Electricity generation income capped at 130 Euro per MWh

This article is based on the information as it was known on 30 November 2022.

As implementation of the European energy emergency measures, the Netherlands is also introducing a temporary cap on market income of electricity producers for the period from 1 December 2022 to 30 June 2023. According to the parliamentary letter of 30 November 2022, the general income ceiling is set at 130 euros per MWh, calculated on the basis of monthly average prices. Above this ceiling, 90% of market income must be remitted.

The cap applies to generation plants from 1 MW onwards, affecting an estimated 1,500 plants. For the levy on income above the income cap, the Tax and Customs Administration cooperates with the Netherlands Emissions Authority (NEa), whereby the Consumer & Market Authority (ACM) provides advice and support.

As the income cap in the Netherlands takes effect from 1 December 2022, the parliamentary letter explains the intended design in anticipation of the bill expected in March 2023. Not all details have been worked out at this stage and the letter also caveats deviations in the final legislation. The measure will be worked out in a standalone implementing law.

What does this mean for your business?

The income cap will apply to electricity generated from wind, solar, hydro, biogas, waste and nuclear power, among others. All income exceeding the ceiling of 130 euros/MWh on a monthly basis will be taxed at a rate of 90%. For biomass, a tariff of 240 euros/MWh will apply and for coal, the income ceiling will follow costs.

By adhering to monthly price averages, the aim is to be in line with - in practice common - accounting based on monthly reports. It is also intended to prevent power plants from being deliberately temporarily shut down if the income ceiling were to match hourly values.

The income cap will in principle apply for the period 1 December 2022 to 30 June 2023. However, the underlying EU regulation allows the income cap to be extended beyond 1 July 2023. This is also explicitly referred to by the finance ministry. The deadline for a decision on this - based on a Commission review - is 30 April 2023.

Electricity from biomass fuels

As mentioned above, for electricity from biomass fuels, the income cap will be higher, at 240 euros/MWh. Electricity producers that (co-)use biomass have indicated that with the lower income ceiling of 180 euros/MWh, they will be forced to produce less electricity, or to co-fire less biomass. One reason is the sharp increase in costs for (woody) biomass. In that case, this reduced electricity production would have to be met by gas-fired power plants.

Electricity from coal

An income cap is proposed for electricity production from coal, which will move with the marginal costs for it. The reason is that on 20 June 2022, the government withdrew the production limitation for coal-fired power plants in order to reduce gas consumption for electricity generation. By introducing the flexible cap, coal plants should be prevented from scaling back production, effectively nullifying this measure.

How is income defined?

The cap explicitly refers to income and not profits, i.e. costs are excluded. In addition, the underlying EU regulation states that the cap should only apply to realised market revenues. This means that income hedged against fluctuations in the wholesale electricity market should be excluded.

Exceptions

Production installations with a certain SDE ruling

For production plants subject to the levy and for which an SDE ruling has been issued with a basic amount higher than 130 euro/MWh, that higher price will apply as an income ceiling. This is intended to safeguard the investment climate for renewable electricity production, without requiring adjustments to the SDE++ or a new subsidy instrument. There are around 100 production plants in the Netherlands that have received such a decision with a higher base amount than 130 euro/MWh.

Revenues from balancing market and re-dispatch excluded

It also follows from the parliamentary letter that market revenues from the balancing market and redispatch will not be covered by the levy for the time being. However, it does indicate that the bill will consider the extent to which there is a possibility of no longer exempting income from these markets, because, for example, as a result of the implementation of this levy, there is too much inflow of electricity to one or more of these markets, in order to prevent this inflow in itself leading to risks for security of supply.

Method of levying above the income cap

The envisaged mode of taxation is payment on declaration, just as for VAT returns, for example. Producers must therefore calculate, declare and then remit the tax due themselves. The levy will have to be paid once afterwards, over all seven months in which the ceiling is in force, to the extent that the ceiling has been exceeded on a monthly basis.

An audit will be required with the declaration in many cases. Exactly how this will be designed, and what level of audit will be required, will be worked out in the short term.

Intended next steps

The Minister of Economic Affairs and Climate Change and the State Secretary of Finance aim to submit the legislative proposal for an implementing law to the House of Representatives in March 2023 so that it can enter into force on 1 July 2023 with retroactive effect to 1 December 2022.

Background

The basis for the price cap is contained in the agreement of European energy ministers on the package of emergency measures to deal with high energy prices of 6 October 2022 and further shaped in the Regulation (EU) 2022/1854 on emergency intervention in response to high energy prices (the EU Regulation). Based on the EU Regulation, all revenues from 'inframarginal' electricity production (including nuclear, lignite and renewables) above 180 euros/Mwh must be collected by member states and passed on to energy consumers to alleviate the impact of high energy prices. For more background, please see 'EU Commission intervenes against high energy prices'.

Dutch interpretation of income ceiling

With 130 euros/MWh, the Netherlands opts for a lower income ceiling than 180 euros/MWh because the Dutch implementation takes into account the market income based on monthly averages and includes prices during off-peak hours, while the EU regulation is based on prices during peak hours.

Implementation by other EU member states

Since the Regulation is effective for all member states within the EU, other countries such as Germany and Belgium have also taken steps towards implementing the measure in their national legislation. For example, Germany is also expected to apply a tariff of 130 euro/MWh for offshore wind and nuclear power generation and a tariff of 60 euro/MWh for coal generation, with an effective date of 1 September 2022 being considered. Belgium would be expected to adopt the 130 euro/MWh tariff as well, with the levy period starting as early as 1 August 2022. We will shortly prepare an overview of the implementation of the EU regulation by the various EU member states.

Contact

If you have any questions about this or would like more information, please contact your own PwC contact or Niels Muller, Chris Winkelman, Juliette Marsé or Mohammed Azouagh from the PwC Energy Utilities & Resources team.