Hungary: Substantial changes in the connection of small power plants to the distribution network

The Hungarian Energy and Public Utility Regulatory Authority (HEPURA) approved Amendment No. 16 to the Distribution Code of Hungary on 25 January 2022. The amendment includes, inter alia, the long-awaited, far-reaching transitional rules for the connection of small power plants to the distribution grid.

KEY TAKEAWAYS:

• The HEPURA has approved Amendment No. 16 to the Distribution Code on 25 January 2022, and the new transitional rules for the connection of small power plants to the distribution network enter into force with immediate effect — the final setup is not yet known
• Only those who already had at least an MGT on 1 July 2021 can participate in the transitional system, provided that the commissioning of the small power plant does not take place before 17 March 2022 — with the exception of the power plants connected to the low-voltage grid and those who already concluded their grid connection contract before 1 July 2021
• By 17 March 2022, applicants in the transitional system must (i) make a binding capacity booking declaration to the competent DSO, (ii) pay a financial security (cash deposit) of HUF 900,000/MVA to the competent DSO to secure those stipulated in the declaration, and (iii) pay an additional financial security (cash deposit) of HUF 3,600,000/MVA to secure the conclusion of the grid connection contract
• Applicants have the option to make their commitments in their capacity booking declarations conditional on successful participation in the METÁR tender
• However, the possibility of a subsequent change of the beneficiary of the MGT, or of the properties included in the MGT or in the grid connection contract is significantly reduced

1.    BACKGROUND

Last spring, new, competitive capacity allocation principles were introduced in the Hungarian Electricity Act, effective from 1 April 2021, bringing conceptual changes to the previous system. Under the amendment, on the one hand, authorised network operators (i.e., MAVIR and the distribution service operators or DSOs) are obliged to make detailed information about free capacities public, broken down by high-voltage and high/medium-voltage transformer stations, and the technical and foreseeable economic conditions of connection, every six months. This is to facilitate the power producers’ access to the public grid, awarded primarily through competitive tenders. On the other hand, grid connection applicants must pay financial guarantees for taking part in the capacity allocation, which is in response to the increasing difficulties of integrating solar power plants into the Hungarian electricity system.

The detailed rules were expected to be published in the Implementation Decree of the Hungarian Electricity Act and the technical codes of MAVIR and the DSOs. MAVIR decided to adopt its own rules in two phases: the final setup is preceded by a so-called “transitional” period, which lasts until the final rules (and the necessary implementing provisions) are adopted. The transitional rules were published on 2 September 2021, whereas the final setup is yet to be adopted. A similar method was anticipated to be adopted by the DSOs.

In line with the above, the HEPURA has recently, on 25 January 2022, approved Amendment No. 16 to the Distribution Code by Decision No. H774/2022, based on the joint request of the distribution system operators — that are E.ON Észak-dunántúli Áramhálózati Zrt., E.ON Dél-dunántúli Áramhálózati Zrt., OPUS TITÁSZ Áramhálózati Zrt., MVM ÉMÁSZ Áramhálózati Kft., ELMŰ Hálózati Kft. and MVM DÉMÁSZ Áramhálózati Kft. The draft was prepared by the Distribution Code Committee, composed primarily of experts delegated by the distributors, with the participation of other industry players (such as energy traders) in the commenting and finalisation of the text.

The amendment covers several areas: the electricity tariffs applicable in the case of non-contracted use of the system have been determined, so has the methodology for calculating the compensation of difference in volume between the DSO and the trader, effective from 1 January 2022, and the obligation for the electricity trader to provide the payment security required by the DSO under their cooperation agreement as a condition for the conclusion of the agreement. Of particular note are the transitional rules for the connection of small power plants to the distribution network, stipulated in Annex No. 6/A of the Distribution Code (“Technical Conditions for the Connection of Small Power Plants to the Distribution Network”), which, as described in detail below, establish a new basis for the allocation of free distribution capacities.

2.    BRIEF DESCRIPTION OF THE TRANSITIONAL RULES

2.1    Scope of applicants concerned

The transitional rules shall apply to applications for connection to high and medium voltage distribution networks which were pending on 1 July 2021 and which were not concluded by the signing of a grid connection contract by that date — excluding applications for the reconfiguration of an existing grid connection point without increasing the entry capacity —, provided that the connection procedure will still be ongoing on 17 March 2022. The “connection procedure” means the process from issuing the so-called technical economic information sheet (MGT) until the commissioning of the small power plant.

Therefore, the transitional rules do not apply in the following cases:

• power plants connected to the low-voltage distribution grid, in particular small power plants of household size; and
• if the grid connection contract has already been concluded before 1 July 2021.

However, only those who already had at least an MGT on 1 July 2021 can participate in the procedure, provided that the commissioning of the small power plant does not take place before 17 March 2022.
All other applicants for connection to the distribution network will have to start the connection procedure all over again (i.e., make a new application), which will be possible through the newly introduced competitive capacity allocation tender in the final system to be adopted later.

2.2    Deferral for applicants submitting a feasibility study

Applicants submitting a feasibility study by the date of entry into force of Amendment No. 16 to the Distribution Code, i.e., 25 January 2022, must meet all the conditions for approval of the feasibility study by 18 February 2022 at the latest. The competent DSO has to approve the feasibility study by 5 March 2022 if the study has been fully corrected and submitted in accordance with the DSO’s requests by the deadline, and then must submit to the applicant a detailed offer by 10 March 2022, including all the technical conditions necessary for connection to the distribution network.

If an applicant fails to comply with the foregoing deadline of 18 February 2022, i.e., fails to meet the conditions for the approval of the feasibility study in time, the connection procedure will be deemed to have failed, the applicant will not be able to make any claim for connection capacity under the connection procedure and will only be able to submit a new application at the competitive capacity allocation tender to be adopted under the final setup at a later stage.

2.3    General rules on the capacity booking declaration and payment of financial guarantees

Under the transitional rules, applicants have until March 17, 2022 to:

• make a binding declaration to the competent DSO of the intended booking of the requested capacity (capacity booking declaration). In the capacity booking declaration, the applicant must, in addition to its explicit intention to book capacity, commit to pay the so-called “application deposit” in due time and must declare whether or not it intends to make the capacity booking declaration conditional on successful participation in the METÁR tender as set out in point 2.4 below. The validity of the declaration is subject to the condition that the applicant must pay the application deposit to the competent DSO in due time;
• pay a financial security (cash deposit) of HUF 900,000/MVA to the competent DSO to guarantee those stipulated in the capacity booking declaration (application deposit); and
• pay an additional financial security (cash deposit) of HUF 3,600,000/MVA to the DSO as a guarantee for the conclusion of the grid connection contract (capacity booking deposit).

The amount of the financial security paid will be set-off against the grid connection fee payable under the grid connection contract.

It is important to note that no exemptions are given if the deadlines are missed. Failure to meet the deadlines will result in the connection procedure being deemed to have failed and the applicant will not be able to make any claim for connection under the procedure. The amount of the application deposit paid shall be returned, unless the applicant fails to pay the capacity booking deposit after having made the capacity booking declaration and having paid the application deposit, in which case the application deposit is lost as a default penalty.

Applicants are liable to pay the foregoing securities irrespective of the status of the approval of the request for connection. However, they do not have to pay the securities if they conclude a grid connection contract before 17 March 2022 on the basis of an approved grid connection plan and if they pay directly a grid connection fee at least equal to the amount of the securities.

However, it is expected that the transitional rules will also apply to those who have concluded or will conclude their grid connection contracts between 1 July 2021 and 17 March 2022, with the condition that if they have already paid or will pay part or all of the grid connection fee before 17 March 2022, their security payment obligation will be reduced by the same amount. In other words, if the amount of the security payable exceeds the grid connection fee already paid under the grid connection contract, the applicant will only have to pay the security less the amount of the grid connection fee paid.

The DSO must refund the excess of the amount of security paid over the grid connection fee within 30 days of the commissioning of the small power plant.

2.4    Capacity booking declaration depending on the outcome of the METÁR tender

Applicants have the option to make their commitments in the capacity booking declaration conditional on their application being successful (at least in part) in any METÁR tender open until 31 December 2022. In this case, slightly different conditions and deadlines will apply.

If the applicant’s METÁR application is at least partially successful, the applicant must:

• send the decision declaring it as a winner to the competent DSO within 60 days;
• submit the grid connection plan to the competent DSO within 3 months; and
• conclude a grid connection contract with the competent DSO within 12 months (provided that the grid connection plan is approved within 10 months)

calculated from the announcement of the tender results, up to the power generation capacity indicated in the METÁR application.

2.5    (General) capacity booking declaration independent of METÁR tender

If the applicant does not wish to make its capacity booking declaration conditional on the METÁR tender, the following conditions and deadlines apply to the applicant in addition to those set out in point 2.3:

• the applicant is entitled to use the capacity included in the MGT if it submits the grid connection plan for approval within the deadline set in the MGT, or, if no deadline is set, by 31 March 2022. The small power plant shall conclude the grid connection contract within 60 days of the approval of the grid connection plan;
• on the basis of a grid connection plan approved before 31 December 2021, the small power plant must, if it does not already have a valid grid connection contract, conclude a grid connection contract, unless otherwise provided, no later than 60 days after the deadline for payment of the financial securities;
• the small power plant must be commissioned by the deadline set in the grid connection contract.

2.6    Other relevant changes

In addition to the foregoing, the new provision of Annex No. 6/A, according to which the right to exercise the rights related to the use of the connection capacity under a valid MGT or grid connection contract may only be exercised by the original applicant or a company under its majority control or its successor under the Hungarian Civil Code with regard to the power plant investment, should be noted. In other words, the previously widespread practice of the DSOs transferring the MGT to the new designated holder at the request of the applicant without proof of succession will be abolished.

It is also important that the capacity available for connection, as specified in the valid MGT or in the grid connection contract, may only be used at the site identified by the plot number indicated in the MGT or in the grid connection contract, and may not be transferred to other properties (exceptions to this may be made in the case of property division or consolidation, or the inclusion of additional properties). In other words, it is no longer possible to subsequently replace or change the land plots identified in the MGT or in the grid connection contract (with the exceptions mentioned above).

3.    EXPECTED IMPACTS

The foregoing provisions will undoubtedly have a significant impact on domestic solar power developments. Investors have already invested substantial financial resources in many projects, and the above restrictions mean that they will have to make significant changes to their business models in the short term. The changes are expected to curtail ongoing developments, as the new financial and technical conditions have to be met within a very short timeframe. It is therefore regrettable that conditions have been imposed ex-post which developers could not have envisaged when they started their projects.

Several questions also remained open, leading to visible market exposure. For example, it is not clear whether financial securities can be claimed back in the event of non-performance or default for reasons beyond the investor’s control. It is also unclear to what extent the scheme will affect investors who conclude their grid connection contract between 1 July 2021 and 17 March 2022.

In addition, in its approval decision, the HEPURA gave the DSOs an additional task: it stated that Annex No. 6/A of the Distribution Code must contain a flow chart illustrating the steps of the connection process for small power plants in accordance with the legislation in force.

The new system and the high pre-financing requirements will be a major irritation for many investors. Ongoing financial and legal assistance may therefore be needed even more as a result.