The recent gas auction in Hungary represents a step forward for competitive development by easing one of the currently prevailing barriers to new market entrants. However, despite this progress, meaningful competition remains a long way away.
Germany's E.ON has recently completed its first gas auction in Hungary. The auction was carried out as one of the stipulations made by the EU following E.ON's purchase of various assets previously owned by MOL, the now-unbundled former monopoly.
E.ON acquired stakes in the unbundled units of MOL under the terms of a deal signed in November 2004. E.ON acquired 75% minus one share stakes in both Foldgaztarolo and Foldgazellato (the new storage and wholesale marketing businesses respectively) as well as a 25% plus one share in stake in Foldgazszallito, the transmission unit.
As one of the conditions for the deal, the European Commission imposed on E.ON a requirement to release up to 1 billion cubic meters of gas each year for a five year period.
The auction consisted of different size lots of 25 million cubic meters, 50 million cubic meters and 100 million cubic meters. In total ten players qualified and thus became eligible to take part in the online auction. Of these, two players were successful. The winning bidders will receive 20% of the gas at the western border entry point and 80% in the east.
The decision by the EC to impose the gas auction requirement on E.ON is a key element in assisting the development of a competitive gas market in Hungary. Recent research undertaken by Datamonitor highlighted the fact that the lack of available access to wholesale gas is a key barrier to market entry for many potential new market entrants in various parts of Europe. By easing this problem through the gas auction, there is a greater incentive for new players to enter the market.
However, there are a number of other factors, unrelated to the availability of wholesale gas, potentially acting as a disincentive to new market entrants. The first of these is the penetration of gas into the Hungarian energy mix. At around half of primary energy demand, Hungary has a notably high degree of gas penetration - much in excess of both its eastern European neighbors and more mature gas markets such as the UK and Germany.
As such, this diminishes potential demand growth given that the market is at, or close to, saturation point. The 2.2% annualized demand growth rate seen over the past decade is likely to begin to diminish in the coming years, despite strong impetus from the power generation sector. Given this situation, new entrants seeking to take advantage of high demand growth rates to win customers through network expansion will not be attracted to Hungary in the way they are elsewhere in central and eastern Europe.
While the gas auction will in itself not create a competitive market, it does give a much needed degree of impetus to competitive development. However, this is very much only the beginning of the process. Whilst the attractions of the Hungarian market to new entrants will be boosted by the auction process, it is not a guarantee that significant numbers of new players will enter the sector and give renewed impetus to competitive development.
When they do, the long process of switching and competitive intensity development will begin - although like many other parts of Europe the development of a meaningfully competitive gas market in Hungary remains many years away.