Energy is the frontline of the green transition

Dr. Péter Kaderják, Director of the Zero Carbon Centre, authored the first of a series of articles on the future of energy in Hungary. The article was published by G7.hu magazine.

The other articles in the column can be found at https://g7.hu/holnap/.

Let me start with what this debate should not be about. As a basic principle, we all have to accept that the climate change that is currently taking place is also linked to human activity and it is a threat to our existence. In this context, we need to accept that a change in human economic activity can have a positive impact on this process.

Furthermore, the transition to a climate-neutral economy in Hungary also has significant benefits to the global climate. If Hungary could reduce its harmful carbon emissions (about 60 million tonnes/year) to zero, it would bring environmental benefits equivalent to 3.5% of GDP of Hungary (approximately 1.728 billion forint costs can be avoided), calculated at current quota prices. Therefore, to set the direction for the professional dialogue on the future of the energy supply of Hungary, which was initiated by the G7, I would suggest that it should

"not be conducted on the barren ground between climate alarmists and climate sceptics."

Climate alarmists say humanity should abandon economic growth and human nature should fundamentally change, whereas climate sceptics are on the opinion that there is no problem and that the green transition is just a silly and bad dream from which we will soon wake up and everything can return to normal.

Both opinions are futile that do not lead to a viable and meaningful economic programme.

The international context of the green energy transition

In am on the opinion that humanity has actually already decided to go green. The combined annual emissions of the countries committed to achieving net zero emissions by the middle of this century exceed 80 percent of annual global emissions. There are already thousands of global corporations committed to achieving climate neutrality. Energy is in the frontline of the green transition. This is understandable, as 80 percent of global climate gas emissions are linked to the use of fossil fuels (coal, oil and natural gas), while fossil fuels still account for 80 percent of human energy use. Therefore, this means that the success of global climate protection efforts

"will depend on the success of replacing fossil fuels with clean energy sources."

Therefore, the green transition is in progress across the globe, with research for energy solutions for the post-fossil fuel era in the focus. This transition will require vast amount of investment and unprecedented degree of innovation, and its importance in regard to economic development and geopolitical issues are indisputable. Hungary must not miss this boat, as it is currently on board as part of EU policy and based on its own initiatives.

I believe that the debate in this forum in the coming weeks will be useful and will helps us better understand how the gradual transition to the mass use of carbon-free technologies will affect the energy independence, economic competitiveness and security of supply of Hungary in the future.

It also answers the question of how to turn the green transition into a positive economic development programme that will enable Hungary to play a meaningful role in the global technological race for future energy solutions. We need to see that the importance of the transition to a zero-carbon economy goes beyond climate protection:

  • Active net zero emissions policies can aid nations to succeed in the global race for post-fossil fuel technologies and the human and natural resources they require.
  • Thus, the EU's climate policy measures (see European Green Deal, "Fit for 55" regulatory package) and the resulting technological and business innovation imperatives is considered a "must" in the technological competition with China and the US.
  • This policy also promises EU, and Hungary in particular, both of which are fossil fuel-poor, increased energy sovereignty and a long-absent vision for economic development.
  • Although the opportunities of Hungary is in this is limited, we may as well be successful.

Key areas of the green energy transition in Hungary

The National Clean Development Strategy (NCDS) is the most important domestic policy document setting out the long-term directions for the green transition and related economic development. Based on the results of the NTFS, the key area of the green energy transition - in addition to optimizing energy consumption and improving energy efficiency - is the decarbonisation of electricity generation.

Electricity generation using carbon-free (nuclear and renewable) technologies can replace natural gas and oil products. Natural gas can be replaced by green electricity for heating and cooling buildings and for industrial use, while green electricity may substitute oil products be for transportation. The requirement of decarbonisation means that, in the medium term, lignite resources of Hungary are considered a strategic energy reserve, too.

Achieving these goals will be facilitated not only by nuclear technology, but also by

"the mass deployment of green technologies that will dominate the markets for energy solutions in the post-fossil fuel era."

Among these, weather-dependent (solar and wind) renewable electricity generation technologies, electric vehicles and batteries, large-scale, seasonal electricity storage technologies, and technologies related to the emergence of a (green) hydrogen economy seem to be dominant today. Low-carbon electricity generation technologies are characterized by high investment costs and near-zero operating costs, in contrast to fossil power generation. The optimal plant size of investments and their risk profile over their lifetime are also very different. This is a major challenge for bankers. Greening the energy sector requires not only huge volume of investment but also greening the financial sector and massive innovation in the financial markets.

Green energy transition and energy sovereignty

The green transition will strengthen Hungary's energy sovereignty. Hungary is a country with modest potential for economically exploitable fossil energy sources. Our average energy import dependency is around 60 percent, but for oil and natural gas this ratio exceeds 80 percent. For nuclear fuel, we are fully dependent on import supply.

Without the use of nuclear energy, the decarbonisation of Europe by mid-century does not seem realistic. The Hungarian energy strategy is also based on maintaining nuclear energy generation and the construction of the new Paks2 nuclear power plant. In terms of decarbonisation,

"this is, by all means, part of the solution, but it will not reduce our dependence on imports."

At the same time, we are well equipped with renewable energy sources, especially solar energy. Hungary is currently experiencing a boom in investment in solar power generation. In contrast to a few hundred megawatts (MW) in 2018, Hungary will soon boast 3,000 MW of installed solar capacity, and further dynamic growth is expected. Following the introduction of the competitive tendering procedure (METÁR), the cost of commercial-scale solar investments has dropped by 50% in the last two years. Most operators are now planning solar investments on a purely market basis without subsidies.

The share of solar PV generation in the Hungarian power generation has increased from almost zero in 2018 to 6.8 percent. In 2021 alone, production increased by 1.1 terawatt hours (TWh), which means that in one single year more than 2% of consumption was replaced by carbon-free generation. The deployment of electricity storage facilities to improve the market integration of solar power producers has also started, as 20 MW storage capacity has been built in the last three years.

Even before the adoption of the Hungarian Recovery and Resilience Instrument (RRF) in Brussels and the receipt of EU funds, the government announced (i.e. anticipated) two RRF priority support programmes in the field: the 200 billion forint residential solar PV support programme and the 85 billion forint programme to support developments helping the integration of weather-dependent renewables into the distribution grid.

Green energy transition and security of supply

The process of green energy transition raises at least two new issues of security of supply in Europe, including Hungary.

Deposits of the raw materials for renewable technology equipment such as solar panels, wind turbines and high performance electric batteries are currently very scarce, as  China has overwhelming dominance in this field. It requires further analysis and a decision whether we should be more concerned about oil sheiks or rare earth metal producers.

The other problem is illustrated by the fact that at the time of the last electricity peak consumption record in Hungary, which took place at 17:15 on 25 January 2022, when the system load (consumption) was 7 396 MW, solar power plants could generate zero (!) energy and wind power plants produced only 86 MW. The green switchover and the simultaneous guarantee of security of energy supply would require that in such situations

"the gas burned in our gas-fired power plants should no longer be natural gas but green gas (green hydrogen or biomethane produced and stored from summer solar production)."

However, we do not yet have these seasonal energy storage solutions in a technologically or commercially viable manner. We have a fundamental need for natural gas as the backbone of domestic energy security until solutions are developed for storage. Therefore, in the light of the current energy market crisis, we appreciate that the European Commission has reversed its previous position and, albeit with restrictions, has classified natural gas-fired power plant technologies as sustainable, which means that they are eligible for funding from the EU.

Green energy transition, competitiveness and economic development

This raises the question whether climate-friendly energy solutions are not too expensive? Does their mass deployment undermine the international economic competitiveness of Europe and our country? Is the green transition not taking too much resources away from other areas that are important for economic development?

I believe that in a fossil fuel-poor region like Europe, current market trends favour carbon-free energy solutions. In fact, a hundred dollar oil price and a hundred euro gas price are the strongest incentives to increasing energy efficiency and promoting renewable energy.

The effect of the high prices is also reinforced by the green economy development components of the support programmes for the revitalisation of the European economy (Recovery and Resilience Facility, RFF) and the related regulatory measures (taxonomy). The latter has also recognised the importance of the use of nuclear energy.

The combination of rising fossil fuel prices, consistent pricing of carbon emissions and dramatic increase in the cost-effectiveness of certain green technologies will make key low-carbon energy technologies competitive with fossil technologies.

Compared to the current prices of the electricity market of more than €100/MWh, solar power plants can produce electricity in the long term in a predictable and profitable way for less than €50. If such prices are maintained, even the Paks2 project will be able to yield high profit margin.

The cost of battery electricity storage, a key technology for renewable integration, has also dropped to one tenth over the last ten years and is becoming increasingly profitable on a market basis. In other areas, such as the trendy green hydrogen technologies, economically viable solutions still seem a long way away, although

"the permanently high gas prices in Europe could quickly override this opinion."

In the context of the green energy transition in Hungary, we have to highlight the opportunities inherent in developing the battery industry. The rapid transformation of the domestic automotive industry towards electromobility and the domestic development of related battery technology offers the potential for mutually beneficial success stories if the synergies can be leveraged.

The International Energy Agency's estimate illustrates the importance of this. They calculated that the transition into net zero energy will result in dramatic increase in the battery industry, as they will have by far the largest share of green technology investment, amouting to approximately 750 billion dollars in 2050, which is 61% of current volume of investment every year in the oil industry. It will surpass the amount of oil investment by four times (!), as the oil industry will fall dramatically by 2050.

Where are we, where do we go from here?

The National Clean Development Strategy estimates the additional investment needed to achieve a climate-neutral economic transition in Hungary at 24 thousand billion forints over and above what would be needed is not action is taken. Of course, it should be noted that this estimate is based on the presumption that the Paks2 investment has been implemented.

More than 80 percent of this investment involves energy-related improvements in power generation, transport and buildings. This means that the thirty year programme of transition to a climate-neutral economy can be achieved at a price which equals to the NATO budget of Hungary,

"which is equivalent to an annual investment volume of 2-3% of GDP",

based on the current calculations. I believe that this perspective can give hope to any climate sceptic reader.

The process of transition to a climate-neutral economy and the key green energy transition in Hungary is in progress, but we are only at the beginning of the journey.

It is encouraging that Hungary has been ranked 13th in the global ranking based on the KPMG Net Zero Readiness Index 2021. In Hungary, key medium and long-term strategy documents for integrated climate and energy policy and the supporting technology-specific industry strategies (for the hydrogen and battery industries) have already been prepared, and, moreover, professionals working in this field all agree on it.

The implementation of the projects identified in these strategies has also started, including the climate-friendly conversion programme of the Mátra Power Plant; the market-oriented support for solar PV development through METÁR tenders; partly as a result of this, the steady increase in the share of carbon-free electricity generation (from 53 to almost 60% in 2018); and the priority electrification programmes for public transport, notably the development of suburban railways and the Green Bus Programme.

The implementation of energy innovation programmes experimenting with energy storage solutions and green hydrogen has been launched. A dedicated GINOP programme will identify and support Hungarian SMEs as "Green Champions" in the green transition; and the systematic development of the energy efficiency market of Hungary has started by the introduction of the Energy Efficiency Obligation (EEO) scheme in January 2021. The Public Debt Management Centre (issuing green bonds) and the Hungarian National Bank (green home programme) are pioneering green financial innovations at international level.

This is, obviously, just the beginning. The education of technical and economic specialists has not followed this trend. The domestic institutional system supporting the development of the green economy is still in its infancy. Many institutions that support the green transition, such as the energy community specialising in local renewable energy use or the distribution flexibility market,

"exist on paper but not in practice."

We do not have a viable seasonal energy storage technology.

At the same time, I expect to see some success stories ranking Hungary high in the development of the green economy in the coming decades in the following areas: electric cars, batteries, solar energy, seasonal green electricity storage through the use of our regionally outstanding domestic natural gas infrastructure; energy efficiency market development; further green innovations in the financial sector.

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