Hungary – the Way to Carbon Neutrality

Hungary and the Hungarian government are committed to achieving carbon neutrality. According to the National Energy and Climate Plan, the main areas of emphasis for doing that involve the development of renewable and nuclear capacities, as well as energy efficiency improvements.

In terms of renewable energy development, Hungary's sole focus is on solar energy. According to the strategy, by 2030, solar's total installed capacity should reach 6.5 GW, which is around 40-50% of total installed capacity in Hungary, and almost equal to peak demand (around 7 GW). Despite the aggressive ‘solar only’ concept, this plan is in line with European trends. Compared to classic capacity portfolios, solar-based portfolios are decentralized and solar-based generation is highly intermittent, therefore – besides capacity development –, a significant strengthening of the low-, medium- and high voltage networks is required. An additional issue is the increase of balancing power and ancillary service demand. Currently, the maximum automatic frequency restoration reserve demand is around 500 MW. Assuming the targeted 6.5 GW solar capacity is achieved, demand will double (to around 1 GW). The exceeded balancing and ancillary service demand create the need for additional gas-fired capacity development.

Solar backed up by nuclear
As solar plants create carbon neutral energy only when the weather conditions are appropriate (which is only around 25% of the year), further supply will be needed. Due to its geographical conditions, the most realistic answer for Hungary is nuclear capacity construction. Towards that end, there are two projects which are ongoing. One is the lifetime extension of the Paks 1 nuclear power plant, while the second is the construction of the Paks 2 nuclear power plant. The lifetime extension plan, which will elongate the existing Paks 1 nuclear power plant's life by ten more years, is under technical, legal and commercial review. Construction of the Paks 2 nuclear power plant is to provide carbon neutral power for Hungary and the broader CEE region for the next 60 years. The development will have material impact on the power supply of the region. Without nuclear energy, it would be very difficult for Hungary to attain its carbon neutral power supply security objective.

Energy efficiency
The third way to reach carbon neutrality for Hungary is an intensive improvement of buildings' energy efficiency. According to the Energy Efficiency Directive of the European Union, Hungary should improve energy efficiency by 32.5% by 2030, which means an approximate increase of 7 PJ/year to meet the energy efficiency target. To facilitate the process, the Hungarian government has introduced a new energy efficiency obligation system. The energy regulator has introduced penalties for electricity, gas and fuel providers as well those who are not able to generate sufficient energy efficiency investments. The regulator and industry expect an additional EUR 3 billion in energy efficiency investments in the next ten years. The primary investment targets are residential and non-residential buildings, and the improvement of energy efficiency for industry and for services. The energy efficiency obligation system does not support power generation investments.

Financing green investments
According to estimates from the Ministry for Innovation and Technology, the financing needs of the carbon-neutral transition could reach HUF 50 trillion by 2050. Given the huge sums involved, the role of the financial sector will be very important in providing financing sources for these investments and developments. Several measures have been taken at both the European and national levels to encourage this evolution. In Hungary, the National Bank of Hungary (MNB) has established incentives for banks to support green financial products, and for setting up new schemes for facilitating investments towards carbon neutrality:

Housing loans: In respect of property sale and construction, real estate should have an energy rating of ‘BB’ or better. In the course of refurbishment the project should include at least one modernization measure specified by MNB (e.g. installation of solar panels, or thermal insulation). MNB imposes lower capital requirements on disbursing institutions, if the APR on the ‘green’ loan is at least 0.3 percentage points more favourable (compared to other similar products).
Corporate and municipal loans: A significant capital requirement discount can be applied in cases of investment or project loans financing renewable energy production.
Green bond exposures: MNB has introduced a capital requirement discount for banks investing in such green bonds. Furthermore, the MNB itself is active as an investor in the green bond market in Hungary.
New funding program for individuals: As part of the Funding for Growth Program, MNB will launch a new preferential loan program with a budget of HUF 200 billion. MNB provides refinancing to credit institutions at a 0% interest rate, which they can use to lend to the retail market at a fixed interest rate of 2.5% with a maximum maturity of 25 years if such loans are used for new, highly energy efficient (at least BB-rated) residential properties. The program provides a significantly higher credit line compared to other state-subsidized loans available, up to HUF 70 million.

Involvement in green lending has already been widely featured on the agenda of domestic credit institutions' product development plans, and such products are increasingly available at more and more financial institutions, but overall, they are not ubiquitous on the domestic market. This could change through MNB's new programs, which might also give a boost to the supply of specifically green credit products by providing favourable financing. This is important for financing renewable energy production and, more importantly, improving energy efficiency, thus setting a course towards net zero targets.

(Géza Losonczy is the Director of KPMG in Hungary; Gergő Wieder is Senior Manager at KPMG in Hungary)