Hungary’s Non-Profit Utility Model: like nationalizing the steam locomotive

The typical reaction to Hungary’s Prime Minister Orban and his ruling Fidesz politicians’ efforts to make utilities non-profit is, “Oh, they are nationalizing the foreign owned utilities and driving them from the country.” I think after more than three years of Fidesz economic consolidation, none of this is surprising.

Making utilities non-profit (whether private or public) is like nationalizing the steam locomotive in the 1950s, technology progresses, so don’t be caught with a Beta-max video machine. The energy utility model, gas and electricity, is outdated and set to become the rail lines of the late twentieth century – that is the remit of government and not private industry interested in profitable growth. New technologies and businesses are present that make the electrical wires and gas lines to homes and businesses a low margin business. In essence the Hungarian government is stepping in thinking they are ‘buying’ the steam locomotives and railings at the height of the industrial revolution.

Hungary’s energy system – keeping it around like a steam locomotive

The large privately owned electricity distribution companies operating in Hungary, that the government seeks to burden the most, RWE and E.ON have already stated they are radically changing their business models to revamp or shed low margin businesses like distribution. The E.ON 2.0 plan calls for a focus on high growth markets (they already pulled out of Bulgaria), while RWE sees their role in actively participating in the energy revolution that involves distributed generation and smart energy systems. The stock price of European utilities have halved over the past five years, new business growth – or even company downsizing (as proposed by RWE) is necessary. Centralized energy systems and the utilities that manage and profit from these are becoming mere network operators with slim (or none) profit margins.

Two energy camps are now emerging in Europe. I’ve stated this before, essentially old EU member states are modernizing and updating their electricity systems with smart IT networks that are able to eliminate huge inefficiencies in consumption and in the supply network. From smart energy meters in homes, to balancing generation assets more efficiently, the integration of IT into the energy system holds huge potential for business, RWE and E.ON are both jumping into this business.

For new EU member states in Eastern Europe (I purposely revert back to the old geographic name and historical connotations) political control and perceived low energy prices are the overriding concern. Under this scenario the system will likely not receive the capital necessary to make a smart energy system develop. This results in the perpetuation of the current centralized energy system where only the price of generation can influence the end price. This is literally the ‘dumb’ business model. A simple demand and supply equation. The citizens of Hungary and other Eastern European countries, are now being forced to maintain a technologically outdated energy system while politicians claim credit for giving the people something that more developed countries now longer want. In short, Hungary and Eastern Europe purposely maintain their second tier hand-me-down status in the European family.

Politicians in Eastern Europe can claim they are lowering the cost of train travel by nationalizing steam locomotives in the 1950s (with the already amortized costs). They ignore modern technologies that can also lower the cost and lead to a more efficient system to operate and provide robust benefits to consumers. There’s a reason that in Hungary the travel time from Budapest to Lake Balaton has changed little since the steam locomotive. So I wish the Hungarian government good luck with their new steam engines. But it is too bad they don’t draw on their substantial human capital in IT to drive their country and the region to the leading edge of a European smart energy system. No doubt, if all the utilities are in government hands, then significant modernization of the grid drawing on Hungarian expertise could happen. But this I doubt, the government will be too enamored with their newly acquired steam engines to notice the smart peasants working in the fields.