HUPX: National interest or MVM’s interest?

Has the light bulb come on for MVM or has it decided to play another game on the Hungarian market? This was the question dominating the workshop organized by the new HUPX company with participation of EPEX Spot, a European power exchange company on April 7th. The day-ahead power market will be coming to Hungary by July 1, 2010. A reference price for the Hungarian market may finally be created.

First, it should be stated that a day-ahead market in Hungary meets the pent-up demand of energy traders and the market along with paving the way for a more efficient operation of the electricity market in Hungary and in the CEE/SEE region.  However there does remain skepticism and many questions as to the role that MVM will play on the market and MVM’s overall strategy.

To create a liquid tradable market exchange you need sufficient buyers and sellers participating. But the problem in Hungary is there is an elephant in the country – MVM. It is the (state owned) dominant market player. It has signficant production capacity, plays a market intermediary role and owns the TSO, MAVIR and now there is a growing interest in distribution companies, in addition to all this it is the owner of HUPX; in other words it is a big fat elephant that if it decides to sit down, then no one is going anywhere.

Gabor Szorenyi director of the Hungerian Energy Office stated at the workshop, this is essentially what happenend over the past two years, politically, and to the benefit of MVM, nothing has occured that would loosen MVM’s grip on the Hungarian electricity market to promote greater market liquidity. Now the possibility exists that some liquidity will develop. But how much is the question?

And this was THE question by participants. To what extent is MVM going to participate in HUPX, since it is the main company that can create liquidity on the market? The strange thing about the workshop was that while the representatives from HUPX and EPEX were there, no one from MVM showed up to explain how they would participate. A representative from the trading arm of MVM Partners was there to explain that yes, MVM was planning to participate. While we also learned that MVM was looking at optimizing the times on its power plants so it could participate the extent of participation is unknown.

There are examples in the CEE/SEE region that can prompt skepticism about the extent that MVM has seen the benefits of an open and transparent market. The Romanian market is a good example where an active exchange operates, but due to control by the state in the generation market and the portfolio arrangement of these companies, the market remains sticky.  That is cheap hydropower can be sold on an international bilateral basis, outside the exchange, while more expensive generation is kept for both the regulated consumers and for the power exchange.

This shifting of generation assets to different domestic and foreign markets is an option that MVM holds. Their current study into asset optimization should be seen as a warning signal for the regulator and other market participants that some generation assets may not be available on the power exchange. How this plays out, whether expensive generation assets are retained for the free market or the ‘regulated’ market remains to be seen – or even its daily availability. Asset optimization may just translate into profit optimization for MVM and not optimization of the market.

Another key issue is the control that MVM exerts over MAVIR. I actually have a favorite part in the presentation from the CEO of HUPX. In extolling the benefits of HUPX, the slides states,

100 % Hungarian ownership guarantees national influence

Hungary’s international influence will be strengthened

This is great. Now I buy my share of Unicum, but is there a place for “national influence” in what will develop into a regional exchange? Soon HUPX should function on an interregional basis as effectively as on a national basis. The regional role of energy traders and energy companies with their regional generation portfolios and their attempts to optimize these at the regional level leaves little room for more national interests to be asserted. The chronic under investment into Hungarian generation and transmission along with current high prices are the result of ‘national interests’ being pursued.

The role that MAVIR can play in concert with HUPX in protecting Hungary’s national interest would actually be horrible for Hungary’s true national interests. Hungary’s true national interest lies in integrating its national electricity market into the CEE and SEE regions for both security of supply benefits, meeting climate change commitments and diluting MVM’s influence in the Hungarian generation mix.

Ahh, did I just write that… regional market integration would dilute MVM’s influence on the Hungarian market? Yes, I did. Imagine, rogue traders would be buying and importing power to the detriment of MVM’s higher priced facilities – or whatever it chooses to charge. Now would that be in the national interest? Could MAVIR help the situation by restricting access to and from the Hungarian market (e.g. Bulgaria)? Will there be underinvestment into cross border infrastructure? What will the be the NTC and ATC values? How much do you trust MVM to participate in HUPX in good faith with its monopolistic control? Will it operate in Hungary’s national interest or in MVM’s own interest?

There should be more indicators that MVM is changing its ways then simply setting up HUPX. MVM needs to develop a regional growth strategy – not a Hungarian national growth strategy, there are enough private players who want into the market to begin to satisfy the generation demand. If you already dominate the market, what good does it do to seek to dominate it more? Why buy into E.ON distribution? A look around at EU and (other) national policies shows that the regionalization of energy markets is occuring, a MVM concentrated on dominating the national market demonstrates a lack of vision that will be eroded over time by endless EU directives and investigations, not to mention continual underinvestment.

If you look at the US and Europe in the 1990s, companies that have expanded beyond their national base (while it was protected) did well (my PhD and recent work has been on this topic). Merger and acquistion activity, or even organic growth at a regional level can be good business – think CEZ. MVM needs to create and act on a regional business strategy – HUPX can be the start of this (although for MVM to succeed at a regional level significant internal changes need to occur).

There remains a lot of unanswered questions as to the viability and level of power that will be available on HUPX. Before the exchange begins operations and companies spend significant amounts of money to join the exchange MVM needs to state the extent that they will participate  – and how. Hopefully the day has finally arrived for Hungary to build a robust electricity exchange with multiple product offerings. This can only benefit the range of consumers in Hungary and their different types of demand. But enough questions remain that some regulatory intervention may be required to reduce MVM’s hold on the entire electricity market. Allowing it to construct a hobbled electricity exchange and expand its domestic influence should not be something it gets away with. Market participants and HEO need to step up and make their views known.