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EU and Member States plan intervention in electricity markets via windfall profit caps

  • Europe
  • ESG
  • Energy and infrastructure

12-09-2022

Since the beginning of the Russian invasion of Ukraine, oil and gas prices have risen to unprecedented heights. This price increase has had a direct impact on the price of electricity in European countries due to the European electricity market design in the form of the merit order.

According to the merit order, the highest electricity price that can be achieved determines the electricity price for all types of generated electricity (so-called marginal power generation technology). The current marginal determinator is electricity generated by gas-fired power plants. This high price can also be collected by the generators of cheaper electricity, or so-called inframarginal power generation technologies (e.g. renewable energies, coal and nuclear power), leading to high profit margins on their side. This situation lead European and national lawmakers to come forward with suggestions to regulate the electricity market by capping and/or skimming off these “windfall profits" via taxes, levies or other means.

This briefing summarises the envisaged measures at the level of the European Union and its Member States.

EU: European Commission considering action to facilitate price cap for inframarginal power generation technologies

In a so-called "Non-Paper on Emergency Electricity Market Interventions", dated 1 September 2022, the European Commission suggested, as a measure against high electricity prices, introducing a price cap for inframarginal power generation technologies. The non-paper describes a cap on the revenues of inframarginal generators and an obligation of the Member States to use these skimmed off profits to reduce consumers' electricity costs.

Further details of the EU plans were announced on 7 September 2022. In a “Commission non-paper for the Extraordinary Energy Council of 9 September 2022”, the European Commission describes an integrated set of emergency interventions consisting of five potential measures. With respect to windfall profits of inframarginal power generators, the non-paper refers to a “European revenue cap for inframarginal generation technologies (i.e. cheaper than current final price-setting technologies).” The cap would be set in a way that the “same price would be paid to all inframarginal generators in a uniform manner, thus ensuring a European solution and level playing field.”  The European Commission was cited to recommend a cap on revenues generated by power producers other than operators of gas-fired power plants when market prices exceed EUR 200/MWh, which is less than half of the day-ahead market price in Germany on that day (EUR 443/MWh). Whilst the measure would establish an EU-wide maximum remuneration of inframarginal revenues, Members States would still be able to uphold existing domestic measures or to introduce measures which impose stricter revenues limitations.

In addition, the Commission proposes introducing the following four measures:

  • a binding target for the reduction of electricity consumption at peak times
  • a crisis solidarity contribution for oil and gas companies
  • liquidity assistance for energy suppliers that get into financial difficulties because of margin calls on the futures markets
  • a price cap for natural gas that is imported from Russia.

Following an emergency meeting on 9 September 2022, the EU energy ministers invited the Commission to prepare specific legislative proposals with respect to the envisaged measures, except for a price cap for natural gas from Russia. The announcement of the proposals is expected on 13 September 2022.

Austria: Electricity price cap

In a meeting on 7 September 2022, the Austrian Government resolved an electricity price cap, which shall apply from December 2022 until the end of June 2024. During this period, the price of electricity up to a consumption volume of 2,900 kWh per household per year will be principally capped at 10 cents per kWh and the balance between this cap and the supplier’s energy price will be compensated by the state. Consumed energy above 2,900 kWh per household per year will not be subject to the subsidy. However, this compensation will be capped at 30 cents per kWh, so that the full balance between the aided price of 10 cents per kWh and the supplier’s energy price will only be compensated subject to that the supplier’s energy price does not exceed 40 cents per kWh.

The government hopes to thereby force suppliers not to increase electricity prices over 40 cents per kWh. The described subsidy applies independently from the size of the household and whether it is a single person household or a multi-person household, which would have made the calculation of the applying subsidy too complicated. The aided consumption volume was calculated on the basis of 80% of the Austrian average consumption of households. Currently, approximately half of all households consume less than 2,500 kWh per year. The government announced that large households will receive additional aid upon application, but the details are not known yet. Low-income households shall be also aided with a subsidy compensating 75% of their grid connection costs. The decision of the government still requires to be implemented by law. 

A tax on windfall profits is in discussion but has not yet been resolved. Prior to the resolution of the government on 7 September 2022, some aid for the compensation of inflation were already granted.

Belgium: Consultation Committee of Belgian Governments calling for a tax on excess profits

On 31 August 2022, the Governments of Belgium convened the Consultation Committee. Here, different measures were proposed to address the rising gas prices and announced that Belgium will be one of the requesting parties for the introduction of a price cap on gas at the European level. One of these measures relates to a tax on the excess profits of energy companies.

Currently, the Belgian nuclear reactors are already taxed on excess profits: the so-called “nuclear repartition”. Due to legal constraints, there will be no additional tax for the nuclear power plants, but there will be an extension of the nuclear repartition to the other players in the energy sector who generate excess profits. By doing so, the Government wants to create a level playing field for the whole sector. By the end of September, it should become clear how the additional tax on excess profits will be implemented and whether it will have a legal standing.

Czech Republic: Introduction of price caps and windfall tax announced

The Czech Prime Minister announced to tackle the price increase on the electricity market by price caps and a windfall tax. Households are eligible for social contribution to the living costs, for companies the government looks for a solution in compliance with EU state aid rules. The Government is expected to discuss further steps in the week commening 12 September 2022.

Finland: Government starts preparations for windfall tax

The Finnish government resolved on 1 September 2022 to commence preparations for legislation concerning the taxation of windfall profits of electricity producers. The tax shall be structured in a way that the prerequisites for investments in clean energy are secured. It will not affect companies operating in accordance with the so called mankala principle, i.e. companies producing and delivering electricity to their shareholders at production cost, without making profit. However, no specific mechanism for the tax has been set out so far.

The government continues to look for solutions to reduce electricity prices both at national and EU level and resolved on taking initiative from the European Commission to reduce the maximum price of bids in electricity exchanges in the EU in a manner that does not exclude from the market significant production capacity or demand response.

France: Cap on electricity price increases of 4% per year and support of EU measures

France has not yet expressed a final position on the possible reform of the wholesale electricity market contemplated by the European Union. However, the French Government supports the adoption of a European contribution mechanism that would be required from energy operators and also supports joint purchasing practices for gas.

Although no measures have been taken in this respect to date (taxation and/or contribution), it was recently decided to maintain the price cap (bouclier tarifaire) for the year 2023. This measure, introduced in the 2022 Finance Law, aims to cap the increase in electricity prices at 4% over the year.

Another initiative to control price increases is the allocation of financial supports to certain companies to offset the cost of supplying gas or electricity to energy-intensive companies.

Germany: Federal Government calling for a price cap and skimming of excess profits

With a set of measures against the rising electricity prices, the German Federal Government announced on 3 September 2022 the planned skimming of windfall profits made by inframarginal generators and their passing on to electricity consumers.

With respect to the skimming of windfall profits, no specific mechanism is described. However, the explanations can be understood in a way that a price or revenue cap is to be set for inframarginal generators and that the difference between this cap and the day-ahead exchange price must be paid to the grid operator.

According to its statement, the German Federal Government is committed to coordinate and develop with the Commission measures at EU level. Should such measures be delayed, however, it seems possible that Germany will introduce aforementioned changes to the electricity market on its own.

Hungary: Introduction of residential market price

Since 1 August 2022, residential customers in Hungary are entitled to a reduced tariff, of 36 HUF/kWh (approx. 0.091 EUR/kWh), for electricity up to an annual consumption of 2,523 kWh per metering point, and a so-called residential market price, of 70.10 HUF/kWh (approx. 0.1766 EUR/kWh), will apply to consumption above this amount. Similar reduced tariffs apply to electricity consumed during night-time or by heat pumps. However, the current residential market price scheme will in principle be reviewed at the end of 2022, and thereafter the electricity price will be adjusted to the world market price on a quarterly basis.

In addition, the Hungarian Government has decided that, in order to remain viable until the end of 2022, micro-enterprises will continue to be entitled to purchase electricity at a reduced price, i.e. the price of the non-residential universal service, up to the limit of the total annual electricity consumption of 4,606 kWh. Any consumption exceeding this amount will be invoiced at the market price provided within the applicable universal service.

Ireland: Measures expected on next Budget Day

In Ireland, discussions on potential market interventions are still at a political level with not a lot of clarity on concrete proposals. However, from a political viewpoint, something will have to be done. Therefore, specific measures can be expected on Budget Day (in October 2022) after the EU has clarified its position.

Italy: Proposal for price cap under discussion

Although the issue of intervention in the electrical market is currently under discussion by the relevant political parties, no formal resolutions have been adopted so far. The competent Ministry has proposed a resolution, consisting, mainly in the following key pillars:

  • The cap would cover all physical and financial transactions at the EU hubs
  • The cap should be high enough vs pre-war levels in order to be attractive for producers and exporters. This would be a price cap decided by political authorities at EU level, taking into consideration international LNG prices, temporary and regularly reviewed
  • The measure should be complemented by public compensation mechanisms to refund importers of the difference between international prices above the cap and the cap for marginal resources required to ensure security of supply, such as spot LNG supplies Over the medium term, overall LNG deliveries could be separated from pipeline ones with a dedicated trading platform
  • A specific regulation should be included to avoid arbitrage opportunities when reaching the cap level (extra-EU transactions)
  • An appropriate and coordinated framework for demand management and allocation criteria should be included to be triggered as follows: (i) in the case of achievement of the cap level, but without situations of physical shortage of gas supply, and (ii) in the case of physical shortage of natural gas supply.

Taking into consideration that the general election will take place on 25 September, further and specific measures could be adopted by the next Government.

Latvia: Introduction of price cap and windfall profit tax under discussion

In Latvia, support measures until now have been directed primarily only in relation to reducing the consequences caused by the increase in energy resource prices, offering various compensatory mechanisms to both entrepreneurs and households.

With respect to a potential price cap and windfall profit tax, an active discussion is currently taking place at both political and societal level with the aim of providing a concrete proposal for harmonisation of electricity market and public interests in the near future. The situation is complicated by the parliamentary elections to be held on 1 October 2022.

Lithuania: Measures for energy consumption saving introduced and support schemes for business and consumers under discussion

On 7 September 2022, the Lithuanian Government approved the plan for energy consumption saving measures to mitigate effects of soaring energy prices. The Government will allocate EUR 1.3 bln to support energy efficiency programmes. A variety of energy saving measures are covered by the plan, which include setting heating limits and capping air conditioning temperatures for public buildings, promoting remote working on Fridays and Mondays in public sector to reduce electric and heat energy consumption. It is anticipated that energy efficiency measures will reduce energy consumption by 20%. The Government is further considering different options to compensate business and consumers and mitigate soaring electricity and heating prices.

Both, the extension of 0% VAT rate for heating for another two years and more than EUR 1 bln support package are currently being debated by the Government. The possibility of skimming of windfall profits and introducing price caps cannot be excluded either. It is anticipated that the decisions by the Government will be made in conjunction to the forthcoming annual budget approval process at the latest. 

Poland: Proposal to suspend EU ETS as alternative to introduction of windfall tax

In view of the rising energy prices, three different ideas have been outlined in Poland:

  • The President of the Energy Regulatory Office recommended so-called ceiling price regulation. This is basically a consumer protection mechanism already applicable in the Polish gas sector, according to which an energy entrepreneur in settlements with consumers may not apply prices higher than the maximum prices set by the regulations. This mechanism is also guaranteeing compensation to energy companies to cover the cost gap.
  • A second proposal involves state fiscal intervention via a windfall tax with the goal to redirect above-normal profits of energy companies to selected categories of end users.
  • Finally, on 7 September 2022, the Polish Prime Minister suggested, in an interview with the Financial Times, a temporary suspension of the EU emissions trading scheme (EU ETS) as a way of helping to lower electricity costs via a quick market reaction. On the other hand, the Prime Minister is of the opinion that the windfall profits levy proposed by the European Commission would take far longer to bring down soaring electricity prices for European households.

Against this background, there is lively discussion in Polish Parliament, Government and within the Energy Regulatory Office. However, given that the Polish power generation is based on fossil fuels, it can be expected that a suspension of the EU ETS requirements will be announced as Poland's position to fight rising energy prices.

Portugal: Government reluctant to introduce windfall tax

The introduction of a windfall tax over profits of certain companies has been widely discussed and has been a recurring topic in Portuguese political debate since mid-spring 2022. This possibility has been mostly discussed on broader terms and not as a measure intended to target only companies operating in the energy sector.

According to the latest reports, the Portuguese Government has, for the time being, decided not to pursue such strategy. Recent Government efforts to control energy costs have mostly relied on tax reduction (reduction of tax over fossil fuels and a VAT reduction on the price of electricity). However, we would not exclude the possibility of the Government deciding to change course again and consider introducing a windfall tax, especially if this becomes common practice in other EU countries.

Spain: Spanish Government has approved similar measures to those recommended by the European Commission

The Spanish Government has praised the market intervention proposal laid by the European Commission as this Government sent Brussels a plan in the same vein last September 2021. Since then, the Spanish Government has approved measures similar to the recommendations made by the European Commission:

  • On the demand side, the Spanish Government approved in May 2021 a regulation granting incentives to consumers should they shift consumption away from peaks. In addition, the Government approved in August 2022 a set of measures to reduce the demand of electricity which include an increase of the temperature of public spaces.
  • With respect to the potential imposition of a cap on the revenues of inframarginal generators to use the excess to reduce consumers' electricity costs, the Spanish Government approved a similar measure in September 2021. This measure has been modulated and reduced during 2022 due to the impact caused among inframarginal electricity companies.
  • Moreover, the Spanish and Portuguese Governments agreed to impose a cap on the gas price in relation to the "pool” price formation in the wholesale market (MIBEL) in May 2022, known as the “Iberian exception”, applicable until May 2023, which was conditionally approved by the European Commission. The Commission does not recommend extending this measure to the rest of the EU.
  • Also, the Spanish Government announced in July 2022 the approval of a tax on the windfall profits to inframarginal generators. Whilst there is no official proposal yet, the Government announced that the tax will be effective during 2023 and 2024 and will only affect to those inframarginal companies with an annual turnover over EUR 1,000 million. However, according to the proposal of the European Commission, this tax would not be compatible with the cap on windfall profits.

The Spanish Government seems to be generally willing to align on appropriate future measures with the European Commission. Whilst it has not publicly commented the recommendations made by the European Commission, Spanish Government repeated its proposal to create parallel electricity markets (for power generated from gas and renewables) to fix prices for the different technologies by the weighted average of the price of the two markets.

Slovakia: Potential introduction of aid scheme for companies affected by increased electricity costs

Slovak Republic has presented a plan to compensate for the increased costs associated with higher electricity prices for households. However, the business environment has been left out of the picture. A concrete plan for economic aid (e.g. compensation or tax breaks) has not yet been developed. 

Irrespective, the Ministry of Economy of the Slovak Republic has published a potential procedure to help companies which would provide for compensation for increased costs, which could be drawn from the State budget and the unspent Euro funds to which the Slovak Republic is entitled. The structure of the compensatory aid would consist of dividing companies into three categories (depending on the potential compensation of up to EUR 2 million, EUR 25 million and EUR 50 million respectively). Companies affected by increased electricity costs and making loss for that reason would be entitled to compensation upon application. However, the introduction of this aid scheme is still subject to pending approval by the relevant national, and possibly also European, institutions and is especially uncertain with a view to the imminent change of the Minister of Economy.

Sweden: Concrete measures awaiting the results of the general election

The general election took place in Sweden on 11 September 2022.The intervention in the electrical market has been highly debated by the political parties. There have been a lot of discussions and promises on introducing caps and/or skimming windfall profits (primarily from the transmission system operators) to alleviate the high prices of electricity. Other suggested measures are to temporarily lower the taxes and VAT on electricity during the winter months and to start recommissioning nuclear plants in the south of Sweden (most financially hit by the price increase) that have been, or are in the process of being, decommissioned. While measures will almost certainly be introduced, the exact shape and form of them will not materialize and be executed until after the election.

The Netherlands: Increase of levies for holders of production licenses for gas and oil expected on Budget Day 20 September 2022

In the Netherlands, a windfall tax been discussed but not yet introduced due difficulties of demarcation of what exactly can be considered as windfall profit. However, levies for holders of production licenses for gas and oil are likely to be increased, in particular the so-called state profit share. New measures are expected to be announced on Budget Day 20 September 2022. 

The following measures have already been taken as a reaction to the energy market developments: as of 1 of July 2022, the Dutch government introduced a reduction of energy tax by 5.6% per kWh exclusive of VAT. From 1 July to 31 December 2022, the VAT on energy (natural gas, electricity and district heating) has been reduced from 21% to 9% as an additional measure to compensate for the high energy prices. The lower VAT rate applies to all components on the energy bill that have to do with the supply of energy, for example, also administration and network management costs.

United Kingdom: Government announces new energy price guarantee and further support, but it is not intended to be funded through windfall tax measures

On 8 September 2022, an estimated £150bn worth of measures to protect households, businesses and public sector organisations from soaring increases in the cost of energy was announced by the UK Government, including the creation of an Energy Price Guarantee which will limit the average price of a typical household’s energy bill for the next two years. A full costing of the measures has not yet been carried out but it is currently intended that it will be borne through additional borrowing rather than through a further windfall tax, or through an increase to the existing windfall tax, the so-called Energy Profits Levy.

Energy suppliers will be paid the difference between the new lower price and the amount energy retailers would otherwise have charged their customers. Although the Energy Price Guarantee factors in a temporary removal of green levies from household bills, schemes previously funded by green levies will continue to be funded by the Government during this two-year period. The Government has begun negotiations with energy suppliers to agree long-term contracts with the goal of reducing prices and increasing security of supply, and with renewable producers to also reduce price levels. 

The Energy Profits Levy was implemented in July 2022 and imposes an additional 25% surcharge on gas and oil ring-fence profits arising on or from 26 May 2022. It takes the combined rate of tax on profits for the oil and gas industry to 65%, although it introduces tax relief for qualifying investment expenditure which effectively raises the total value of tax relief to over 90% of such expenditure. The Energy Profits Levy is meant to be a temporary measure and will be phased out when oil and gas prices return to “normal levels”, although it will expire after 31 December 2025 unless renewed. The levy does not apply to the electricity generation sector.

Outlook

The envisaged measures at EU and/or domestic level with respect to windfall profits would affect power generators, off-takers and inventors. The details of these measures are still unclear. In particular, the following issues will have to be addressed in a way that complies with common principles of law of the EU and its Member States:

  • Which inframarginal generators will be affected? The principle of equal treatment requires that all generators who make windfall profits due to the high gas prices should be included. On the other hand, it is questionable whether differences in the windfall depending on the different costs (e.g. presumably higher for coal than for nuclear power and renewable energy plants) need to be taken into account in the determination of price or revenue caps to ensure compliance with the principle of equal treatment.
  • How low can price or revenue caps be? The skimming of windfall profits cuts across the power generators’ legitimate expectation that the regulatory framework for their investment, including the possibility to generate revenues based on the market/exchange price, remains essentially unchanged. Such intervention can therefore only be justified if the purpose pursued, i.e. relieving the financial burden on electricity consumers, outweighs the affected generators’ interests. Against this background, at least a complete skimming of windfall profits appears to be hard to justify.
  • How long can the skimming last? The principle of proportionality requires that any skimming of windfall profits is necessary and adequate to achieve the purpose of relieving the financial burden on consumers. It would therefore no longer be adequate when the energy prices fall back to pre-crisis levels.

See below for a document containing all the European and UK Energy Partners

European and UK Energy Partners