Hungarian Paprika
Hungarian paprika is made from peppers that are harvested and then sorted, toasted, and blended to create different varieties. All Hungarian paprikas have some degree of rich, sweet red pepper flavor, but they range in pungency and heat. Just to confuse you there are eight grades of Hungarian paprika: különleges (“special quality”; mild and most vibrant red), csípősmentes csemege (delicate and mild), csemege paprika (similar to the previous but more pungent), csípős csemege (even more pungent), édesnemes (“noble sweet”; slightly pungent and bright red), félédes (semi-sweet with medium pungency), rózsa (mildly pungent and pale red), and erős (hottest and light brown to orange). In the US, what is marketed as Hungarian sweet paprika is usually the édesnemes variety.
Spanish Smoked Paprika
Unlike Hungarian paprika, in which the peppers are slowly sun-dried, pimentón peppers are slowly smoked over a fire, imparting an unbelievably rich and smokey flavor. The resulting smokey-sweet powder is used to create a warm, complex flavor profile. Like all paprika, you can find smoked paprika with varying degrees of heat: dulce is mild, agridulce is semi-hot, and picante is quite hot.
What to Use : Sweet vs Hot
The sweetness and heat of the paprika is all to do with the types of peppers used. If you are looking for a general use paprika, start with sweet paprika, and try other varieties as you experiment. However, unless stated otherwise, Spanish dishes will often use smoked paprika.
For general heat without a lot of flavor, use cayenne pepper, but beware: a little goes a long way!
For less heat and more flavour, use a Mexican style chilli powder.
For a sweet, more mild flavor use traditional sweet Hungarian Paprika, which is generally not spicy at all.
For a salsa-like flavor with a lot of heat, use Tabasco Sauce!
Can you substitute?
Although you will read that you cannot substitute cayenne with chilli, and vise versa, I believe that you can if you know what you are doing. If you do have a blended chilli powder, remember that it contains other herbs and spices. If you are using it as a substitute for cayenne you may need to add more than the recipe states while at the same time reducing some of the other flavourings in the dish.
Conversely you are substituting cayenne for chilli powder, use only a small amount and add some additional flavourings to the dish.
Paprika’s flavour can be quite different, and it is best not to use it as a substitute for chilli powder or cayenne pepper unless it is an emergency. If it is an emergency, substitute mild chilli powder such as ancho or chipotle powder (for a smoky flavor), or use just a pinch of cayenne. Depending on your recipe, you can add salt, cream, lemon juice or tomato juice to help reduce the spiciness of cayenne pepper.