Alternative Energy & Power 2019

Last Updated August 07, 2019

Hungary

Law and Practice

Authors



Wolf Theiss is one of the leading European law firms in Central, Eastern and South-Eastern Europe with a focus on international business law. The firm has built its reputation on a combination of unrivalled local knowledge and strong international capability. With 340 lawyers in 13 offices located in Albania, Austria, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia, Slovenia and Ukraine, Wolf Theiss represents local and international industrial, trade and service companies, as well as banks and insurance companies. As the only law firm to have an energy practice dedicated to the CEE/SEE region, it is well placed to keep up with this complex and fast-changing market. The Budapest office is well known for its energy practice, constantly receiving top rankings from the leading legal directories. The energy team in Budapest consists of eight lawyers, led by managing partner Zoltán Faludi and practice head László Kenyeres.

The electricity sector is regulated at various levels in the Hungarian legal system. The highest-level norms are laid down in acts, while detailed rules are set out in government decrees, ministerial decrees, decrees of the Hungarian Energy And Public Utility Regulatory Authority (HEPURA) and the codes of the operators. The most important legislations of the power industry are Act LXXXVI of 2007 on electricity (Electricity Act) and Government Decree No 273/2007 (X 19) on the implementation of certain provisions of the Hungarian Electricity Act (Implementation Decree). The Electricity Act and the Implementation Decree provide a regulatory framework under which additional legislation – such as Government Decree No 389/2007 (XII 23) on the obligatory dispatch and purchase of electricity generated from waste or from renewable energy sources (Feed-in Tariff Decree), Government Decree No 299/2017 (X 17) on the feed-in tariff for renewable electricity and the premium tariff (Premium Decree), and Government Decree No 382/2007 (XII 23) on the procedures of the authority licensing construction in the electricity sector (Power Facility Construction Decree) – govern specific areas of the sector.

Therefore, the list of the most relevant electricity-related legislations is as follows:

There are both private and State-owned entities in the Hungarian power industry. In the generation sector the most important actor is the MVM Group, a vertically integrated State-owned entity that owns and operates the Paks power plant, the nuclear power plant of Hungary. The Paks power plant has four reactor units and its nominal capacity is currently 2,000 MW. The Paks power plant has a leading role in Hungary’s electricity supply as it represents around 40% of national electricity generation. In addition to the nuclear power plant, Hungary has significant gas-fired power plant capacity (generated by private and State-owned facilities) and coal-fired power plants. As Hungary has undertaken to increase its power consumption from renewable energy sources, in recent years multiple support schemes have been implemented to encourage investments into renewables, in particular solar energy projects (see 1.8 Unique Aspects of the Power Industry). The majority of these projects are owned by private entities.

The Hungarian grid is owned by MAVIR, the transmission system operator (TSO), which is an entity of the State-owned MVM Group. MAVIR operates as an independent transmission system operator (ITO).

The distribution systems are operated by six regional distribution system operators (DSO). Five of the DSOs are private companies, while one of them has been acquired by the Hungarian State in recent years.

There are around 170 licensed electricity traders on the Hungarian electricity market. The majority of these traders are foreign private entities pursuing only wholesale electricity trading activity; however, MVM Group is also a significant player in the supply sector.

Mandatory provisions on unbundling of activities having natural monopoly characteristics, such as transmission system operation and distribution of electricity from other activities of the electricity sector (eg, electricity generation and supply), are set out in the Electricity Act and the Implementation Decree. As a general rule, vertically integrated entities (companies or company groups holding a licence for either electricity transmission or distribution and performing generation or supply activities at the same time) are required to be unbundled according to legal personality, organisational structure and independent decision-making rights.

In the generation sector the main actors of the market are MVM Group (State-owned), MET Group, Opus Global, Alpiq and EP Energy. The transmission of the electricity is operated by MAVIR (part of MVM Group), while the distribution facilities are owned by E.On, Innogy and the NKM Group, a State-owned utility entity.

According to the Electricity Act, household consumers are entitled to receive electricity at a regulated price. Household consumers are supplied by three universal service provider companies owned by E.On, Innogy and the NKM Group. For industrial consumers, any trading company holding the full-scale trading licence of the HEPURA is entitled to sell electricity. The market (at the industrial level) is very fragmented as more than 50 entities (private and public companies, such as MVM, MET, Uniper, MOL and CEZ) supply power directly to industrial end-consumers.

On 1 January 2019, Act LVII of 2018 on the supervision of foreign investments conflicting with the interest of Hungarian national security (Foreign Investment Act) entered into force. The Foreign Investment Act affects investors from outside the EU, EEA or Switzerland engaged in the energy, financial, telecommunication or national defence sectors.

In the power industry distribution, transmission, network operation activities and electricity production over 50 MW are under the scope of the Foreign Investment Act.

Foreign investors shall notify the Minister of the Interior and ask for its approval if they intend to

  • acquire directly or indirectly a more than 25% ownership (that is 10% in case of publicly listed companies) or a dominant influence in a Hungarian company pursuing activities in a sector deemed sensitive to national security;
  • establish a Hungarian branch office in one of these sensitive sectors;
  • acquire a right to operate or use infrastructure or assets which are necessary to operate in one of these sensitive sectors.

The approval is also necessary if a foreign investor acquires less than a 25% ownership in a company but the acquisition results in more than 25% interest in the respective Hungarian company being held by (several) foreign investors.

The Minister of the Interior has 60 days (which can be extended by an additional 60 days) to decide on the approval or rejection of the foreign investor’s request. The minister may block the transaction if it violates the security interests of Hungary. If the minister denies the request, the foreign investor cannot be registered as a member of the acquired company and the agreement on the operation of such infrastructure or assets shall be null and void. The minister’s rejection may be challenged at court only on the ground that there was a serious procedural breach.

There are no specific guarantees for foreign investors in the power industry, however, besides the constitutional guarantees, Act XXIV of 1988 on the investments of foreigners in Hungary shall apply providing immediate compensation on the actual value in case of nationalization, expropriation or other measures tantamount to expropriation or nationalization. In addition, Hungary ratified the Energy Charter Treaty, the Convention on the Settlement of Disputes between States and nationals of other States, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and as a member state of the Organization for Economic Cooperation and Development (OECD), it applies the OECD Code of Liberalisation of Capital Movements.

In addition to the multilateral international treaties, Hungary entered into 54 bilateral investment agreements in order to grant promotion and protection for foreign investments, as well as access to international dispute settlement processes. Furthermore, as of 1 January 2017 the corporate income tax was decreased to 9% from 15%, which could be attractive for foreign investors in respect of taxation.

The Electricity Act and the Implementation Decree contain the specific regulations on the transfer of assets and M&A of power industry entities. General rules on the transfer of assets and mergers are established by Act V of 2013 of the Civil Code (Civil Code) and Act CLXXVI of 2013 on the transformation, merger and division of legal entities.

Accordingly, the list of applicable legislation includes, in particular, the following:

The HEPURA is responsible for the approval of the transfer of fundamental assets and the M&A of energy companies.

The merger and demerger of licence holders are generally subject to the HEPURA’s prior approval or acknowledgment (depending on the acquired percentage of voting rights and shares). The HEPURA’s acknowledgment and prior approval are not applicable to the authorised operators of direct lines or private lines and the recharging point operators. The HEPURA has 75 days to pass its resolution.

The prior approval of the HEPURA is necessary for the acquisition of control of more than 25, 50 or 75% of voting rights, or for the direct acquisition of 100% of an electricity company, and for the exercise of the rights associated therewith. The prior approval is not necessary for the acquisition of combined licence holders (that is, the combined licence of construction and electricity generation for power plants below 50 MW) and limited electricity trading licence holders.

With respect to the transfer of fundamental assets, the HEPURA’s prior approval is also necessary except for combined licence holders, persons authorised to supply electricity (except for universal service providers), authorised operators of private lines and direct lines, recharging point operators and authorised operators of electricity storage facilities. The HEPURA has 75 days to approve the transfer of fundamental assets.

The HEPURA examines whether the purchaser meets the financial, business and technical criteria, and has the facilities and qualified staff described in specific other legislation that are necessary for the continuous and long-term execution of the activity for which the authorisation is requested. The HEPURA also considers whether the purchaser complies with the energy efficiency requirements. If the purchaser is engaged in bankruptcy or liquidation proceedings, the HEPURA rejects the application. The HEPURA may also reject the application if the purchaser’s operational licence, or that of its legal predecessor, has been revoked for reasons attributable to the applicant or its predecessor within ten years prior to the submission of the application.

At national level, energy-related functions are fragmented among different entities and governing bodies. The Ministry of Innovation and Technology, more specifically the State Secretariat for Energy and Climate Policy, is primarily responsible for the creation of national sectoral policies and the implementation of the National Energy and Climate Plans. There is also a minister without portfolio overseeing the decision-making in energy-related issues, such as the TSO (MAVIR) and the State-owned DSO (MVM), and another minister without portfolio in charge of Paks II nuclear power plant affairs.

The independent transmission system operator, MAVIR, is responsible for the safe, uninterrupted and secure operation of the whole Hungarian electricity system; eg, for balancing the deviations of balance groups, allowing access for system users on an equal basis, ensuring the economical and efficient operation of the transmission network, as well as the operation and extension of the electricity market.

The HEPURA is the independent regulatory body of the energy and public utility market, supervising the energy sector. The HEPURA’s activity includes, in particular, licensing, supervision, price regulation, and tariff and fee preparatory tasks.

According to the Electricity Act, the HEPURA closely co-operates with the Hungarian Competition Authority in order to ensure the protection of competition on the electricity market in compliance with the relevant EU regulations and national laws, to ensure consistent application of law, and to carry out the assessment of significant market power. The HEPURA may set reasonable limits, such as price limits and provisions aimed at the protection of transparent supply, adequate bidding process and non-discriminatory contracting. If the licence holder infringes these obligations, the HEPURA is entitled to impose sanctions and to order the licence holder to re-establish the lawful conditions.

Act LVII of 2018 on the supervision of foreign investments conflicting with the interest of Hungarian national security (Foreign Investment Act) entered into force on 1 January 2019, establishing a foreign investor screening process in the energy, financial, telecommunications and national defence sectors. The act affects investors from outside the EU, EEA and Switzerland (see 1.3 Foreign Investment Review Process).

The Electricity Act was modified due to the implementation of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II). Under MiFID II, options, futures and any other derivative contracts relating to commodities are considered to be financial instruments. Therefore, the Electricity Act was amended and as a result only spot transactions can be concluded on the regulated electricity market (ie, HUPX). This means that transactions relating to derivative contracts cannot be concluded on the regulated electricity market as of 3 January 2018; commodity derivative contracts can only be concluded on the newly set up trading venue, HUDEX (see 2.1 Structure of the Wholesale Electricity Market).

As a member state of the EU, Hungary is obliged to implement the Clean Energy Package of the EU that has been recently adopted. The Clean Energy Package will impact Hungary’s renewable energy policy.

By the end of 2016, hundreds of new applications had been submitted by solar project developers, with a total capacity of around 2,000 MW, in order to participate in the very favourable feed-in tariff (FiT) support scheme. Since 2017, the FiT system – which guarantees the mandatory off-take of generated electricity – has been replaced by a new renewable scheme (METAR). In the new scheme, the support price is subject to competitive tendering, therefore the system requires more flexibility, efficiency and risk-taking from solar project developers (see 3.3 Principal Law and/or Policies to Encourage the Development of Alternative Energy Sources). Nevertheless, the Hungarian 'solar boom' does not seem to be cooling down. Experts estimate that in the coming years solar power plants with a total capacity of around 3-4,000 MW will be developed, which will have a significant effect on various sectors (eg, electricity transmission and generation) of the Hungarian power market.

The Electricity Act and the Implementation Decree contain the fundamental rules of wholesale electricity trading and the transparency requirements, in addition to Regulation (EU) No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency (REMIT). The Electricity Act sets out those services where regulated prices shall be applied (eg, universal services). The Electricity Act, as well as Act CXX of 2001 on the capital market and Act CXXXVIII of 2007 on investment firms and commodity dealers, and on the regulations governing their activities, contain the principal rules on regulated markets (ie, exchanges).

In addition to the aforementioned laws, the TSO’s International Operational and Commercial Code, Network Code and Commercial Code also contain regulations regarding wholesale trading.

Therefore, the principal laws applicable for the wholesale electricity market consist of the following:

The Hungarian electricity market has been structured in compliance with the Third Energy Package. This means that consumers are free to choose their suppliers; the price of electricity sold on the wholesale market is not regulated. On the retail market, household consumers and micro enterprises are entitled to universal service, which is subject to regulated prices. These consumers are mostly supplied by universal service providers. They are free to contract with any trader; however, no real competition exists on the household market, mainly due to the low regulated prices. On the wholesale energy market, traders are free to set their prices.

Under given circumstances, the HEPURA may declare that a market operator has significant market power, in which case the HEPURA may set price caps or order the sale and purchase of electricity at auctions in respect of such operator.

The wholesale electricity market is also affected by renewable energy subsidies, such as feed-in tariff systems and premiums that were introduced by the government in order to boost renewable energy production (see 3.3 Principal Law and/or Policies to Encourage the Development of Alternative Energy Sources).

Wholesale energy trading is subject to a licence issued by the HEPURA, which can be obtained by Hungarian or foreign companies seated in the EU or EEA. In Hungary, there are several privately owned energy trading companies; however, the State-owned, vertically integrated MVM has significant market power in the electricity market.

There are forward, day-ahead and intraday markets. Bilateral trading also exists at all levels of physical and financial trading, typically for non-standard products. Trading is mostly undertaken through bilateral agreements (mostly with standardised contracts for OTC trading; eg, EFET Master Agreements and Annexes) or exchanges. HUPX operates a regulated spot power exchange where standard hourly and block day-ahead electricity products can be traded (HUPX DAM), as well as an intraday market (HUPX ID). Since MiFID II entered into force, derivatives and futures are traded on HUDEX.

Currently, there is no power capacity market in Hungary. However, there is a 'single-buyer capacity market', which is an ancillary service 'market', where the TSO (MAVIR) purchases capacities from power plants through tendering procedures in order to balance the system. In Hungary, the so-called balancing circle system operates, which means traders shall join or establish a balancing circle in order to trade with electricity. On the wholesale electricity market, bilateral agreements are mainly schedule based. Nodal prices do not exist in Hungary.

Import and export of electricity to or from other jurisdictions is permitted in Hungary. Cross-border trading of electricity and network usage are regulated by Regulation (EC) No 714/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity and repealing Regulation (EC) No 1228/2003.

Hungary is a well interconnected market, with voltage transmission connection to seven of its neighbouring markets. The main international cross-border flows show a general direction from the western and northern borders (Austria, Slovakia, Ukraine) to the eastern and southern borders (Serbia, Croatia). In Romania, the price level is generally similar to Hungary, therefore physical flows change according to 4MC (NTC based DAM market coupling of CZ, SK, HU, RO) price patterns. Considering that Hungary is at a higher price level than Austria, Slovakia and Ukraine, there is a substantial flow from these markets. Main export directions are towards Serbia and Croatia; however, hydrologic situations and major power plant overhauls play a decisive factor in its seasonal changes.

At present, the supply mix of electricity in Hungary is as follows:

  • nuclear 35.7%;
  • import 28.6%;
  • gas 17.86%;
  • oil 0.16%;
  • lignite 10.51%;
  • coal 0.10%;
  • biogas 0.45%;
  • biomass 3.43%;
  • waste 0.89%;
  • solar 0.20%;
  • wind 1.64%; and
  • hydro 0.47%.

The market concentration of companies is governed by Act LVII of 1996 on the prohibition of unfair trading practices and unfair competition (Competition Act). The Competition Act specifies the circumstances where concentration shall be rejected by the Competition Authority. The Electricity Act governs the HEPURA’s market surveillance rights and the conditions of significant market power procedures.

The main legislative acts are Act LXXXVI of 2007 on electricity (Electricity Act), accessible at https://net.jogtar.hu/jogszabaly?docid=A0700086.TV&searchUrl=/gyorskereso%3Fkeyword%3Dvet; and Act LVII of 1996 on the prohibition of unfair trading practices and unfair competition (Competition Act), accessible at https://net.jogtar.hu/jogszabaly?docid=99600057.TV.

In Hungary, the Competition Authority examines the concentration and M&A of companies that could affect the competition on the market. Besides the Competition Authority, the HEPURA also conducts market assessments (significant market power procedures) to avoid prevention, restriction or distortion of competition and has certain powers to intervene if it finds that certain market players have significant market power.

There are no specific limits regarding concentration, but the Competition Authority may reject the merger clearance if the merger could lead to a significant negative impact on competition in the relevant market. The Competition Act sets out the following conditions for when the concentration of companies shall be notified to the Competition Authority: (i) the combined net turnover of all groups of companies involved and the net turnover of the companies controlled jointly by members of the groups of companies involved with other companies of the previous financial year exceeded HUF15 billion, and (ii) among the groups of companies involved there are at least two groups with net turnover of HUF1 billion or more in the previous year together with the net turnover of companies controlled by members of the same group jointly with other companies.

Even if the aforementioned conditions are not met, the concentration shall be reported to the Competition Authority if it is uncertain whether it could significantly reduce competition on the relevant market. The Competition Authority may prohibit the concentration if the concentration results in a significant impediment to competition on the relevant market or approve the concentration with certain conditions.

The HEPURA may impose obligations based on the outcome of its significant market power procedure, which may include:

  • to affect supplies in an open and transparent way;
  • the use of price cap;
  • the use of cost-based pricing mechanisms;
  • the obligation of making offers; and
  • the application of non-discriminatory contract terms.

In addition to the merger clearance and significant market power procedure, the merger of energy enterprises may also depend on the HEPURA’s prior approval (see 1.4 Principal Laws Governing the Sale of Power Industry Assets).

The Competition Act contains the general prohibition of anti-competitive behaviours.

The Competition Authority is responsible for the enforcement of competition rules and the carrying out of tasks pertaining to competition. The Competition Authority co-operates with the European Commission in the application of Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU). The Competition Authority initiates competition control proceedings if it identifies an infringement of the Competition Act. During the competition control proceeding, the Competition Authority is entitled to use the following investigative measures:

  • request for information;
  • hearing of witnesses;
  • access to documents;
  • conduction of on-site inspection without prior notification, based on judicial authorisation at the undertaking or even in private rooms and cars of the staff; and
  • seizure, sealing or making forensic images of the computer database.

Based on the findings of the competition control proceeding, the Competition Authority may:

  • establish infringement of law;
  • order a situation violating the law to be eliminated;
  • prohibit the continuation of the conduct that violates the provisions of the law;
  • impose obligations on the undertaking, the commitment of an infringement by which it has established;
  • order a corrective announcement to be published in respect of previous information that is likely to deceive in the case of unfair manipulation of consumer choice;
  • impose fines; and
  • establish that the conduct under review is not unlawful.

The maximum amount of the fine is 10% of the company’s net sales revenue, or the net sales revenue of the group – of which the penalised company is identified in the resolution as a member – for the financial year preceding the year when the resolution was adopted. If the fine is imposed on associations of companies, the maximum amount is 10% of the previous financial year’s net sales revenue of the member companies.

Hungary ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change in 2002. Based on the protocol, Hungary must reduce its greenhouse gas emissions by 6% compared to the pre-industrial levels for 2008-12. In addition, Decision No 406/2009/EC of the European Parliament and of the Council of 23 April 2009 on the effort of member states to reduce their greenhouse gas emissions to meet the Community’s greenhouse gas emission reduction commitments up to 2020 (Effort Sharing Decision) establishes binding annual greenhouse gas emission targets for the member states for 2013-20. The national emission shall not exceed a 10% increase in greenhouse gas emissions compared to the 2005 level. As an extension to the Kyoto Protocol, Hungary ratified the UN’s Paris Agreement in 2015, where the EU’s nationally determined contribution includes a collective target to reduce greenhouse gas emissions by 40% until 2030 compared to the 1990 level.

As Hungary is an EU member state, the EU-ETS rules shall apply. In this regard, Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC (EU-ETS Directive) is implemented in the national legislation through Act CCXVII of 2012 on the participation in the EU-ETS system and the implementation of the effort sharing decision. Other national laws include Government Decree No 306/2010 (XII 23) on air protection and Government Decree No 314/2005 (XII 25) on environmental impact assessment and integrated pollution prevention and control (IPPC) licence.

The list of relevant laws includes the following:

Currently, there are three coal and lignite-fuelled power plants in Hungary, which are Mátra Power Plant, Oroszlány and Tatabánya, and two lignite mines, in Mátra and Bükkalja. In recent years, some of the old coal-fired power plants have been shifted to biomass (eg, Kispest and Dorog Power Plant) or have been closed (eg, Inota Power Plant). According to the relevant policies, such as the Paris Agreement and Directive 2010/75/EU of the European Parliament and of the Council of 24 November 2010 on industrial emissions, all coal-fired power plants shall be closed by 2030; however, in the case of Hungary, the exact phase-out deadline is still to be defined.

As underlined by the current 2030 National Energy Strategy (with respect to existing best available technologies), coal and lignite represent essential strategic reserves in the energy mix, ensuring energy security and reducing energy dependence. Other relevant policies include the National Mineral Asset Management Action Plan published at the end of 2017 for the implementation of Government Decision 77/2011 (X 14) on the National Energy Strategy.

Therefore, the list of corresponding legislation is as follows:

Hungary implemented Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC. In this respect, the national target for the share of energy produced from renewable sources in the gross final consumption of energy was set at 13% by 2020. With the entry into force of Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources (RED II), a new framework was established for meeting the EU target of 32% of renewable energy in the gross final energy consumption by 2030.

In Hungary, the production of electricity from renewable sources is supported by a feed-in tariff (FiT) system for installations with an installed capacity of 50-500 kW. The FiT system was replaced by the so-called METÁR system as of 1 January 2017, which includes a new feed-in-tariff system (METÁR-FiT) up to 0.5 MW installed capacity, a “green premium without tendering” system for installed capacity between 0.5-1 MW and a “green premium granted through tendering” system for installed capacity over 1 MW. In the old FiT system, the generated electricity is sold to the TSO at a fixed price, whereas under the new METÁR system the electricity is sold directly to traders or the stock market with price correction.

The HEPURA is the central agency for the FiT and METÁR systems. The FiT price, the supported quantity and the support period, as well as the margin of METÁR price correction are defined by the HEPURA.

Accordingly, the list of corresponding laws and regulations consists, in particular, of the following:

  • Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC;
  • Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources (RED II);
  • Act LXXXVI of 2007 on electricity (Electricity Act);
  • Government Decree No 273/2007 (X 19) on the implementation of certain provisions of the Hungarian Electricity Act (Implementation Decree);
  • Government Decree No 389/2007 (XII 23) on the obligatory dispatch and purchase of electricity generated from waste or from renewable energy sources (Feed-in Tariff Decree); and
  • Government Decree No 299/2017 (X 17) on the feed-in tariff for renewable electricity and the premium tariff (Premium Decree).

In general, the construction of new electricity generation facilities (ie, power plants) requires the following authorisations:

  • a construction licence and an electricity generation licence, separately (forming a single licence only if the respective new power plant is below 50 MW);
  • a building permit;
  • an environmental permit or IPPC licence; and
  • other construction-related permits and approvals (if needed), including, in particular, a water permit (eg, for wastewater discharge), approvals by the local DSO and TSO, and a permit of the land registry authority (eg, for the reclassification of the project land).

The construction licence and electricity generation licence (or the combined licence of small power plants) are granted by the HEPURA, whereas the building permit is issued by the Construction Department of the Local Government Office. A combined licence is not necessary if the power plant’s capacity is below 0.5 MW and a building permit is not required if the capacity at the connection point to the grid does not exceed 50 kVA. The other construction-related permits are granted in general by the respective departments of the Local Government Office. It is important that even if there is no need for other such permits, the Construction Department may ask for an approval by the respective departments during the building permitting procedure, in which case the departments can define additional terms and conditions of the construction. The environmental permit and the IPPC licence can be requested at the Local Government Office.

Once the construction of any electric energy facility has been successfully completed, the constructor at most times has to apply for commissioning approval at the same Local Government Office. If the commissioning approval has been given, the commercial operation of the facility may start.

The principal laws regarding the establishment and operation of electric energy facilities, including the necessary licences of the HEPURA, are set out in the Electricity Act and the Implementation Decree. In addition to the Electricity Act, the TSO has its own grid codes – such as the International Operational and Commercial Code, Network Code and Commercial Code – specifying the relationship of the TSO and other market participants; eg, network access, and balancing and reporting matters.

Act LXXVIII of 1997 on the formation and protection of the built environment (Construction Act) and Government Decree No 312/2012 (XI 8) on official procedures and inspections for construction and construction supervision, as well as on official services for construction, contain the principal rules on construction works, the procedural requirements and deadlines. The Electricity Act and Government Decree No 382/2007 (XII 23) on the procedures of the authority licensing construction in the electricity sector (Power Facility Construction Decree) set out the specific rules on the building permitting of electric energy facilities (in general), including the necessary permits and procedures.

In addition to the building permit, an environmental permit or IPPC licence may also be necessary for the establishment of electric energy facilities under Act LIII of 1995 on the general rules of environmental protection and Government Decree No 314/2005 (XII 25) on environmental impact assessment and integrated pollution prevention and control (IPPC) licence.

The list of corresponding legislative acts are as follows:

The regulatory process of constructing and operating new electricity energy facilities consists of the following main steps:

  • land registry procedures (if necessary); eg, taking the project land out of cultivation, separation of the project land into multiple plots;
  • filing of a statement of claim to the local DSO; eg, to secure the grid connection of the power plant;
  • preparation of a preliminary feasibility study;
  • building permitting procedure and receipt of a final and binding building permit;
  • preparation of a grid connection plan and approval of the grid connection plan by the local DSO (if necessary);
  • signing of the grid connection agreement with the local DSO (if necessary);
  • construction of the electric energy facility and the grid connection (if necessary);
  • permitting procedures at the HEPURA;
  • trial operation of the electric energy facility and application for membership in a balancing circle (if necessary);
  • application for commissioning approval at the HEPURA; and
  • signing of an operation and maintenance (O&M) agreement, grid usage agreement and balancing circle membership agreement (if necessary).

Factors that are considered when deciding on the approval of electric energy facility projects include, in particular, the financial plan of the developer, the financial report from the past three years, the environmental impacts of the project, the technical aspects and quality standards of the facility, the compliance with security and safety standards.

If an environmental impact assessment is necessary for the construction of electric energy facilities, the environmental authority may hold public hearings provided that more than one municipality is affected.

The typical terms and conditions of construction and energy generation licences consist of the following:

  • the rights and obligations of the producer; eg, the right to produce and take over electricity, compliance with the quality standards, adherence to the schedule;
  • term of the licence (depending on the specifics of the project);
  • operation and maintenance of the facilities, quality standard systems (if necessary);
  • obligations to provide data and information to the HEPURA;
  • conditions of amending or withdrawing the licence;
  • consequences of breaching the terms and conditions of the licence; and
  • potential legal remedies of the licence holder.

The building permit of electric energy facilities contains the following:

•       compliance with the building permit and the provisions of applicable law;

•       term of the building permit (that is two years, which can be extended twice for two years each time;

•       obligation to give notice on the start of construction;

•       obligation to apply for commissioning approval within 30 days from the completion of the construction; and

•       approvals and declarations of the respective departments of the Local Government Office (if applicable).

The terms and conditions of licences and permits may be amended upon request by the producer. The authority in charge may also amend the licences and permits if it is necessary in accordance with a change in the applicable law. However, amendments of licences or permits shall not adversely affect the safety, quality and price of the supply of end customers.

Based on the Hungarian Electricity Act and the Power Facility Construction Decree, the developer of electric energy facilities can either use its own property for the facility to build upon or a property that belongs to another person (ie, an alien property).

For the installation of electric energy facilities on alien property, the developer shall enter into a land use agreement with the landowner(s). If the developer cannot reach an agreement with the respective landowner(s), the provisions of Act CXXIII of 2007 on expropriation (Expropriation Act) may apply laying down the conditions of expropriation and the restriction of property rights. In such case, the expropriation or the restriction of property rights shall be reimbursed by prompt and adequate compensation paid in lump sum. The amount of compensation shall be calculated by taking into consideration the market value of similar properties, or, in the lack of similar properties, the location of the land, the access to public utilities, etc. Note that the developer and the DSO can enter into an agreement on the compensation amount and further additional conditions.

During the building permitting procedure, the developer has to prove that it has the necessary right over the project land to construct and operate the electric energy facility; that is, a land registry extract from the last three months in the case of its own properties, or the respective land use right agreement, landowner’s consent, lease agreement, etc, in the case of alien properties.

The producer has the right to apply for decommissioning of the power plant. In certain cases, it is required by law to apply for decommissioning; eg, if the construction and/or electricity generation licence expires within 180 days and the producer is not interested in the extension of the licence, or if the producer is not capable of producing electricity in compliance with the licence. The basis of decommissioning is the decommissioning study, which includes the reason, circumstances, timing, costs and financial sources of decommissioning, and the environmental and recultivational obligations.

In possession of the decommissioning licence, the producer is obliged to decommission the power plant in compliance with the terms and conditions of the licence. It is important that the decommissioning licence cannot be issued by the HEPURA if the safety of public utility networks or the supply of consumers is in danger. If the producer decommissions the power plant without a licence, the HEPURA may impose sanctions on the producer.

If the producer does not intend to operate and maintain the power plant, or if the power plant is in a condition that makes its proper functioning impossible or endangers the other users and customers of the public utility network, then the producer is obliged to apply for decommissioning approval at the Construction Department of the Local Government Office. The basis of decommissioning is the decommissioning plan and documentation.

During decommissioning, the producer must remove the electricity generation facilities, including every equipment and accessory, and restore the original condition of the project land, or, if it is impossible, adhere to the original agricultural classification of the land, or, if it is impossible, pay compensation.

In general, the construction of new transmission lines requires the following authorisations:

•       an operational licence;

•       a building permit;

•       an environmental permit or IPPC licence; and

•       other construction-related permits and approvals (if needed), including a water permit (eg, for wastewater discharge), approvals by the local DSO and TSO, and a permit of the land registry authority (eg, for the reclassification of the project land).

The operational licence can be requested by the HEPURA. The TSO must execute the maintenance repair and renovation works and improvements on the grid in a manner that ensures the interoperability and security of the electricity system and in due observation of the principle of minimum cost. The TSO is obliged to operate, maintain and develop the transmission system in a safe, reliable and effective way, and with a view to the environmental protection requirements and the security of supply. For the respective authorities in charge of other authorisations, as well as the list and accessibility of applicable law, see 4.1 Principal Laws Governing the Construction and Operation of Generation Facilities.

For the regulatory process of obtaining approvals necessary to construct and operate a transmission line, see 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities.

The operational licence of transmission lines includes the following:

•       rights and obligations in connection with the transmission services;

•       protection of the transmission network users;

•       cross-border activity;

•       preparations of mid-term and long-term development plans;

•       co-operation with other licence holders;

•       maintenance of and disposition over assets necessary for transmission;

•       operation of quality standard and communication systems;

•       conditions of outsourcing certain activities;

•       access to the transmission network;

•       obligations to provide data and information to the HEPURA;

•       separation of activities (unbundling); and

•       accounting and non-discriminatory rules.

For the terms and conditions of building permits, as well as the amendment of licences and permits, see 4.3 Terms and Conditions Imposed in Approvals to Construct and Operate Generation Facilities.

For the rules of obtaining surface access and use to the project land, see 4.4 Proponent’s Eminent Domain, Condemnation or Expropriation Rights.

According to the licence of the MAVIR, the Hungarian TSO has exclusive right to operate and maintain the Hungarian transmission system. Since MAVIR owns the assets of the transmission network system, it can be stated that the transmission of electricity is a natural monopoly in Hungary. The exclusive transmission right is granted in the licence (technically a resolution) of the HEPURA.

The Electricity Act, the Implementation Decree and the operational licence issued by the HEPURA determine the conditions for providing transmission services (ie, the rights and obligations of MAVIR).

Network usage fees and charges are regulated principally in the Electricity Act. The president of the HEPURA has legislative power to further specify the principles, application and the amount of network usage fees in its decrees.

Therefore, the principal laws governing the transmission service and the transmission charges are the following:

•       Act LXXXVI of 2007 on electricity (Electricity Act);

•       Government Decree No 273/2007 (X 19) on the implementation of certain provisions of the Hungarian Electricity Act (Implementation Decree);

•       Decree No 7/2016 (X 13) of the Hungarian Energy and Public Utility Authority on the framework rules of determining the system use charges, grid connection and special charges;

•       Decree No 10/2016 (XI 14) of the Hungarian Energy and Public Utility Regulatory Authority on the application of system use charges, grid connection and special charges; and

•       Decree No 15/2016 (XII 20) of the Hungarian Energy and Public Utility Regulatory Authority on the amount of system use charges, grid connection and special charges.

The following charges are considered as network usage fees under the Electricity Act: transmission fee, distribution fee and public lighting distribution fee. The regulation of network access fees, connection fees and special fees are set within the framework of four-year price regulation cycles. The HEPURA is obliged to carry out an asset and cost review before the opening of a price regulation cycle. During the cycle, the network usage fees are set on a yearly basis. The president of the HEPURA determines the components of the various network access fees, the principles and the regulatory framework for determining and regulating network access fees in the form of a decree. In addition, the HEPURA publishes a price methodology guideline on its website and the network usage fees in the form of a decree.

The rates of the network usage fees and the conditions of charging are uniform in Hungary. According to the Electricity Act, network usage fees must be transparent, publicly available and proportionate, and shall be applied objectively on a non-discriminatory basis. Network access fees are regulated in accordance with the lowest cost principle, considering the justified and reasonable operating expenses of efficient authorised operators, including the invested capital. The regulation of network usage fees must encourage the affected authorised operators to intensify their efficiency and to improve the quality of their services, as well as the security of supply. The network usage fees must be determined based on the previous price regulation cycles, in order to avoid major differences between the amounts. The transmission fee shall cover the TSO’s reasonable operational costs, the reasonable depreciation of assets and cost of capital, the justified costs of purchasing the electricity needed to replace the recognised network loss on the transmission network, the costs relating to ancillary services and costs relating to international network integration.

As network usage fees are established in the HEPURA’s decrees, network users may not be entitled to challenge directly the fees before the HEPURA. In Hungary, decrees are legal regulations as per the constitution. The review of legal regulations is the exclusive competence of the Hungarian Constitutional Court. Therefore, in order to apply for legal review of the tariff-setting decrees of the HEPURA, the petitioner shall turn to the Constitutional Court. Due to the conditions set out in the Constitution and Act CLI of 2011 of the Constitutional Court, the market participants have very limited ground to initiate the review of the HEPURA decrees.

The Electricity Act, in line with the pertinent legislations of the EU, provides detailed rules on network access. According to the Electricity Act, the TSO must make available the transmission networks to network users in exchange for the network access fee (connection fee) specified in the Electricity Act and the relevant decrees of the HEPURA subject to contracting obligation for the transmission of electricity. The conditions of access to the transmission network cannot be discriminatory, cannot provide grounds for abuse, cannot contain unreasonable restrictions and cannot jeopardise the security of supply and the quality of services prescribed by law. The TSO is entitled to give priority to generators using technologies free from emission of carbon dioxide, or technologies using renewable energy sources or waste, or technologies producing combined heat and power in connection with the operation of and access to networks, and such priority does not constitute a breach of the principle of non-discrimination.

The TSO may only refuse access to the transmission network and/or limit, reduce or suspend contracted supplies in an objective, transparent and non-discriminatory manner. Service may be limited, reduced or suspended in advance or during the operation of the electricity system in the following cases:

•       extraordinary network conditions;

•       any danger for life or property;

•       shortage of network capacity, generating capacity or electricity transported across borders;

•       any malfunction in the interoperable electricity system or the electricity system;

•       any imminent danger in terms of the provision of ancillary services or the governance of the system;

•       the electricity is imported from installations, the operation of which directly or indirectly endangers or may endanger persons residing in the territory of Hungary, their property or the natural environment;

•       the import of electricity is disadvantageous for the generation of electricity from renewable energy sources or waste, and the high-efficiency cogeneration of electricity; and

•       in order to carry out maintenance and remodelling work (if it cannot be performed in any other way).

In general, the construction of new transmission lines requires the following authorisations:

•       an operational licence;

•       a building permit;

•       an environmental permit or IPPC licence; and

•       other construction-related permits and approvals (if needed), including a water permit (eg, for wastewater discharge), approvals by the local DSO and TSO, and a permit of the land registry authority (eg, for the reclassification of the project land).

The operational licence can be requested by the HEPURA. At first, the HEPURA approves the operational area where the DSO may provide distribution services. For the approval of the request, the HEPURA takes into consideration the safety of supply, quality of the service and the capability of measuring. The DSO shall possess the necessary distribution network defined in laws and standards, including grid lines, switchgears, transformers, equipment and staff. The HEPURA is entitled to ask the TSO’s opinion when it deems necessary. For the respective authorities in charge of other authorisations, as well as the list and accessibility of applicable law, see 4.1 Principal Laws Governing the Construction and Operation of Generation Facilities.

For the regulatory process of obtaining approvals necessary to construct and operate electric distribution facilities, see 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities.

Generally, distribution system operation licences contain the following terms and conditions:

•       rights and obligations in connection with the distribution services; eg, ensuring the delivery of electricity to end-users, serving all market operators in an objective and non-discriminatory manner;

•       protection of the distribution network users; eg, operation of customer service centres;

•       obligations regarding network users; eg, enforcing the DSO’s general business condition and the network code’s provisions on network users;

•       co-operation with other licence holders;

•       rights and obligations regarding distribution system users; eg, system operation and maintenance duties;

•       maintenance of and disposition over assets necessary for distribution; eg, the DSO shall own the assets necessary for its service, shall secure and maintain the assets necessary for the operation and carry out operation, maintenance and development of the distribution network;

•       operation of quality standard systems;

•       conditions of outsourcing certain activities;

•       activities regarding the network system; eg, yearly development planning and submission of the plan to the TSO;

•       access to the distribution network – eg, transparent, objective and non-discriminatory access to the network – the DSO may not prescribe unreasonable restrictions and the conditions regarding network access cannot endanger the safety of supply and service quality;

•       obligations to provide data and information to the HEPURA;

•       separation of activities; and

•       accounting and non-discriminatory rules.

For the terms and conditions of building permits, as well as the amendment of licences and permits, see 4.3 Terms and Conditions Imposed in Approvals to Construct and Operate Generation Facilities.

Based on the Electricity Act, the DSOs shall continuously provide the distribution services. They may suspend the services for the possible minimum amount and time only in circumstances that are defined in the applicable law (ie, the Electricity Act and the Network Code of MAVIR).

For the rules of obtaining surface access and use to the project land, see 4.4 Proponent’s Eminent Domain, Condemnation or Expropriation Rights.

Based on the Electricity Act, the DSOs do not have exclusive right to provide distribution services in the territory specified in their operational licence. However, the DSOs must own all assets that are necessary for their activity. This may also include the grid lines; therefore, if a DSO owns a grid line in a specific territory, it practically leads to natural monopoly as the construction of a parallel grid line would be very costly. The DSOs shall ensure the access to the network in a transparent, non-discriminatory manner in consideration of network access fees and shall apply the same general terms and conditions towards network users (deviations are limited to objective technical differences between the respective grid connections). The DSOs may deviate from the regulated network usage fees downward, in a non-discriminatory manner.

The Electricity Act and the Implementation Decree define the conditions for providing distribution services and the rights and obligations of DSOs.

Network usage fees and charges are regulated in the Electricity Act; however, the president of the HEPURA has legislative power to further specify the principles, application and the exact amount of network usage fees in decrees (not resolution).

For the list and accessibility of applicable laws, see 5.2.1 Principal Laws Governing the Provision of Transmission Service, Regulation of Transmission Charges and Terms of Service.

Distribution system fees shall cover the reasonable operational costs relating to the DSOs’ activity, the reasonable depreciation of assets and cost of capital, the justified costs of purchasing the electricity needed to replace the recognised network loss on the distribution network and the reasonable cost of offsetting in the case of differing from the profile. For the other aspects of electricity distribution system charges and terms of service, see 5.2.2 Establishment of Transmission Charges and Terms of Service that is applicable here as well.

Wolf Theiss

Faludi Erős
Ügyvédi Iroda ▪ Attorneys-at-Law
Kálvin tér 12-13, Kálvin Square, 4th floor
1085 Budapest, Hungary

+36 1 4848 800

agnes.hargitai@wolftheiss.com www.wolftheiss.com
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Wolf Theiss is one of the leading European law firms in Central, Eastern and South-Eastern Europe with a focus on international business law. The firm has built its reputation on a combination of unrivalled local knowledge and strong international capability. With 340 lawyers in 13 offices located in Albania, Austria, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia, Slovenia and Ukraine, Wolf Theiss represents local and international industrial, trade and service companies, as well as banks and insurance companies. As the only law firm to have an energy practice dedicated to the CEE/SEE region, it is well placed to keep up with this complex and fast-changing market. The Budapest office is well known for its energy practice, constantly receiving top rankings from the leading legal directories. The energy team in Budapest consists of eight lawyers, led by managing partner Zoltán Faludi and practice head László Kenyeres.

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