European Commission intervenes to address high energy prices

23/09/22

On 14 September 2022 the European Commission, proposed by means of an EU Regulation, the following four measures:

An obligation for EU Member States to reduce their gross electricity consumption by 10% (until 31 March 2023);
An obligation for EU Member States to reduce their gross electricity consumption by at least 5% during selected peak price hours (until 31 March 2023);
A temporary revenue cap on electricity producers with lower marginal costs (such as renewables, nuclear, lignite and crude oil) until 31 March 2023; and
A temporary mandatory solidarity contribution on 2022 excess profits generated from activities in the oil, gas, coal and refinery sectors.

According to the EC, these measures seek to mitigate the impact of high electricity prices and protect consumers, while preserving the benefits of the internal market and a level-playing field.

The legal basis of the proposed Regulation is Article 122 of the Treaty on the Functioning of the European Union. As such, the proposal requires a qualified majority vote in the Council to be approved.

When adopted, the Regulation will be binding to all EU Member States and thus implementation into national law would not be necessary. However, the proposed EU Regulation does not regulate the administrative aspects of the measures and especially of the solidarity contribution (which needs to be collected by the EU Member States). This point needs to be regulated under national law unless the EU swiftly issues an implementing Regulation (that would regulate the collection of the contribution). Furthermore, EU Member States retain the right to introduce more ambitious measures both in terms of demand reduction and the limitation of revenues of electricity producers, as long as they are proportionate, do not distort the functioning of electricity wholesale markets, do not jeopardize investment signals and they are in line with EU law.

What does this mean for your organization?

If you are an EU based electricity generator or operator in the fossil fuel industry, the proposed Regulation will likely have a direct impact on your business over the coming months. Mainly:

If you are in scope of the temporary revenue cap (see below), you should expect a reduction in allowable revenues through to March 2023; and
If you are in scope of the solidarity contribution (see below), it is advisable to already assess the impact of the contribution on your organisation.

If you are not directly involved in the generation of electricity or in the fossil fuel industry, the proposed Regulation may still have an indirect impact on you, but this is currently difficult to quantify. Mainly, it is still unknown how the proposed Regulation will practically impact the final consumer price of electricity.

In addition to these two measures, the proposed Regulation also requires EU Member States to reduce their total monthly gross electricity consumption by 10% compared to the average gross electricity consumption of the corresponding reference period (the reference period broadly being 1 November to 31 March of the five previous years) . There is also a mandated 5% reduction in electricity consumption during peak price hours. To achieve these reductions, it may be that EU Member States impose restrictions on their local electricity consumers (potentially via efficiency mandates or reduced operating hours), and this may have a direct impact on your business.

Temporary revenue cap on ‘lower margin’ electricity producers until 31 March 2023 (Article 6 and 7)

The proposed Regulation sets out an approach to recover excess revenues from electricity producers with lower marginal generation costs (see the below list of in scope generation methods). To limit the revenue of these lower cost producers, a maximum market revenue cap of 180 EUR per MWh of electricity produced has been proposed. This cap is proposed to apply from no later than 1 December 2022 and remain in place until 31 March 2023. The market cap will not fix the price of electricity, but instead limit the revenues earned by these lower cost producers (with any excess revenue above the cap being surrendered to the EU Member State).

So as to preserve market stability, the revenue cap will apply to the following forms of electricity generation:

Renewable energy (including wind, solar thermal, solar photovoltaic, geothermal, hydropower without a reservoir, biomass fuel (excluding bio-methane) and other waste);
Nuclear;
Lignite; and
Crude oil and other oil products.

EU Member States may elect to exempt some electricity producers where the power-generating facilities installed capacity is under 20 kW, or the generator is already subject to another form of revenue cap by the EU Member State. In addition, the proposal mandates that EU Member States shall use any surplus revenue (resulting from the cap) in support of final electricity customers, so as to mitigate the impact of high electricity prices on those customers in a targeted manner.

Our observations: It is not yet known how the proposed revenue cap, in conjunction with the expected additional financial support for final consumers, will impact the current electricity price pressure. Given the revenue cap is proposed to expire on 31 March 2023, we expect to see further debate around potential structural reform to the EU electricity generation market in the near future.

Temporary mandatory solidarity contribution on excess profits generated from activities in the oil, gas, coal and refinery sectors (Article 13)

The proposed Regulation introduces an exceptional mandatory solidarity contribution for the fossil industry applicable in all EU Member States and should apply from 31 December 2022 at the latest.

Basis for calculation of the solidarity contribution: taxable profits in 2022 (fiscal year starting on or after 1 January 2022) from activities in the oil, gas, coal and refinery sector as determined under bilateral treaties or EU Member State’s national tax laws, which are above a 20% increase of the average taxable profits generated in the three fiscal years starting on or after 1 January 2019. A negative average annual result leads to average taxable profits being zero.
Solidarity contribution payers: EU companies and permanent establishments with activities in the field of oil, gas, coal and refinery sectors.
Tax rate: 33% (NB: preamble: EU Member States remain free to apply a higher rate if they already apply a similar contribution/levy/tax).
Application: for a period of one year after entering into force of the Regulation (one day following the publication in the official EU journal) and no later than 31 December 2022.

The EU Member States shall use the proceeds from the contribution to facilitate financial support measures in a defined, transparent, proportionate, non-discriminatory and verifiable manner.

Our observations: the solidarity contribution is clearly inspired by the national windfall taxes that some EU Member States already apply to tax the excess profits of energy companies. This is already the case in Hungary, Greece and Italy. The Czech Republic decides this month on its own windfall tax and Spain has already submitted a draft bill. Germany is also considering introducing a windfall tax. According to the EC, existing or planned national measures sharing similar objectives with the contribution shall comply with or complement the rules governing the contribution.

Another interesting point is the obligation of EU Member States - as a matter of solidarity - to share the proceeds of the contribution to the common financing of measures to reduce the harmful effects of the energy crisis (next to local financial support measures).

What’s next: 30 September 2022

According to the EC, at the Extraordinary Energy Council on 9 September 2022, Energy Ministers of EU Member States endorsed the EC’s ongoing work in these areas. The proposed measures will be discussed at another extraordinary Council meeting that has been scheduled on 30 September 2022.