The financial support scheme of the electricity generation from renewable energy sources has been the mandatory off-take system for long time, which is built on one hand on the off-take of the electricity generated by facilities using promoted (RES) technologies by MAVIR (Hungarian Electricity TSO) on differentiated regulated prices, and on the other hand and parallel to this, on the regulated "distribution" of such electricity. Partially due to the recent changes in the relevant EU-legislation and reflecting also the general and specific (energy) policy objectives of the Hungarian Government, major changes are expected in this system. The Government published its draft legislation on 18 March 2016 aiming to override the present renewable energy support scheme of the electricity generation from renewable sources, the essential elements and expected effects of which we will summarise below.

AIMS AND EFFECT

Hungary has undertaken to cover 14.65 % of its gross energy consumption from renewable energy sources at latest from 2020. The Government is behind schedule with the proposal of the new supporting scheme concept for long as Hungary's undertaking regarding the share of renewable energy sources in the gross final energy consumption has made it necessary to overhaul the existing system, whilst the idea of a new supporting scheme was put on the table already in 2010. This way the concept aims to contribute to various energy policy goals of Hungary such as the promotion of building new generation capacities, the improvement of the security of supply, as well as providing proper and predictable income for the generators, and finally to secure the sustainability of the system thus, to prevent other market participants from bearing unnecessary extra costs.

Pursuant to the previous statements of competent government officials, the Government aims to have the draft legislation adopted – both on parliamentary and on governmental level – until the end of this year, so the most important elements of the new system could come into force not later than 1January 2017.

TENDER PROCEEDINGS AND GREEN PREMIUM

Based on the draft conception (consisting of three different pieces of legislation), most of the electricity generation facilities using renewable energy sources with a capacity of more than 0.5 MW will no longer be eligible to participate in the mandatory off-take system and for them the new premium based supporting scheme will become applicable. Pursuant to the published proposal, the mandatory off-take system in its current form will only be available for generation facilities with a capacity of less than 0.5 MW and for demonstration (i.e. experimental) projects. Those generation facilities with a capacity higher than 0.5 MW using renewable energy sources will be obliged to sell the electricity generated individually, on a free-market basis. The "expected" sale prices will be determined by the TSO MAVIR as a so called "reference market price" based on the prices of the Hungarian Power Exchange (HUPX). Parallel to this, the Hungarian Energy and Public Utility Regulatory Authority (HEA) will set the "support prices" for the electricity generated from renewable sources taking into consideration the production costs and the concept of the fair return of the project. The margin between the support price and reference market price will be the "green premium", which will be paid to the generators by MAVIR securing this way the profitability of the electricity generation from renewable sources and in the same time decreasing the distance of the market prices and the present mechanisms being irrespective of economic cycles of the green energy support scheme.

The above concept implements the European Commission's communication on "Guidelines on State aid for environmental protection and energy 2014-2020" (2014 C 200/01) into the Hungarian legislation. One of the core element of the Commission's new guideline is that the capacities relying on renewable energy sources should principally be awarded through tender proceedings. Accordingly, pursuant to the published draft legislation, the generation facilities with an output of more than 1 MW will only be eligible to participate in the new financial support scheme if they are awarded through proper tender proceedings aiming the selection of the most competitive and most effective projects. In case of generation facilities with a capacity of less than 1 MW, the HEA will decide upon individual request and through administrative procedures on the amount of the supported electricity as well as the term of the support.

TECHNOLOGY SPECIFIC RULES AND PREVIOUS DEFICIENCIES

Specific provisions will be applicable to the already operating generation facilities using biomass or biogas. The term "biogas" will become exactly defined in the Electricity Act for the first time (until now it was used without any specification amongst the enumeration of the renewable energy sources, see Section 3(45) of the Electricity Act) but the detailed rules will also provide novelties. The already operating generation facilities will be subsidised with the newly introduced "brown premium", the amount of which will be determined by the HEA in case the new legislation comes into effect. The aim of the brown premium is to persuade those biogas/biomass generators also capable to use cheaper fossil energy sources to maintain the electricity generation from biogas/biomass.

We expect that, in addition to the already published draft legislation, the new regulation will establish further specific regimes in case of the electricity generation facilities based on photovoltaic and wind power. Regarding wind-energy generators, as an effect of the previous regulation, there was no real possibility to acquire new capacities. Following the unavoidable refusal of applications for new generation capacities by the HEA (with reference to the difficulties of balancing as justification) under the improper legislation in effect before 2007 not taking into consideration the volatility of the wind energy, many affected foreign investors left the country, while the newly introduced legislation referred the creation of new capacities to tender proceedings. However, the already launched tenders were put on hold in 2010, and no tenders have been launched since then, resulting in the exit of further investors. All this, similarly to the cogeneration plants, which became excluded from the mandatory off-take system in 2010, then nevertheless a special levy was introduced in order to subsidise them, has caused a high degree of uncertainty and ultimately raised the country risk. Therefore, it is necessary to comprehensively settle this areas in order to mitigate the economic uncertainties as well as the related country risk.