Thursday, October 11, 2007

Hungary Bites off its Nose: no transparency means no jobs

The realization of high electricity prices are going to impact the Hungarian economy and the subsequent jobs and tax revenue may be hitting home. One can only hope that the Hungarian government takes note at what the country's manufacturers are saying.

In an FT article:

Soaring electricity prices and uncertainty about energy regulation could put a halt to a €220m ($311m, £153m) industrial project that stands to generate more than €1.1bn of investment and create 4,000 jobs in a depressed region of Hungary, according to one of the country’s leading chemicals companies.

Electricity prices are already among the highest in the European Union – and are set to rise by nearly 50 per cent in 2008.

Now how did Hungary find itself in this position.... through protecting a variety of interests. That is wanting the state to be in control of electricity prices and reaping the benefits from it.

As explored in REKK's Central Eastern Europe's Electricity Market project in 2005 and 2006, the lack of generation in Hungary, the lack of cross-border capacity, the use of long-term contracts and the opaqueness of cross-border allocation of capacity all lend themselves to an unstable, uncompetitive and disfunctional market. This has only been exacerbated by Hungary's recent attempt at introducing 'competition' to comply with the EU's 1224 directive of all members states allowing comeptition by July 2007.

All the law did was 'open' the market to an unregulated monopoly (state owned) MVM, creating further in-transparency in the market and not at all sending the right signals for competition to take off. Actually, even if the laws allowed competition to occur, further market changes would have to occur, like getting ride of long term contracts, building more cross-border capacity, and building more generation.

The prices that will be charged to industrial users in 2008 is a direct result of these past state actions and their inability to create a transparent marketplace. The result is now a lack and a loss of investment for industrial users and more unfairly to the people of Hungary the loss of jobs.