Issues and Challenges of Electricity Market Liberalisation in Hungary

1. Issues and Challenges of Electricity Market Liberalisation in Hungary Dr. Tibor DRASKOVICS Chairman of the Board MVM Zrt Hungary

2. Contents of presentation 1. General description of Hungarian Power System – before 2006 2. Market opening 3. Changes in 2005 - Implementation - TSO Effects Potentials MVM Group

3. Structure and operational model of the Hungarian power industry 31. 12. 2005 Trading companies Eligible customers MVM Public Service Wholesale Transmission Power plans + import Public service + distribution Public service customers MAVIR Rt. Independent System Operator The main relations between the players

4. The privatised Hungarian Power SystemPower Generation Companies in 2005 Owner GWh/year* % MVM 13.368 53,2 Electrabel 2.909 11,6 AES 1.664 6,6 RWE 3.807 15,1 ATEL 1.715 6,8 EDF 1.315 5,2 Croesus 215 0,9 Transelektro 0 0 E.ON 0 0 EMA Power 0 0 ÁPV Rt. 147 0,6 Total: 25.140 100,0 EDF *Electricity sold to the public service wholesaler (MVM)

5. The privatised Hungarian Power System Distribution&Supply Companies in 2005 Electricity bought from the public service wholesaler (MVM) in 2005

6. Steps of market opening • First step • from 1 January 2003 eligible customers with consumption of above 6.5 GWh/year • Second step • from 1 July 2004 all customers except household customers are eligible • Next step - Directive 2003/54/EC • from 1 July 2007 household customers also eligible - 100% of the market is open

7. The evolution of marketfrom 01. 01. 2003

8. Important Political Decisions in 2005 affecting the Hungarian Power System - practically with consensus of all four political parties in the parliament 1. Amendment of Privatisation Act – • no further privatisation of electricity industry • state owned Hungarian electricity industry integrated into one hand - Holding 2. Life extension of Paks Nuclear Power Station

9. Implementation01.01.2006 Holding’s Medium-term Strategy approved by Board of Directors • TSO established • Wholesale trading activity unbundled • Paks Nuclear Power Station – ‘flagship’ of industry

10. Change from ISO to TSO structure System operation transmission assets from MVM Zrt. grid operation from National Power Line Co. Ltd. (OVIT Rt.) Owner of MAVIR Zrt. - MVM Zrt. + 1 „golden share” with Ministry of Economics and Transport

11. System Operator MAVIR Power Plants Customers MVM Distr.Cos Public Utility Wholesaler Public Utility Supplier Public Utility MAVIR Subject to licence Transmission network Distribution network Traders Eligible Small, <50 MW Commercial path Physical path

12. Transmission Network interconnections Ukraine Rimavska Sobota / Moldava Mukachevo Slovakia after 2010 Sajóivánka Zahidno- Ukrainska Levice Pod Biskupice Kisvárda after 2010 Tiszalök Wien Gabčikovo Felsőzsolca Wien Neusiedl Austria Sajószöged Mátra P.P. On 220 kV about 2010-2012 Göd Detk Győr Debrecen Tisza II. Zugló Albertfalva 2006, under construction Oroszlány P.P. BP BP after 2010 Ócsa Szombathely Dunamenti P.P. Südburgenland Litér Martonvásár until 2010, at latest Albertirsa Szolnok Dunaújváros Oradea Romania Hévíz 2008 about 2010 Nadab Lenti Cirkovce Slovenia Paks Nuclear P.P. Békéscsaba Arad 120 kV 750 kV 400 kV 220 kV planned, or under consideration Toponár Sándorfalva Zerjavinec Szeged Pécs Arad Nedeljance Siklós Subotica 120 kV Croatia Serbia and Montenegro after 2010 Donji Miholjac Ernestinovo

13. Physical Import and Export in 2005 Main Characteristics of the Hungarian Power System Import – Export Trade Ukraine Slovakia 4814 /26 GWh 8806 /0 GWh Austria 809 /856 GWh Total Import: 15 635 GWh Total Export: 9 410 GWh Import Balance: 6 225 GWh 1190 /146 GWh Romania 0 /6689 GWh 16 /1693 GWh Croatia Serbia

14. Challenges for TSO • cross-border capacity – to participate in CEE regional co-ordination from 01.01.2007 • ITC (Inter-TSO Compensation) – to become part of the system on 01.01.2007 • regional market for ancilliary services (primary, secondary, tertiaryreserves) • inadequate information – transparency is needed

15. Beneficial effects of Restructuring • new resources available • cost effectiveness • efficiency improvement

16. New Potentials • better utilisation of advantageous geographical location • closer relationship with neighbouring countries

17. TradingRequirements • technical connection of grids (UCTE extension) • harmonised electricity markets • gradual integration of electricity markets

18. Relationships on mutual interest • infrastructure – interconnections (e.g. Békéscsaba-Oradea) • resources to satisfy competitive (single European) market needs • developing regional markets

19. Regional marketRequirements • more intensive co-operation of market-players • mutual and joint investments • strategic partnerships • etc.

20. MVM Group • optimising Group structure – holding - synergy at Group level • competitiveness in Hungary in the region in Europe

21. Structure of MVM Group MVM Zrt. (Strategic holding) Generation (PA Rt., Tatabánya Erőmű Kft., MIFÜ Kft., GTER Kft.) TSO (MAVIR ZRt., OVIT ZRt., Transmission Network Directorate) Engineering and technical services (ERBE Energetika Kft., Villkesz Kft.) Competitive market trading MVM Partner Rt., selling directly to consumers Public service obligations (wholesale) Foreign portfolio elements MVM-ADWEST GmbH., other foreign investments

22. Thank you for your attention!