Germany adopts electricity price cap financed via skimming of windfall revenues

• Germany

• ESG
• Energy and infrastructure
• Energy crisis – business resilience

21-12-2022

German Parliament adopted on 16 December 2022 an "Act to introduce an electricity price brake" (Strompreisbremsegesetz – hereinafter "StromPBG") which provides, inter alia, for the introduction of an electricity price cap and the skimming of windfall revenues of certain power plant operators. The act implements Council Regulation (EU) 2022/1854 of 6 October 2022 on an emergency intervention to address high energy prices (see our summary of 3 October 2022). With this briefing we want to provide an overview of the StromPBG with a focus on the price brake and skimming measures.

Electricity price brake: household consumers and enterprises to get a basic quota of electricity at a reduced price

The StromPBG's purpose is to provide relief for end consumers (including household consumers and enterprises) affected by rising electricity costs through granting them a basic quota of electricity at a fixed price for a certain period of time (electricity price brake/cap). This relief shall be financed, in particular, by skimming off surplus revenues generated by the operators of electricity generation plants which they have, according to the Government, achieved due to the current energy crisis. The implementation foresees that the relief is automatically provided through the utilities via lower payment obligations.

Depending on the consumer group, different basic quotas and fixed prices will be granted. In principle these are as follows:

Companies who receive more than EUR 25 million under the electricity brake, may not pay dividends and bonuses to their directors and members of the supervisory board.

The electricity price brake will (initially) be applicable from January 2023 until end of April 2024.

Skimming off windfall revenues: plant-specific revenue caps from 1 December 2022 onwards

The skimming off windfall revenues on the German electricity market is in principle based on the requirements from the Council Regulation (EU) 2022/1854. However, with respect to certain key aspects it foresees deviations.

Affected technologies

The skimming in Germany will apply to offshore and onshore wind, solar and hydro power plants (excluding other renewable energy plants having an installed capacity of less than 1 MW), waste burning plants, nuclear power plants and lignite-fired power plants. However, contrary to the Council Regulation, hard coal-fired power plants are excluded from the skimming mechanism.

Plant-specific revenue caps

Instead of setting a fixed revenue cap that applies to all electricity generators like the EU suggested (the Council Regulation sets a general cap at EUR 180/MWh), Germany introduces a mechanism that determines separate revenue caps for each electricity generating plant.

Thus, in order to allow the determination of such caps, data in the form of the amount of electricity generated, the electricity generation costs, and the selling prices needs to be collected. The amount generated is known to the grid operators. For the production costs, publicly available data can be used. However, with respect to the selling prices, only the plant operators know the numbers. To mitigate this, the StromPBG provides two options: either the generators disclose the contracts for their individual power plants to refer to the actual quantities and prices, or their revenues are calculated using average prices on the spot and futures markets.

In addition, hedging agreements entered into by relevant plant operators may be considered in the calculation of the revenue caps.

Skimming of 90% of revenues above cap

The amount to be skimmed off is in principle calculated as follows:

windfall revenue which is skimmed off=0.9*(revenue-(calculated cap+safety margin))

This includes the following steps:

• The revenues determined for each plant based on one of the two approaches described above are deducted by the relevant caps
• The caps are calculated differently for each affected power generation technology, and include safety margins
• 90% of the revenues above the caps are skimmed off (by creating a payment obligation of the electricity generator vis-à-vis the grid operator whose grid is being used by the generator for feeding-in the generated power).

Calculation example for onshore wind farm

An example for a calculation for an onshore wind farm subsidised via market premium under Renewable Energies Act (Erneuerbare-Energien-Gesetz – “EEG”), for which no selling prices were disclosed, is shown below. In this case, for the calculation of the amount to be skimmed off, the electricity generated is multiplied by the energy carrier-specific monthly market value (spot and futures market) to calculate the revenue. The calculated revenue is then deducted from the product of the quantity of electricity generated and the applicable value in accordance with the EEG, including a safety margin of at least 30 ct/MWh.

Period of application

The skimming will take place retroactively from 1 December 2022 and is initially limited to 30 June 2023. It may be extended at a later date by legislative ordinance, but not beyond 30 April 2024.

Outlook

From a legal perspective, the known problems remain. The debate of equality of treatment is ongoing since electricity generators are not the only ones profiting from the current market situation, however, they are currently the only ones whose revenues are being skimmed. First players from the energy sector have announced to take legal action. Also, even if there is no direct interference with price determination in the form of the merit order, the encroachment on the fundamental right of corporate freedom is clearly noticeable. Whether judicial review under the reasonableness test will uphold the law is uncertain.

From an investor's perspective, the new revenue caps must be considered commercially. It cannot be excluded that this will be accompanied by an initial decline in investments. At least, it is clear that the StromPBG is not supportive of the politically set climate targets. For this reason, instead of imposing investment hurdles in the future, stakeholders ask the legislator to set new investment incentives to implement the expansion targets.