Publications / Research Papers
Was it worth building the SK-HU gas natural interconnector?policy briefPublished: 25 of October, 2016

The 2011 Hungarian energy strategy considered the SK-HU gas interconnector as a priority infrastructure project. The interconnector was expected to serve three main objectives: improve Hungary’s gas market integration with Western Europe, improve Hungary’s bargaining position vis-à-vis Russia for the renegotiation of long term contracts as they were set to expire in 2015 and strengthen the resilience of the Hungarian gas transmission network (i.e. security of supply).

Earlier REKK gas market modelling conducted in 2012 supported the economic rationale for the SK-HU interconnector, not only for security of supply reasons but also from a market perspective. Modelling assumptions included a uniform entry-exit tariff of 1-1 EUR/MWh and a spread between TTF and oil indexed long term contracts that surpassed the tariffs. In 2012 estimates for Hungarian demand never fell below 10 bcm/year. Modelling also assumed firm oil-indexation for Russian gas pricing without downward pricing flexibility. According to modelling, the implementation of the SK-HU would ease the congestion on the AT-HU interconnector and facilitate the flow of additional spot gas to Hungary and further south of Hungary.

However in practice the utilization has differed from modelling forecasts; since the commissioning of the SK-HU interconnector in July 2015 practically no flows have occurred, and still Hungarian wholesale natural gas prices have dropped significantly. Has the commissioning of the SK-HU interconnector contributed to this decrease in wholesale gas prices even without its physical utilisation?

In this policy brief we offer three possible explanations for the low pipeline utilisation and argue that construction of the interconnector was more than beneficial for Hungary by opening wholesale competition against the dominant supplier and working as a bargaining chip for the government in the 2015 renegotiation of the Russian LTC. We estimate that the 120 MEUR Hungarian investment into the SK-HU interconnector was paid back to Hungarian customers in less than six months.