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Hungary envisions stepwise gas market integration with Croatia – interview with Pál Ságvári, Vice President of Hungary’s HEA

The inauguration of the long-awaited LNG terminal on the island of Krk and the reception of the first liquified natural gas (LNG) cargo on the 1st of January will be remembered as a milestone in the history of regional gas source diversification and the improvement of security of supply.

In the previous decade, Hungary always supported proactively the idea of the implementation of the North-South gas corridor and its Southern endpoint, the Krk LNG Terminal. This commitment is evidenced by the fact that Hungarian companies are the main capacity holders for years to come in the terminal. Hungary is now ready to take this to another level. Pál Ságvári, Vice President of the Hungarian Energy and Public Utility Regulatory Authority (HEA) spoke to CEENERGYNEWS at the 36th International Scientific & Expert Meeting in Opatija about Hungary’s vision of extending the reach of the Krk Terminal, possible new gas supply routes in the region and the road to get there.

“The Krk Terminal was a gamechanger project in the region’s energy supply,” starts Mr Ságvári. “Now that the terminal is up and running it’s time to consider further possibilities to extend the current reach of the terminal physically and also commercially.”

We propose to start developing the regional gas market, in close partnership with Croatia, in order to make the terminal more attractive and accessible for other regional countries as well.

Ukraine, with total annual gas consumption of 30 billion cubic metres (bcm) is a good candidate and Hungary would be ready to guide LNG cargoes to Ukraine. The idea is to establish an LNG corridor that would enable gas importing from Croatia via Hungary to Ukraine, which could also justify the incremental capacity development of the LNG terminal.

“There are two issues that must be solved before we move towards the establishment of this corridor,” explains Mr Ságvári. “First Hungary has to create non-interruptable firm capacities with Ukraine. Secondly, we have to eliminate the logistical bottleneck between Hungary and Croatia by the integration of our gas markets.”

This is a rather complex process because it requires the involvement of a variety of stakeholders: the close cooperation of national regulatory authorities, transmission system operators (TSOs) and gas exchanges are essential to elaborate a vision and roadmap for possible market integration.

“The main drive of the integration is to cut back on logistical costs,” says Mr Ságvári. Eventually, it will lead to a boost of liquidity on both sides and extend the current reach of the Krk terminal physically and also commercially.

Hungary envisions market integration in three steps. The first one is market coupling, which implies separate Virtual Trading Points (VTP) and balancing with implicit capacity allocation.

“What we should do at this point is to put together the order book of gas exchanges, which will open up commercial opportunities,” underlines Mr Ságvári adding that this would also create a tighter bid-ask spread and through optimal utilisation of cross border capacities result in total social welfare of 2 million euros on the coupled markets even according to the most conservative calculations. This would be good news for the consumer and also for regulators.”

HEA is fully committed to this cooperation and is ready to start the joint work as soon as possible.

Mr Ságvári revealed that the Croatian regulator is also open to the possibility of exploring the Hungarian proposal of market coupling. The regulators will set up a working group to discuss the next steps.

However, the market coupling is not the final objective, as Mr Ságvári explains it is only the first step, a no-regret option.

The second step is to eliminate the tariffs on the Hungarian and Croatian border to create one joint virtual trading point, although this is a long-term vision, that needs more harmonisation on the regulatory and TSO side according to Mr Ságvári.

The integration of the Hungarian and Croatian gas market would also open the way for Ukraine to access LNG from Croatia and eventually justify doubling the incremental capacity of the Krk Terminal.

With rather ambitious goals Hungary is keen to take the first steps of the integration and launch the process as soon as possible as it will probably take years to implement this complex restructuring of the market. At least the example of the electricity sector, which is ahead of the gas market in terms of integration, suggests so.

Just a couple of days ago the electricity markets of the 4M MC region of the Central and Eastern European countries (Hungary, Czech Republic, Slovakia, Romania) and the MRC region of the Western European countries were linked up successfully.

“The Interim Coupling is a real success story,” highlighted Mr Ságvári. “After years of negotiations, the project is a big milestone for Hungary and Central Europe while it also brings us one step closer to the establishment of a single European day-ahead market.

HEA played a key role in the implementation of the Interim Coupling project, coordinating between the seven regulatory authorities involved. As Mr Ságvári pointed out in the power sector the market coupling was more evident as the parties are more reliant on each other.

The Interim Coupling connected the borders of 4M MC with the Multi-Regional Coupling by introducing Net Transmission Capacity based implicit capacity allocation on six borders (PL-DE, PL-CZ, PL-SK, CZ-DE, CZ-AT, HU-AT), resulting in even more favourable conditions for day-ahead power market participants.

Single Day-ahead Coupling (SDAC) allocates scarce cross-border transmission capacity in the most efficient way by coupling wholesale electricity markets from different regions through a common algorithm, simultaneously taking into account cross-border transmission constraints and calculating prices.

Now that the project has been completed, power markets will see higher more balanced prices, growing liquidity, as well as more efficient cross-border capacity allocation.

The next step is the Bulgarian-Romanian coupling, which is scheduled three months after the successful go-live of the Interim Coupling. The Croatian-Hungarian coupling will happen simultaneously with the introduction of Flow-Based Market Coupling (FBMC) for day-ahead electricity trading in the Core Capacity Calculation Region (CCR) comprising Austria, Belgium, Croatia, the Czech Republic, France, Germany, Hungary, Luxembourg, the Netherlands, Poland, Romania, Slovakia and Slovenia, which is scheduled to go-live in February 2022.

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