Tax Optimization Could Reduce Energy Sector Burdens

Gábor Matuss, Partner at Andersen Tax Advisory Zrt., has been advising the energy sector for almost 20 years. He has served in this capacity through the economic crisis of 2008-2009, the boom period that followed and the global energy market’s more recent upheavals. The Budapest Business Journal spoke to him about the short-term challenges and risks facing the sector.

(An interview published by Budapest Business Journal in the issue of “TOP Executives – The Most Influental Energy Executives in Hungary 2024”).

To understand the current energy market, it is worth reviewing the events of the last few years. How far back in time should we go?

The destabilization of the market essentially started in 2021. The post-COVID economic recovery suddenly generated strong global demand for electricity and natural gas, leading to a significant price increase. At the same time, the supply side also decreased, as a great deal of maintenance work postponed during the pandemic had to be carried out in power plants and grid infrastructure. It should also be mentioned that Russia started to reduce its gas exports to Europe in 2021, obviously as a means of exerting pressure. But EU environmental measures and programs have also had an upward effect on prices.

The next chapter was the outbreak of the RussianUkrainian war. Was this the single factor that pushed world gas and electricity prices to record levels in 2022?

The formula is complex. Europe has been importing huge quantities of natural gas from Russia for decades, so the continent’s exposure, especially that of Germany and the countries of Central and Eastern Europe, has been high. The escalation of the war and the imposition of reciprocal sanctions led to huge price increases on the world gas market, compounded by speculation, the
uncertainties of the stock market environment and the limited availability of alternative energy sources, which together have led to energy prices rising to unprecedented heights.7

Prices have fallen significantly since then, although they are still well above pre-2021 levels. Can we expect a further drop?

The situation has indeed stabilized. The previous winter was unusually mild, and in the spring of 2023 the continent’s gas reservoirs were at relatively high levels. In addition, last summer, the downturn in European industry led to a fall in demand for energy. Record-high prices have made both residential and industrial consumers more thrifty and interested in increasing energy efficiency. I believe that, despite these developments, there will be no further significant decline and that there is a good chance that pre-COVID energy prices will not return.

What risks and challenges will the global and European energy market face in 2024?

While the situation is stable, there are still a number of risks to be considered. The biggest of these is the expiry of the gas supply agreement between Moscow and Kiev at the end of 2024, which could permanently close the limited Russian supplies to Europe via Ukraine. From this point of view, the length and severity of this winter and the next cold spell in the autumn, which will have a major impact on gas consumption, are of huge importance.

Another important question is when the Chinese economy will return to a strong growth path. This is interesting because European countries are mainly competing with China for available LNG capacity, which is a major alternative to Russian gas. The global energy market is also influenced by ongoing armed conflicts, such as the military action against Yemeni insurgents in the Red Sea, which threatens shipping. And let’s not forget that there are presidential elections in the US in November.

How can Hungary reduce its exposure to risks? What are the main objectives of the Hungarian energy strategy?

The long-term goal is to decarbonize domestic energy production, which can only be achieved through a combination of nuclear and renewable energy. Another priority is to reduce import dependence, while at the same time achieving the widest possible connection to the regional electricity and gas networks. A major shift in emphasis in meeting the country’s energy needs is part of the strategy, which will mean a shift in the share of different energy mixes and an increase in the importance of electricity generation. The government is aiming for the largest share of electricity generation to come from two sources: nuclear and renewables. This will require the long-delayed Paks II project to be completed.

What will the country’s energy needs be in the coming period?

Demand for electricity will grow strongly over the next 6-10 years. New energy-intensive production units will start operating, such as battery factories. Residential energy consumption will also rise, driven by digitalization, more air conditioners, smart homes and more electric cars.

What challenges does this pose for the network infrastructure?

With the proliferation of solar power plants and the ever-increasing system load and electricity consumption, the modernization of the national electricity system cannot be delayed any longer. It is unsustainable that, in the case of industrial investments, the decision on where the planned plant can be connected to the network is currently also a factor. The fluctuations in the production of an increasing share of renewables will increase the role of so-called balancing energy, which will continue to be supplied mainly by gas-fired power plants. In addition, the development of domestic energy storage capacity will become increasingly important. The recent residential solar tender is already supporting the deployment of systems that include storage, but we are also seeing more and more examples of industrial use of energy storage in the country.

To what extent does the lack of necessary network improvements contribute to further burdening on the sector?

The domestic energy sector is subject to a series of specific taxes. For example, the Robin Hood tax, introduced in 2009 on a temporary basis, currently takes 41% of the profits of the companies concerned. On top of this, there is the special tax on balancing capacity, the utility line tax and a few other items, which together result in far fewer resources being available for investment and development. In this respect, we are essentially 10-15 years behind, which is not easy to catch up overnight. The special taxes imposed on the sector therefore reduce the profitability of firms, thereby reducing their value, which has a negative impact on the return on investment for their owners. There is therefore an essential need for tax optimisation by industry players.

How can these burdens be alleviated?

It is not a simple task, as the special taxes listed are likely to be with us permanently in one form or another. Nevertheless, my personal experience is that the operators concerned have room for manoeuvre in virtually all cases. Within the limits of the legislation, it is generally possible to find optimisation opportunities for all taxes that can significantly reduce the burden on a given company or group. In addition, frequent changes in the rules make the role of tax advisors, who also have industry knowledge, particularly valuable and who can build on their up-to-date knowledge to offer tailor-made solutions.