The economic analysis of a state pump storage facility investment in HungaryUploaded: 1 of August, 2008

Our study was commissioned by the Ministry of Economy and Transport with the cooperation of the Hungarian Energy Office and MAVIR, the Hungarian transmission system operator in order to assess the need for a pump storage facility from the perspective of the transmission system, with a special focus on justification for such a government investment. With this focus, we interpret the question as a query into possible arguments for a pump storage facility as a reserve capacity provider (as a system concern and not a government concern). We find, however, a pump storage facility built and operated as an energy storage capacity to swap low-price off-peak electricity for high-price peak electricity neither a system concern nor government concern in a modern, liberalized, European electricity market. Therefore, in our study, we look for instances of too low system reserve capacity, cases that might justify a pump storage facility as a reserve provider, and if so, why this information is not delivered by the market. Our research is based on a more than two-year long time series of system load and production data, almost twenty thousand hours of observations. We examine correlation between lowest system load and availability of downwards reserve capacities, highest system load and availability of upwards reserve capacities, and two delicate issues of special importance to the contemporary Hungarian policy debate, reserve needs of wind capacities and simultaneous instances of low system load and downturn of the Hungarian nuclear power plant. We find no justification for a system level pump storage investment as a reserve provider in any of the above research queries. We identified, however, all the regulatory factors and the features of the market structure that are responsible for the lack of proper incentives and for sending out wrong signals to actors in the reserve markets, factors that are to blame for most of the observed reserve market misconduct.