1. István Pataki Hungarian Energy Office 8th Baltic Electricity Market Mini-Forum Riga, Latvia, 24. April 2009 The „Hungarian Case” HUNGARIAN ENERGY OFFICE Internet: www.eh.gov.hu

2. What is the „Hungarian Case”? Hungarian Energy Office (HEO) approved auction rules submitted by the former single buyer MVM Trade. Under the resolution of HEO MVM Trade was obliged to modify the auction rules - a general price cap was ordered, - domestic end-users and DSOs had priority. 2 HUNGARIAN ENERGY OFFICE Internet: www.eh.gov.hu

3. Contents Short Introduction of the Hungarian Power Market Antecedents Steps by the Office Statements 3 HUNGARIAN ENERGY OFFICE Internet: www.eh.gov.hu

4. . Suppliers MVM Electricity Trade Ltd. (wholesaler) Power Plants TSO 1. Operation, maintenance and development of transmission grid 2. Operation of system level services MAVIR ZRT Universal Suppliers (USP) Render of universal supply to household- and other eligible small consumers Distribution system operator (DSO) Operation, maintenance and development of distribution grid Supplier (trader) (subject to license) Trader MVM Partner : licenses : possession of assets : legally separate entities : unbundled accounts Distribution assets Power Plants Paks Vértes Gas turbines Power Plant shares MVM Group Transmission assets 4 H UNGARIAN E NERGY O FFICE A SHORT INTRODUCTION OF THE HUNGARIAN POWER MARKET (1)

5. 2003 2004 2005 2006 2007 2008 months 5 A SHORT INTRODUCTION OF THE HUNGARIAN POWER MARKET (2) HUNGARIAN ENERGY OFFICE Internet: www.eh.gov.hu

6. Antecedents (1) 6 HUNGARIAN ENERGY OFFICE Internet: www.eh.gov.hu

7. 7 HUNGARIAN ENERGY OFFICE Internet: www.eh.gov.hu Forward Base-load Prices for 2008 EEX forward base-load price: 55 EUR/MWh Slovenska Elektrarne auction 400 MW Resulting Marginal Price: 2096 Sk/MWh (61 EUR/MWh) Antecedents (2) Changing Trading Conditions Polish and Romanian TSO did not allocate cross-border capacity for export for 2007 at yearly capacity auction The Czech and Slovakian TSO did not sign the inter-TSO compensation mechanism agreement

8. 8 HUNGARIAN ENERGY OFFICE Internet: www.eh.gov.hu Ordinance of The Government of the Slovak Republic of 317/2007 Section 6 Cross-border exchange of electricity: The capacity allocated in the Auction is reserved as of the moment of satisfying the conditions specified by the Auction rules, in case of purchase of electricity generated in the designated area for the purpose to export, the electricity customer shall submit the electricity supplier a confirmation about the reserved capacity in the cross-border profile. Section 8 Conditions for supply of electricity including supplies of balancing electricity and supply of electricity to households (7) The volume of electricity defined for export shall not threat the safety of electricity supply in the designated area. Section 12 Conditions for provision of system services (9) The payment for system services shall be billed to the electricity exporter who cannot prove that the exported electricity was imported to the designated territory. Antecedents (3)

9. 9 HUNGARIAN ENERGY OFFICE Internet: www.eh.gov.hu Possible Consequences Higher than expected demand especially during the summer season might induce member states to make cross-border trading more difficult to achieve Deteriorating trading conditions might cause problem of security of supply Market integration will suffer Antecedents (4)

10. Change of Import Balance since Market Opening 2003 2004 2005 2006 2007 2008 2009 hónapok trend 10 Antecedents (5) HUNGARIAN ENERGY OFFICE Internet: www.eh.gov.hu

11. Hungary had a single buyer market model until 2003. After market opening the contractual structure remained the same. Former single buyer MVM Trade contracted the majority of domestic generation capacities. Hungary introduced the so-called SIGNIFICANT MARKET POWER (SMP) regulation in the beginning of 2008. By SMP regulation former single buyer was obliged to sell domestic generation capacities via public capacity auction. 11 HUNGARIAN ENERGY OFFICE Internet: www.eh.gov.hu Short History of the Hungarian Power Market Antecedents (6)

12. PRESENT MODEL 12 Green arrows show possible, but at present non- operating relationship Generators (domestic) Import - Export MVM Wholesale trader Successor Organizations of Public Utility Suppliers Universal suppliers Traders ) Household and for universal supply eligible consumers Free market consumers Traders Organized Market Auction Controlled price Power Procurement Contracts Long-term Contracts Antecedents (7) HUNGARIAN ENERGY OFFICE Internet: www.eh.gov.hu

13. June 2008: DG COMP issued a negative decision against Hungarian long-term PPAs. Legal uncertainties while starting purchase and sale for 2009. In average 10 EUR/MWh higher wholesale prices than EEX price level. In 2008 retail traders used price margin above wholesale-cost reason. Decreasing net import – from 6-7 TWh/year to 4 TWh/year - narrowing sources, - export-restriction in the north. Reduced contracted capacity at MVM Trade. 13 HUNGARIAN ENERGY OFFICE Internet: www.eh.gov.hu Unexpected Developments Antecedents (8)

14. 14 HUNGARIAN ENERGY OFFICE Internet: www.eh.gov.hu Unexpected developments Antecedents (9)

15. 15 HUNGARIAN ENERGY OFFICE Internet: www.eh.gov.hu Unexpected developments Antecedents (10)

16. 16 HUNGARIAN ENERGY OFFICE Internet: www.eh.gov.hu Expected Position of MVM Trade for 2009 Despite of its reduced portfolio MVM Trade remains the most important wholesaler in Hungary. With the cheapest nuclear and coal power plants MVM Trade is the most competitive wholesaler in Hungary. All demand of Universal Service Providers (USP) will be met by MVM Trade at controlled tariffs. For lack of a power exchange MVM Trade auction price is the main price signal for Hungarian market players. PurchaseSale Domestic generation: 21,5 TWhUSP: 13 TWh Import: 0 TWhAuctions: 8,5 TWh Antecedents (11)

17. What we did With SMP regulation and auction obligation we ensured access to MVM Trade contracted domestic generation capacities. We did not put obstacles in the way of free cross-border trading (export). With priority rules we equalized chances of customers and traders of buying electricity at the auction. With general price cap on MVM Trade (dominant market player) we avoided unjustified wholesale price increase. It is used only for MVM Trade sales not for the total wholesale market. With priority rules we might have avoided some unjustified retail price increase. With priority rules we gave chance DSOs to cover some parts of 2009 network losses (network loss tenders were unsuccessful). 17 HUNGARIAN ENERGY OFFICE Internet: www.eh.gov.hu HEO resolution Steps of the Office

18. To protect transparent, clear market competition and to ensure secure supply for domestic users, HEO insisted on holding the auction against the legal steps promised by power plants with long-term contracts. HEO made this step in spite of the fact that the licensee, MVM Trade obliged could have concluded bilateral contracts with users and distributors. Under MVM Trade (calling for the auction) bidding guarantee the traders with larger capital most likely would have cut out domestic users and later would have sold the energy purchased at a higher price than the Leipzig (EEX) price with a significant profit to Hungarian users, to distribution companies or to southern suppliers outside EU with capacity shortages. The conditions in the relevant resolution issued by HEO ensured the same chances to access to energy offered at the auction for the different market groups (users, distributors, traders). To our evaluation, the Office, in accordance with EU and Hungarian regulations, took the interest of market players and users into account, settling with them repeatedly before issuing the resolution. Statements (1) HUNGARIAN ENERGY OFFICE Internet: www.eh.gov.hu

19. HEO analyses market situation very carefully and uses regulatory tools to promote competition and protect customers’ interest. By resolution of the Office MVM Trade Zrt. held another (quarterly) energy and capacity auction on March 18, 2009. Considering the significant change regarding market conditions (due to financial crisis domestic and regional demand decreased significantly, while reference prices of the German Exchange dramatically fell) the market players could participate with the same conditions and the approved Auction Code did not include any clauses as to the use of purchased energy. 19 HUNGARIAN ENERGY OFFICE Internet: www.eh.gov.hu Further Auctions Statements (2)

20. 20 Thank you for your attention! István Pataki patakii@eh.gov.hu +36-1-459-7850 HUNGARIAN ENERGY OFFICE Internet: www.eh.gov.hu