If you wish to have a heated discussion with an average Hungarian, you do not have to talk about soccer or Transylvania or Tokaj wine, it is enough to mention one word: Rezsicsökkentés. “Rezsi” means public utility charges, “csökkentés” means reduction: in other words, how to reduce electricity, gas and district heating bills to households?
This single word is behind the never-ending election success of the current government – since 2010, the FIDESZ party was re-elected three times. This short writing will try to summarize the history of Rezsicsökkentés, plus will explain why Romania should NOT follow this Hungarian gamble with commodity prices, exchange rates and domestic consumption.
The whole rezsicsökkentés idea started around December 2012, just before Christmas with the usual national populist brainwash strategy: utilities are taking home to Germany (Eon, RWE and EnbW), to Italy (Italgas) and to France (EdF, Veolia and GdF) too much money from the poor Hungarian electricity and gas customers. One politician, with zero energy industry background, was promoted as the Commissioner responsible for reducing electricity and gas bills. The government did not notice that there was a (semi)independent energy regulator in Hungary at the time, who would have been better placed to execute this political order. Anyway, electricity and gas prices, plus use of system charges were reduced in several steps; the price of district heating was “frozen” (a funny word in the heating sector). Official statistics showed that by 2014 (new elections) Hungarian households had the cheapest electricity, gas and district heating prices in Europe.
What was the net result of the above decisions? With the exception of E.On and Veolia, all foreign investors pulled out of the Hungarian electricity and gas sectors. MVM, the national champion, took over most (but not all) distribution companies. At the same time, Hungarian electricity and gas consumption was steadily increasing – why save electricity and gas, when the price is capped? Commentators tried to explain that this version of the rezsicsökkentés will destroy the Hungarian electricity and gas sectors. Hungary is a major importer of both electricity and gas; it is not a good idea to cap the price of these utilities in HUF, when both electricity and gas are sold in euros. Also, the original rezsicsökkentés was unfair. All households had the same price, hence the super-rich (with swimming pools and Tesla cars) were the main beneficiaries of this arrangement, and not the poor with little consumption. Finally, the Hungarian electricity distribution system was in need of multi million euro investments to accommodate RES producers, especially PV farms. The rezsicsökkentés discouraged investors from spending money on upgrading the Hungarian distribution network, but at the same time PV investments were advertised and promoted. The final result of this disastrous policy was the Hungarian government’s announcement just few weeks ago: all future PV connections to the Hungarian grid are on hold, until further notice. This is the only EU country that is actively blocking ready-built (money spent) RES producers to start generating electricity.
All would have been good, had the European energy crisis not reached Hungary. As from Q2 2021 (well before the awful Ukraine war) Hungarian electricity prices started to sky rocket. The original reason for this increase was the systematic manipulation of CO2 prices, then gas prices jumped to absurd level, following Russia’s decision not to honor long-term contracts. Given that the last MWh of balancing electricity is always from gas in Hungary, HUPX (Hungarian electricity exchange) mirrored gas price increases in real time. The Black Friday of modern Hungarian energy policy was 26 August 2022: year ahead electricity was trading at euro 1,003/MWh (it was never before in the four-digit territory), while forward gas prices were over euro 340/MWh. At the same time, household electricity and gas prices remained at the original, pre-war level and in HUF. No advanced economic knowledge is required to notice that this arrangement was doomed to failure: raising euro commodity prices, plus collapsing HUF-EUR exchange rate (it went over 400 resistance level for the first time this summer) was a mortal combo for the Hungarian government.
Most ministers realized by mid-Summer that something must be done about rezsicsökkentés to avoid bankruptcy. But what step(s) were open for the Hungarian government, given that one of the major election promises was precisely that rezsicsökkentés should remain forever? The first step happened on 1 July 2022: the Hungarian regulator reduced (repeat: reduced) domestic electricity prices, but increased use of system charges for all users. Again, this must be an one-off in Europe: no responsible politicians would reduce electricity prices during the energy crisis, especially not in a country that is neighboring Ukraine. The second step was a major announcement from the prime minister, which was actually made in Romania, at Băile Tușnad. HUF 2,100 billion (over euro 5.21 billion) – this was the total price of the rezsicsökkentés for this year. The prime minister confirmed that the Hungarian government could not continue with this arrangement: rezsicsökkentés must be reformed.
The main point of rezsicsökkentés v 2.1 was all about limiting the number of consumers who are entitled to reduced price electricity and gas. First, SMEs were kicked out, without much time or explanation, then annual consumption limits were introduced for domestic customers, finally, the price regulation of district heating changed with the introduction of “Separately treated establishments” (basically, swimming pools, theatres, hospitals, schools and non-profit organizations, like International Red Cross). The average price increase for this category of district heating customers was in the 1,800% (one-thousand-eight-hundred percent) region! The above decisions made more damage to Hungarian economy and society, than the two years of Covid. Hundreds of SMEs closed down, some domestic customers have to choose whether they eat/drink or pay utility bills, and almost all public buildings from swimming pools to movies shut down immediately. I was (un)lucky enough to travel with a TV crew all over Hungary to interview SME investors, who were forced to shut down due to high energy prices. I have never seen so many grown-up people cry.
What is the moral for the Romanian decision-makers? Resist the temptation to reduce the price of basic commodities that are in short supply at home: going short of imported products (as the trader would say) is never a good idea, especially so in the case of volatile goods, like electricity or gas. Rather increase wages to European level and let customers pay the real price of electricity, gas and district heating. Finally, do not make political promises that concern traded commodities: as the above Hungarian example shows, markets can and do go crazy and the growing gap between (i) capped prices in local currency, and (ii) international free-market prices in euro can bankrupt a country. Remember the good warning from the London underground: “Mind the gap!”
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This article first appeared in the printed edition of Energynomics Magazine, issued in December 2022.
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