A new era in Hungary's district heating sector: higher profit limits and a focus on geothermal energy

In the Hungarian district heating sector, services provided by both producers and service providers are subject to regulated prices and profit limits. The profit limit is determined as the product of the asset value and the profit factor specified in the respective Ministerial Decree. Until recently, producers of district heating were only allowed to apply a profit factor of 4.5 %, even if they utilised renewable energy or met the requirements of high-efficiency cogeneration. Any profit exceeding this cap needed to be reinvested to enhance production efficiency and could not be withdrawn from the enterprise (e.g. as dividends).

The new rules, applicable to installations commissioned after 31 December 2024, will grant a profit factor equal to the arithmetic average of the reference yields published on the last business day of March for 10-year and 15-year Hungarian government bonds, plus 2.5 % (with a minimum of 4.5 % and a maximum of 9 %). The changes will also allow higher profit rates for operators of existing conventional production units that implement investments enhancing energy efficiency or reducing district heating costs.

Shortly after introducing the new district heating price regulation framework, the Government sent another positive signal to potential investors. The Ministry of Energy published the National Geothermal Utilisation Concept, a policy document aiming to make geothermal energy a key component of Hungary's green economy by leveraging the region's favourable geological conditions. Domestic geothermal energy use is targeted to increase from 6.4 PJ in 2022 by 20 % to 8 PJ by 2026, and to 12-13 PJ by 2030. The strategy is expected to increase the share of geothermal energy in total heat production from 6.5 % to 25-30 % by 2035.

The Concept highlights a joint approach to industrial, agricultural and district heating, focusing on the development of cascade systems on a heat community basis to optimise geothermal energy extraction. Regarding district heating, the policy document underlines that significant water-based geothermal potential exists in Budapest and 20 other medium-sized and large municipalities that currently have district heating but are not yet supplied with geothermal energy.

To achieve the objectives outlined in the Concept, a state financing framework based on 3+1 pillars is proposed:

1. Targeted grants to mitigate geological and associated financial risks during the initial phase of investments based on thermal water extraction. Projects with secure market conditions that fully utilise heat in a cascade system and align with municipal needs (while ensuring compliance with reinjection conditions) will be prioritised.
   
   
2. A geothermal investment loan scheme characterised by favourable and predictable terms for the implementation of investments, including drilling, heating centres and pipeline systems.
   
   
3. Further support schemes aimed at enhancing the efficiency of geothermal energy utilisation and promoting municipal heating initiatives.

The "+1" pillar is the aforementioned restructuring of district heating price regulation, i.e. the increase of profit factors for new district heating production units utilising renewable energy (including geothermal energy)

The recent legal changes in Hungary's district heating sector offer a promising opportunity for investors, especially those focusing on geothermal energy. The new regulatory framework, which allows for higher profit limits, combined with the additional incentives highlighted by the National Geothermal Utilisation Concept, creates a conducive environment for investment. These developments position Hungary as an attractive market for those looking to engage in the growth of renewable energy within the district heating sector.

authors: Gergely Horváth, Barbara Darcsi