Brussels, 10 November 2005
The European Commission has opened a formal investigation under EC Treaty state aid rules (Article 88(2)) into Hungary’s long term power purchase agreements (PPAs) concluded between the state-owned electricity network operator MVM Rt. and the power generators. The PPAs guarantee a return on investment to the generators without any risk. They cover around 80% of the Hungarian power generation market, leaving little room for new market entrants. The Commission has doubts about the compatibility of the PPAs with EC Treaty state aid rules that require Member States not to grant aids or subsidies which distort or threaten to distort competition within the EU’s Single Market. The investigation will allow the Commission to obtain more information on the PPAs and give interested third parties an opportunity to comment. The Commission will then finalise its assessment of whether the PPAs are likely to cause undue distortion of competition.
Competition Commissioner Neelie Kroes commented: “The Commission has a duty to verify that the EC Treaty state aid rules are respected in the electricity sector, in particular to ensure that state compensation is proportionate and does not deter new competitors from entering the market”.
In the mid 1990s, in order to ensure the modernisation of Hungary’s electricity sector, the fully state-owned and monopolistic network operator MVM Rt. entered into long term PPAs with power generators that would invest in Hungary.
Under the PPAs, MVM Rt. has the obligation to buy a fixed quantity of electricity at a fixed price, thereby guaranteeing a return on investment to the generators without any risk. The PPAs also include a guaranteed profit. They were signed between 1995 and 2001 and expire between 2010 and 2020 depending on the generators.
At present, PPAs cover around 80% of the Hungarian electricity generation market, thereby creating a serious potential obstacle to the liberalisation of this market.
In the Commission’s view, the PPAs’ compatibility with EC Treaty state aid rules, and in particular with the Commission Communication on the methodology for analysing state aid linked to stranded costs in the electricity sector (“the Methodology”, see IP/01/1077), is doubtful. An invitation to comment will therefore be published in the Official Journal, enabling all interested parties to submit their comments for further assessment.
The methodology for assessing stranded costs in the electricity sector has previously been used by the Commission to assess the progressive transition to liberalised energy markets in Austria, Belgium, Greece, Italy, The Netherlands, Portugal, Slovenia and Spain, and it is currently used to assess compensation in the energy sector in a number of other Member States. Stranded costs are costs that were incurred by companies before the liberalisation of the electricity sector, and that the effects of the liberalisation makes it impossible or very difficult to recover.