �waste� Is the designated authority liable to decide about implementing conflicting waste definitions by national vs. community legislation, energy vs. waste legislation? Is GoO under Article 5 to be seen as a form of support under Article 4? Shall GoO be issued for non-separarted municipal waste? Shall utilization of non-biodegredable but separated waste for energy production be supported?

15. Gabriella Pal Hungarian Energy Office 15 Further eligibility issues of RES-E In Hungarian legislation all RES-E is eligible to feed-in obligation but not all RES-E definition is eligible to price support Lower capacity threshold: Directive: no. Hungary: 0.1MW< Excluded technologies: Directive: incineration of non-separated waste Hungary: all waste incineration

16. Gabriella Pal Hungarian Energy Office 16 National indicative targets Most new MS have lower share of RES-E than EU-15. If large hydro is to become non-eligible: RES-E is next to zero. The EU-15 used to have 13.9% of RES-E in 1997 and decided a 59% of average increase over 13 years. The same exercise for Hungary would result an increase from an optimistic 1% in 2004 to 1.59% by 2017, or, alternatively, 1.3% by 2010. EU-Hungary Copenhagen Treaty: 3.5%

17. Gabriella Pal Hungarian Energy Office 17 Existing RES-E capacities in new MSs

18. Gabriella Pal Hungarian Energy Office 18 Support schemes External costs of non-renewable electricity not fully shifted to producers New LCP Directive not implemented yet further cost increase to come for non-RES-E on social welfare basis RES-E provides avoidance of external costs: it justifies higher fix prices �Unbundling�of RES-E and CHP support seems to be necessary

19. Gabriella Pal Hungarian Energy Office 19 Guarantee of origin System of GoO not implemented yet Very similar data requirements enacted Calorific Value of biomass is self-reported at time of purchase along with changes is stock Issues not addressed yet: Verification Storage related loss of CV (storage time and condition) Calorific value is not sufficient for accurate calculations Net heat rate is critical: kJ/kWh Benchmark values and on-site supervision

20. Gabriella Pal Hungarian Energy Office 20 Guarantee of origin Hybrid plants (biomass+fossil fuel) �A GoO shall specify the energy source from which the electricity was produced, specifying the dates and places of production (Article 5.)� Ex-post or ex-ante Exact volumes of RES-E from co-firing Relative net heat rate of co-fired fuels

21. Gabriella Pal Hungarian Energy Office 21 Conclusions Definitions to be further clarified for hydro and waste New RES-E sector yet to come Focus on biomass, large potential Co-firing and hybrid technologies seem to take a lead Make sure to preserve higher priority of RES-E over CHP-E along the legislative changes An EU-driven sector Domestic customers� electricity expenditure is high, willingness to pay for RES-E is low Common internal market for RES-E may emerge Large export potential after EU accession Price support must focus on viable RES-E

22. Gabriella Pal Hungarian Energy Office 22 Thank you for your attention Gabriella P�L Hungarian Energy Office Department of Economic Research and Environmental Protection tel - fax: 36-1-4597747 email: palg@eh.gov.hu