Stability is key for one of Europe’s international energy champions

05 Nov Stability is key for one of Europe’s international energy champions

György Kóbor, Chairman & CEO, MVM Group, describes the mindset behind the future steps of one of Hungary’s prized blue-chip companies

MVM Group has a long and rich history in Hungary: it has been a strategic partner in the development of the country, building and modernizing the power generation and transmission infrastructure. Could you give us a rapid overview of the MVM Group, with a couple of key facts and figures to illustrate its importance and contribution, and what it stands in Hungary today?

MVM Group is Hungary’s largest utility company with a rich history and a strong presence in both the electricity and natural gas value chains – from the production, transmission, distribution, sales, all the way down to the meter services. The Group is present in 18 countries, with the major part of the operations in Hungary. Outside of Hungary one of our biggest operating markets is the Czech Republic, where we have similar operations than in Hungary with a big retail business.

In the past ten years MVM Group has become an indispensable player in the Hungarian economy, ranking as Hungary’s 4th largest company by sales. It has also been placed on the map in Central Europe, since it positions as the 13th largest company in Central Eastern Europe by sales. MVM group overall counts close to 17,000 employees. We have about 6.2 million customers, but we already announced some further acquisitions and expect our customer base to grow to 8 million next year. Our earnings before interest, taxes, depreciation and amortization (EBITDA) is close to EUR 500 million. We are 100 percent state-owned, but we have full market-based operations. We have networks, we have customers, we have e-mobility businesses so we operate across all the value chain in Hungary. Outside of Hungary we are dealing with mostly with wholesale, and in Austria, Slovakia Czech Republic and Romania we have retail operations as well.

What are some of the highlights of your 2025 vision, especially in regards to your transition to cleaner energy?

By 2025, MVM Group will become a carbon neutral energy and infrastructure company providing end-to-end solutions for our customers. Today the current share of MVM carbon-free energy generation is 83.3 percent (for the period of January to September 2020). We are an active participant in the European debate about CO₂ reduction, and our vision is to increase this share of 83 percent of CO₂-free generation to 85 to 90 percent by 2025.

The majority of the ‘low CO₂ generation’ is nuclear, a technology which we believe to be essential to a successful carbon neutral transition in the long-term, but the RES generation is continuously increasing with the addition of the new capacities. Due to its geographical constraints and lack of water and mountains, Hungary can only rely on solar, wind and nuclear energy sources. Hungary is actually running a major national project for capacity replacement, with Paks 5 and 6 power units being built. We are not necessarily growing and expanding capacity, but we are maintaining capacity.

The next big vision is photovoltaic expansion. Currently the installed capacity is of 1 GWh. The vision is to increase this to a total of 9 GWh of photovoltaic and renewable. The peak consumption in Hungary is now of 7 GWh, which means that Hungary’s installed capacity will be much bigger than the consumption. The majority of that is Photo-voltaic. We have real expertise in carbon neutral power generation – including nuclear and photovoltaic energy – carbon neutral mobility and smart solutions. Apart from pinpointing energy businesses with direct clients in the region, we are open for opportunities where we may have an advantage based on our expertise.

The third pillar of our strategy is conventional power plant development. We are currently phasing out of old obsolete lignite-fired power plants, which are a heavy burden in terms of CO₂, and replacing these lignite operations with new technologies like CCGT which are less damaging. There is a huge debate in the EU whether gas as a primary source could be subsidized or not, but due to our geographical constraints and our reserve system, we are heavily investing in gas-fired power plants. All in all we have pretty good environmental records and CO₂-free production levels, but we are aiming to enhance further our ranking by 2025. When it comes to our Photo-voltaic production increase, MVM targets to capture 25 percent market share in that market. In 2025, we also ambition to generate 25 percent of our EBITDA abroad.

You have spoken about the path to capital market maturity. Is a future IPO still on the table or has this been put on ice for the time being?

It is a gradual process, mostly up to the owners to decide whether or not we should go public. Our duty is to prepare for it. In March 2020, the MVM Group launched a program to prepare for raising funds from the capital market related to the implementation of its ambitious growth strategy and to achieve stock market capacity. We had a major exercise in house, focused on the adaptability and capability to go public. This project has been going on for quite a while, and we will be by fourth quarter of 2021 ready to go public. We are changing our accountability policy to IFRS, starting to prepare for a bond issue, which both necessitate some process transparency. We would like to go public and the company in this context is absolutely exchange fit; the question is if and when the owners want to do it.

One of your goals is to position MVM among Europe’s top 10 energy companies. For this you’re driving growth both organically and through strategic acquisitions, in Hungary and neighbouring of Eastern Europe and the Balkans. Tell us a bit more about the company’s strategy behind the most recent international acquisitions, in Czech Republic, Romania and the Balkans. What kind of new synergies have you created within the group, to achieve this shift towards carbon-neutral solutions? 

MWM is quite heavily represented in Hungary, across all elements of the value chain. In order to be able to grow, we cannot grow along our value chain as it is pretty content, so there are two possibilities. One is to grow in areas related to energy but like e-mobility, g-mobility, construction services, manufacturing activities, beyond the meter services, etc – everything that is a good supplement for the current business in Hungary. The other possibility is to look abroad for growth opportunities. These are the two options: grow outside the value chain in Hungary, or grow abroad.

We defined a regional strategy, and based on several parameters we set aside our target countries, which are essentially the Visegrád countries and the West Balkan area, from Serbia, Macedonia, Montenegro and Romania. Those are neighbouring countries with whom we have good relations and physical links, and lots of other stories. We are both looking at starting greenfield operations, establishing a new business and growing it, which is, for example, what we are doing in Romania, and acquiring companies ,which is what we have done for example in Czech Republic. There we acquired from Innogy, a big company with many customers and a big presence in the Czech retail market. The idea is that these are good standalone investments that generate good profits for us, we are focusing on EBITDA, but by acquiring these assets we can grow synergies within the group and unleash other potential. We are pretty big in gas, in terms of trading in Croatia, Ukraine and beyond, and it is always good to have a hatch position. The Czech market is pretty big, with 30 KWH, and it represents a natural hatch for us in terms of operations. Interestingly, district heating there is based on coal. As we are phasing out of coal as a fuel element, there is a big wave in Czech Republic now to turn away from coal to other types of district hearing elements, CHP (Combined Heat and Power) but not only. We are part of that process, helping the Czech economy making this change from lignite and coal base operation to an environmentally friendlier solution with CHP. We are part of that discussion, in Czech Republic, in Hungary and other countries. Within the European energy scheme 2021 to 2030, different countries have different obligations; in the Czech Republic it is a voluntary obligation, whereas in Hungary it is mandatory to reduce emissions and reinforce energy saving B to B and B to C solutions. In the case of Hungary, the goal is to cut down energy exposure by 7 Petajoule by 2030; in the energy business the Petajoule has a major role. The same goes in the Czech Republic, they have a voluntary regime, they contract with the Ministry for energy saving, and then the country can report those savings. Both in terms of generation and in terms of customer solution, the goal is to significantly cut down CO₂ emissions, and produce environment-friendly solutions for all.

How would you describe the significance of the flagship Mátra Power Plant Project, and turning an old system into new, clean and highly efficient energy?

It is quite significant. This energy efficiency scheme is in the final stage of adoption legally. The goal is to invest roughly EUR 1.3 billion by 2030, whereas in terms of generation we are planning to invest roughly EUR 0.8 billion. We plan to include available external funding as well for this.

MVM is committed to the implementation of the national decarbonization transition and we believe the successful implementation of the Mátra PP vision on a business basis will ensure the return on the transaction. In alignment with the increasing need for flexibility, MVM has a vision for Mátra PP to become a more flexible generation asset instead of a base power plant.

There is no better example than the energy industry to portray the interrelationship between innovation and sustainability. Can you give us an inside peak to the company’s R&D program, what are some of the most fascinating projects taken on, with or without other partners?

Hungary is a small country, but we have a very strong tradition of innovation. There are two ways of innovating: either you follow the others and leave other countries spend the money and you just take a solution that are already ripe; or you go alone. I think Hungary is in between. We are very well advanced in several areas of the economy, such as healthcare activities. In the energy business we are a bit lagging behind.

In terms of innovating activities we are more focused on customer solutions rather than on different generation types, although we have massive activities around hydrogen. Hydrogen is a buzzword in Europe and everybody is dealing with hydrogen, but not really knowing what the outcome will be. We have a pilot project in this respect around green hydrogen solutions and storage facilities, using photovoltaic energy to transform gas and take out hydrogen and oxygen. We have projects around CCS technologies, around carbon capture storage technologies, because of our lignite. Using lignite in the production is a big killer brutally releasing CO₂, but using lignite in a clean environment could be an option for the future, when it comes to carbon capture solutions.

Innovation is a central focus in our organisation. We are fostering innovation through employees as well: we run in-house competitions for innovative solutions, from simple solution for office operations all the way to generation solutions. Customers tend to be more and more focused on energy, and, therefore, if you want to be successful in the future, you have to adopt a customer thinking. For this reason we involve our customers in the product development phase. Innovation is a way of thinking, how do we think about ourselves, etc. Usually our business is very traditional. For 150 years, gas and electric supply has remained the same, with production, transmission, distribution and drilling. That has to change. We have to change. If you cannot change then you need to employ people or to purchase companies to acquire this kind of change capabilities. Last year we required a big I.T. company that is totally different from us, in order to define what we need and what customers need and come out with solutions. We also spend a lot of time in Israel talking to people in this very innovative environment, because they have lots of solutions for energy businesses. Israel is a small country and they need to have outside activity so this is a good match for them.

It is a very complex issue but I am very enthusiastic about it the future of energy which is definitely around innovation. Never was more exciting to work in energy than in these days. We can achieve a lot in the fight against climate change. Not only via cleaner production of electricity (of which MVM is pretty good already), but improving electrification vs. other energy alternatives such as e-mobility, in which MVM is also a frontrunner in Hungary. If we walk along the value chain, besides our carbon free and very reliable NPP, we already have a sizeable portfolio of renewable, mostly of PVs. The only lignite-based power plant is under our management and already have quite elaborated plans how to transform this site into a much modern portfolio of other energy solution.

Contributing to European energy security of supply is also a role played by MVM and particularly its natural gas segment. What are some of the latest investments made in natural gas infrastructure and how are you working to boost supply and its distribution throughout the region?

 For a very long time Hungary has been aspiring to diversify its gas supply, both from a source market point of view, and from a route point of view. Hungary, through one of the MOL subsidiaries, is investing in Serbia, and also developing connections to Romania. We have agreements to build out capacity with Slovenia as well, which is the only country were we don’t have connection with. We also contracted this LNG project for seven years, with 1 bcm per year, and I think this is a good opportunity for Hungary to diversify both in terms of source and in terms of routes.

The ground basis of natural gas security of supply in our focus region is our capacity of natural gas storage, 4.4 bcm mobile capacity, which is the largest of its kind in the region, thus not only providing backup security for our clients, but also an excellent flexibility asset for the supply of the region. Storage is always interesting because for gas supply you need to have the flexibility. Flexibility from the grid is not always guaranteed because of the seasonal fluctuation, so you need to have storage capacity. We have a 4.4 bcm storage facility in Hungary, and we are looking for opportunities outside of Hungary in terms of storage, because that will be needed for the Czech operations.

In the region MVM is upscaling its natural gas business development activities. MVM is building up its regional natural gas presence as well: AT, SK, HR, RO and CZ, including building up build the wholesale supply model in the region for its retail operations (e.g. CZ, RO). MFGK will soon be negotiating new source options in the region. Therefore, booking a significant stake of capacity in Croatia’s LNG hub, this was also a milestone for MVM and for Hungary as well.

What are your views on a unified electricity market in the region, its pros and cons and the necessary conditions for it to thrive and benefit all members?

Fifteen years ago, we were already discussing around a hypothetic unified energy market in Brussels. I think a unified European market of energy is more of a dream than a reality. Regional energy markets sounds a little bit more realistic, because in reality when it comes to the implementation each and every country always prefers to follow its own rules. There are exceptions to this of course, as they are also well functioning across-borders capacities and regional exchanges. However what we found out in that when problems arise, the countries’ own interests always come first. Regional interest always comes second.

This works much better in power, than for gas which is very much physical. Gas is also at the forefront of geopolitical discussions. Hungary has a very interesting situation because it stands in the middle of Russia and Europe and it is geographically a hub, both in terms of gas in terms and electricity. We have very great connections with all the neighbouring countries so the physical opportunities are there. What I feel is lacking as a common regional understanding of problems. Each country is thinking at the country level, and each country is defending its own interest. The idea is great, but the implementation is really lagging behind. 

One result of the current pandemic is the slowing of globalization, also known as “slowbalization.” Many hope that we will return to a greener economy after COVID-19, but some experts are concerned that the world will turn to an even less sustainable and green economy post-COVID-19. As we look towards a post-pandemic world, what do you predict for the future of the fight against climate change and how do you see MVM’s role in this fight?

A year ago nobody was talking about a pandemic situation, nobody imagined it. As of now, it is very hard to say when this situation will be over. Seeing the trends and the developments in the energy business, I do not foresee any major change on the solutions or on the goals. There will be an impact on consumption, and maybe we will be more conscious about the environment, we will develop a more caring spirit towards each other. This kind of spirit will be transpiring in the energy business.

The EU goals in terms of energy were a little bit visionary, and it will be easier to realize these goals by building energy communities, aggregators and prosumers. In general, in a crisis people react by defending themselves and their own interests, and the psychology today is the same as in a war. After that, I believe that there will be more solutions developed, more decentralized solutions, more focused on those issues that were let down in the clean energy package. A year ago, I would have said that the clean energy package is a dream made in Brussels. Now, in the midst of COVID-19, I would say that it could be the way. It would be easier to implement all these goals after the COVID-19 crisis.

To conclude this interview, what is your final message to the readers of Newsweek?

We are well on track to meet our main priority of achieving one of the highest levels of financial and economic maturity, which is to bring the whole MVM Group to the next level to be able to attract independent investors on the European capital markets. We do not necessarily want to be the biggest player on the market, but we want to be a player that is noticed, and that counts on the regional table.

When it comes to the future of the energy business, I was always sceptical about what we can achieve at the EU level in terms of CO₂ emissions, when we are so small compared to China or the US, it is a difficult to want to change the world alone, and it makes no sense. However this is more of a mindset, Europe is on the right track, and I think sooner or later everybody will follow.

Regarding the Hungarian economy, Hungary is not really liked in terms of it politics, however in economic terms we are robust, and this is confirmed by investment bank and investors. Even in these times of COVID-19, we managed to attract investments and operations to Hungary. It is a good place to be, where the micro and macro are fitting.