The protracted war between Russia and Ukraine, the sanctions against Russia and the resulting Russian supply restrictions are causing energy prices to rise dramatically across Europe. Europe is facing a serious energy crisis. In recent weeks, it has become clear that there will most likely not be enough gas for the autumn and winter heating season in Europe. This has led the Hungarian government to declare an energy emergency and adopt a seven-point action plan.

Let's take a look at what these measures are.

1. Hungary increases domestic gas production from one and a half billion cubic meters to two billion cubic meters.

Energy security is a matter of national security. The current crisis has highlighted that reducing energy import dependence is an energy policy priority. Our country relies to a large extent on imported energy sources for its energy supply, with a significant external dependence particularly on natural gas. Hungary's external dependence on natural gas must and can therefore be reduced. There are significant domestic gas reserves, with almost 70 billion cubic meres of gas currently in production, but it is estimated that up to 1 500 billion cubic meters could be brought to the surface.

This is why it should be borne in mind that only those elements of the natural gas sector that are in our own hands are crisis-proof, and that these are the only ones we can rely on in times of trouble. It is therefore essential to explore future scenarios for security of gas supply in which a substantial increase in the production of our conventional and non-conventional gas reserves is a real option.

2. Péter Szijjártó was authorized to purchase additional gas stocks

A fully self-sufficient, island-like operation does not seem realistic for the time being, so we need to look for other external sources, in addition to better utilizing internal capacities. To strengthen the country's energy security, the government is negotiating to purchase an additional 700 million cubic meters of natural gas over and above the volumes in long-term contracts. Currently, gas stocks in European storage are around 62 percent, while Hungarian gas storage is 46 percent full. The aim is to have the maximum possible stocks available at the start of the heating season.

According to Attila Steiner, State Secretary for Energy, about two thirds of the annual gas consumption of the population is already stored. This is significantly better than the EU average, and he also pointed out that the government has made a few significant investments in recent years, connecting our gas network to all neighboring countries, and providing us with large and flexible storage facilities. While Hungarian gas storage facilities can supply domestic population and industry for months, most countries' storage facilities can only do so for a few weeks.

3. An export ban is imposed on energy carriers and firewood.

In the current situation, all energy sources, be they oil, gas, coal, or firewood, must be kept in the country. What we have at our disposal is in the service of Hungarian households! Under the current decision, we will only sell energy to other countries if the supply of Hungarian households and the functioning of domestic industry is guaranteed. The only exception to the export ban is the rent storage, under which part of the gas purchased by Serbia will be stored in Hungary.

4-5. Until the end of the year, domestic lignite production will be significantly increased, and the units of the Mátra Power Plant will be restarted to ensure domestic energy supply

In the current energy crisis, the question is not how clean the energy is, but whether it will be available at all. Of course, climate targets are important in the long term, but the protracted war and misguided sanctions policies are deepening the energy crisis. In this context, the head of the International Energy Agency, among others, recommends that countries should not use the gas coming into Europe to generate electricity, but should reserve all gas for the winter months, while electricity generation should be replaced by alternative sources (oil, coal, nuclear, renewables). The Mátra Power Plant units will be temporarily restarted to meet residential and industrial energy demand. In Hungary, the Mátra Power Plant is now ready for further power generation with the recently completed overhaul, with two units (and one reserve) operating at an average capacity of 450 MW, but with a capacity of 600-625 MW available.

6. In view of the energy emergency, the Government takes the initiative to extend the operating life of the Paks nuclear power plant.

Without nuclear power, there is no stable electricity supply. The Paks nuclear power plant is low-cost, low-carbon and safe. According to Minister of Industry and Technology László Palkovics, all the conditions for an extension of the operating life are in place. In principle, an extension of 10 to 20 years is possible. Under the current decision, Paks I and Paks II would temporarily produce 2,000 MW and 2,400 MW of electricity respectively after the commissioning of Paks II, and the parallel operation of the units would result in near-zero electricity imports. In addition to the new lifetime extensions, investments are also planned to increase the efficiency of the Paks nuclear power plant and to develop new solutions for energy storage, for example through the creation of a battery farm. The share of renewable energy produced in Hungary is steadily increasing, and the government is also taking a number of measures to promote the role of hydrogen as an alternative fuel and energy carrier.

7. Utility cost reduction will remain until average consumption. Above-average consumers pay a retail market price that is lower than the world market price.

The seventh point of the emergency energy measures aims to mitigate two serious negative consequences of the failed sanctions policy in Brussels. While keeping the utility cost reduction for average and below-average consumption, meeting above-average consumption at above-reduced prices will both help to ensure the sustainability of the utility cost reduction achievements and minimize the chances of systemic electricity and gas shortages.

On the one hand, adaptation was needed to make the system sustainable. The EU's misguided response to the Russia-Ukraine war sent oil, gas and electricity prices skyrocketing in the first instance. In a single year, the price of electricity and gas on the Old Continent increased fivefold and sixfold respectively.

The idea behind the utility cost reduction was that the difference between the market price and the fixed price paid by the households would be taken over and paid by the state. This is how the government managed to achieve that in the whole European Union, Hungarians paid the lowest prices for electricity and gas.

The Hungarian government could responsibly promise to take on the extra costs, as long as gas prices remained stable at between EUR 10 and EUR 30 per megawatt hour and electricity at between EUR 30 and EUR 50 per megawatt hour. However, in recent months we have seen gas prices of around EUR 250 and electricity prices of around EUR 500 on the stock exchanges, and no one knows when the prices will peak. In such an uncertain environment, no country's budget can afford to keep the reduction without limits.

On the other hand, a correction was also needed for expected bottlenecks. Exploding prices and potential market imbalances, combined with the trends in the volume of Hungarian energy consumption are a dangerous mix.

Hungarian electricity consumption has been rising steadily since the introduction of the utility cost reduction in 2013. While in 2014 the highest monthly consumption was below 3.8 terawatt-hours, in January this year it was well above 4.4 terawatt-hours. A similar long-term trend can be observed in gas consumption, with monthly gas consumption in Hungary of 6.6 terawatt-hours in 2021, 36% above the 4.9 terawatt-hour figure in 2014.

A key function of price is to inform market participants. When supply is plentiful and/or consumption is low, the price falls, making it clear to everyone that it would be worth cutting back on the production and sale of a product or service. Likewise, high demand and/or low supply means that a rise in price will encourage operators to increase production and/or reduce consumption.

In the pre-war market situation, when the countries of Europe had virtually unlimited access to oil, gas and electricity, the fact that the utility cost reduction switched off the information-mediating character of the price did not really cause any economic problems. However, in the current energy situation, where normal demand on the continent will almost certainly exceed available supply, it is vital that market mechanisms are partially activated.

But even under the new system, Hungarian citizens will still receive substantial benefits. Up to the average consumption level, electricity will be 87 percent cheaper than the market price and gas 90 percent cheaper. However, the state will also protect Hungarian citizens in the case of consumption above average. The residential market price is 74% cheaper than the real market price for electricity and 27% cheaper for gas.

The need for a change in the Hungarian utility cost model was therefore caused by a combination of external factors, the failed sanctions policy of EU leaders, the resulting price rises and expected market supply difficulties. Maintaining the utility cost reduction to average consumption will continue to support Hungarian households. And for above-average consumption, reintroducing the market information function will help to make the fiscal burden of the Hungarian model bearable, while reducing the chances of supply disruptions.

Past and current government measures aim to strengthen energy sovereignty and security and maintain the utility cost reduction achievements. Energy sovereignty in Hungary is not only a welfare and economic issue, but also a national security one. It is in Hungary's clear interest to reduce its energy import needs, while at the same time ensuring its wider connection to the regional electricity and gas networks.