EU authorises compensation to electricity producers in Hungary

The European Commission has authorised, under EU State aid rules, an aid scheme to compensate electricity producers for costs incurred after liberalisation of the market in Hungary.

The Commission concluded that the compensation will not exceed what is necessary to recoup the shortfall in investment costs repayment over the assets' lifetime, including a reasonable profit margin.

"The Hungarian scheme will rightly compensate incumbent power generators for the termination of long-term contracts after the liberalisation of the market, which will benefit industrial customers and end consumers in Hungary", said Competition Commissioner Joaquín Almunia.

The Hungarian scheme aims to compensate three power generators for the costs incurred as a result of the termination of their power purchase agreements (PPAs) and which they cannot recoup (the so called "stranded costs").

The three beneficiaries are Budapesti, a subsidiary of EDF, Dunamenti, a subsidiary of GDF Suez, and Pannon, a subsidiary of Dalkia. The compensation authorised today will be deducted from the amounts of aid to be recovered from them in application of the Commission Decision of 4 June 2008, which found that the PPAs involved illegal State aid incompatible with the EU internal market.

The Commission concluded that the compensation scheme was in line with its Communication relating to the methodology for analysing State aid linked to stranded costs. The Commission found that the costs taken into account for the calculation of the compensation were eligible for aid, in particular because they concern investments in assets that have become non-economical as a result of the liberalisation of the Hungarian electricity sector. Moreover, all revenues generated by the investments and aid previously received have been deducted from the cost amount taken into account for the calculation of the compensation. This ensures that there is no over-compensation.

In the mid-90s, Hungary put in place a system of PPAs as an incentive for electricity companies to invest in Hungary. Under this system, certain Hungarian power generators were selling their electricity to the state-owned incumbent electricity company MVM. Under contractual conditions, power generators were sheltered from competition, as their profitability was secured and they were not exposed to the corresponding commercial risk.

The Commission's decision of 4 June 2008 required Hungary to terminate the PPAs and to recover the aid already granted through these agreements since Hungary joined the EU. Further to this decision, Hungary introduced a law ending the PPAs and providing for the possibility to compensate power generators for losses incurred in this context.

The non-confidential version of the decision will be made available under the case number N691/2009 in the State Aid Register.