Hungary has made remarkable progress in liberalising its energy markets, as part of the government's aim to strike a balance between energy security, economic efficiency and environmental protection. A new Electric Power Act was passed in December 2001, partially opening the electricity market to competition by 2003 and to full competition by the time Hungary accedes to the European Union in 2004. A new law on gas will be approved in 2003 introducing competition in the gas market. Hungary still faces a number of challenges however. In the electricity sector, it needs to ensure that MVM, the largest utility, does not cause distortions through its market power. Security of gas supply is vital for Hungary. Opening the Hungarian upstream market to increase indigenous gas production and to facilitate competition is a positive step. But domestic production is not sufficient. Limited gas-to-gas competition, uncertainty as to future gas demand and the oligopolistic structure of gas distribution companies may constrain the development of competition. Finally, policies which cap energy prices to address social welfare concerns discourage energy saving, distort fuel choices and discourage investment by energy firms. As part of the IEAs periodic review process of its Member countries, this report analyses Hungarys energy sector and policies, and provides proposals and recommendations for the Hungarian government.