The idea of price fixing is having a real renaissance in Central Europe. If any of the retired employees of the Hungarian Price Fixing Bureau (PFB), an institution closed in 1990, had been looking for work, now is the right time for them to sign up with a new agency. In Hungary, price fixing, with the new name of “price cap” is likely to stay (for utilities and food) rather than to go soon (as was the case with fuel). And regionally, there is also considerable interest in the PFB experience: all Central and Eastern European countries introduced one or another form of price capping after the outbreak of the terrible war in Ukraine. This short article aims to draw attention to a possible terminological error: the term “price capping” is inaccurate. This has become a catch-all term that masks (important) differences between different price control mechanisms. The latest EU proposal to cap the price of natural gas, as passed on Monday, 19 December 2022, may suffer as a result of this terminological misunderstanding.
Price caps in Hungary can be divided into two broad groups: energy and everything else (mainly food). In the energy sector, there were two subgroups of price caps: domestic utility bills and fuel tariffs. This year, Santa Claus came to Hungary with a special gift: on the night of December 5, the price cap on fuel was abolished. That leaves just one subgroup of the energy industry, utilities, but it is important to understand what exactly happened with the price cap for fuel.
Any price cap system may fail in two ways: either the company obligated to supply the product can no longer financially support selling below market prices, or the price-capped product simply runs out and shortages occur. In the past six months, the Hungarian energy industry has experienced both.
The first, the financial issue, is out of the question in connection with the price cap on fuel: at the beginning of November, the most important player on the Hungarian fuel market (MOL) announced record profits. Removal of the fuel price cap in Hungary was driven by a phenomenon that the younger generation has probably never encountered before: lack of supply. The fuel price cap in Hungary was premature – it was introduced too early, before the war, in November 2021. The other Central European countries limited fuel prices only much later, responding to wartime fuel price levels. The relatively low value (480 forints) was further reduced by the devaluation of the HUF/EUR exchange rate. Understandably, it was simply not worth importing fuel to Hungary, while demand was growing – the first was petrol-tourism (half of Central Europe went to Hungary to refuel cars, lorries and tractors), and then, after the restrictions were phased in, the black market. Between January and October this year, Hungary consumed as much fuel as it did during the entire year 2021. Hungary’s existing refining and transportation capacity was simply not sufficient to meet this extra demand. Queues began to form, gas stations closed and shortages took over the previously well-functioning Hungarian fuel retail market. What is the biggest lesson from this history of capping fuel prices? The Hungarian fuel market cannot function without imports (especially diesel). In the future, any new fuel price restrictions will have to take this fact into account.
In the utilities area, the story is completely different – this was discussed in the 8 December issue of Energynomics Magazine. The Hungarian government was forced to switch to a new version of the ”rezsicsökkentés”: the price is reduced only to a pre-determined level of average consumption for household consumers, with most businesses pushed back to the competitive market. Why? The state company (MVM) that was obliged to supply electricity and gas at a reduced rate was simply unable to finance this distorted system: the purchase price was higher than the final tariff to customers. It was not electricity or gas shortages that demolished this “rezsicsökkentés”, but the difference between the official price (in forints) and the one on the international market (in euros). In short, shortages killed the fuel price cap, while “rezsicsökkentés” had to be reformed due to the approaching financial collapse of the service provider.
How does the natural gas market correction mechanism, as approved last Monday, fit with the above Hungarian examples?
As I mentioned in the introduction, in Hungary, unfortunately, several price regulation mechanisms have the same collective name: price-cap. The natural gas proposal as adopted in the EU is NOT a price cap in the Hungarian sense. There are two elements here. The first is a mechanism to correct market prices in case of extreme volatility. This is necessary given the main European natural gas price benchmark (TTF) has been behaving very strangely over the last 12-18 months. Intraday down/up price variations of 30-50 euros per MWh were common, although there were no significant changes in fundamentals. In other words, there was someone (or many) who has (have) manipulated the TTF market. This is relevant for Hungary and also for Romania because gas at the border tends to be indexed to TTF.
The other proposal is to introduce a separate price index for liquefied natural gas (LNG) imported into the EU. LNG is the only viable fast alternative to Russian gas, therefore it is particularly important that there is now a reliable market reference level (benchmark) for this until recently marginal product. The details do not matter in the context of this article and they will change a thousand times, anyway. The bottom line is this: the proposal, which was dubbed in the Hungarian press “the Brussels gas price capping”, has nothing to do with the idea of price-cap in the Hungarian sense of the word. Price regulation in Hungary was a classic price cap, a maximum price regime. The Brussels proposal on natural gas includes a market correction mechanism that would only come into play in case of extreme price movements (manipulation) and a new LNG price index. Mitigating extreme natural gas price volatility and setting a fair benchmark for LNG would help to guarantee that Central European countries, including Romania and Hungary, can offer some kind of controlled (capped) price system for domestic customers this (and perhaps next) winter.
It is rather unfortunate, then, that Hungary was the only EU government voting AGAINST the above natural gas price correction proposal on Monday. Commentators can only guess what political or other considerations might have motivated the Hungarians to go against the common wish of the other twenty-six EU countries. One thing is clear: by actively and deliberately obstructing the introduction of the gas price correction mechanism, the Hungarians were only helping one of their long-term partners: but such partner does not wear caps, but rather fur hats (usanka).
About the author Jozsef Balogh is a senior business developer for Axpo Solutions, Switzerland, with special focus on Central European and Ukrainian electricity, gas and CO2 opportunities. He had been active in the Central European energy industry in various roles since 1992. He has been especially active in Ukraine and Hungary.