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Council of the European Union agrees on emergency measures to reduce energy prices

  • United Kingdom
  • Energy and infrastructure

03-10-2022

The Council, represented by the energy ministers of the European Union, reached an agreement this Friday (30 September 2022) on a Council Regulation with respect to the measures proposed by the European Commission on 14 September 2022 (see our briefing of 16 September 2022).

The European Commission had proposed the following measures:

  1. an obligation for the Member States to reduce the demand for electricity;
  2. a cap on market revenues for the generation of electricity from inframarginal technologies and the skimming of windfall profits;
  3. a right for the Member States to intervene in the price setting for the supply of electricity for small and medium-sized enterprises; and
  4. a solidarity contribution by fossil fuel companies.

The proposed measures were in principle adopted by the ministers; however, they included several amendments to provide for more flexibility for the implementation by the Member States. In addition, the provisions on incentives for renewable power purchase agreements proposed by the Commission have not been adopted by the Council.

This briefing gives an overview of the Regulation adopted by the Council and highlights the changes made to the Commission’s draft proposal.

Reduction in demand for electricity

The Commission's proposal that Member States “should seek” to implement electricity savings has been replaced by the, still limited, obligation to “endeavour” implementing such savings. As proposed by the Commission, the saving shall relate to 10% of the total monthly gross electricity consumption and at least 5% in gross electricity consumption during selected peak hours where prices are expected to be the highest. For the selection of such time periods the Member States are granted full discretion.

The savings will be achieved by targeted measures determined by the Member States. Such measures may include financial compensation paid to consumers who reduce their electricity demand, whereas the amount of such compensation would have to be established through open competitive processes (e.g. tender procedures).

The Member States’ measures regarding reduced consumption during peak hours will apply during the period from 1 December 2022 and 31 March 2023. For the other measures, no timeframe has been set.

Revenue cap for inframarginal power generation technologies

The Council also agreed on the introduction of a cap on market revenues for inframarginal power generation technologies suggested by the Commission.

Member States shall implement caps on all realised market revenues (regardless of where the underlying transaction takes place) per MWh of electricity produced by essentially any energy source other than gas and coal. Namely wind energy, solar energy, geothermal energy, hydropower without reservoir, biomass fuel (excluding bio-methane), waste, nuclear energy, lignite, crude petroleum products and peat.

The revenue cap is set at 180 EUR/MWh (according to the Council, a level well above the initial market expectations before the war in Ukraine). To put this into perspective, assuming that for example Germany introduces a revenue cap of 180 EUR/MWh, an amount of 120 to 240 EUR/MWh, based on the recent day-ahead prices of electricity in Germany, would be skimmed off.

In deviation from the Commission's proposal, Member States can:

  • set the cap at a higher or lower level than the 180 EUR/MWh;
  • introduce national measures to limit the market revenues of producers from other energy sources than those mentioned above (in particular hard coal);
  • differentiate between technologies;
  • put in place revenue caps for other market players such as traders in the electricity market;
  • decide that the cap on market revenues does not apply to electricity produced in hybrid plants which also use conventional energy sources;
  • exempt from the application of the cap any revenues obtained from the sale of electricity in the balancing energy market and from compensation for redispatching and countertrading.

Whilst the industry preference seems to be avoiding an interference with the electricity market prices, Member States can, in accordance with the Commission proposal, decide whether to apply the cap on market revenues at the settlement of the exchange of energy or thereafter.

In addition, the Member States will have to take appropriate measures to reflect concern from the recitals of the Regulation that the cap on market revenues should apply to realised market revenues only. Such measures will be necessary to avoid harming those electricity generators who do not actually benefit from the current high electricity prices due to having hedged their revenues against fluctuations in the wholesale electricity market, including renewable energy plant operators who have entered into physical or virtual power purchase agreements (PPAs) with fixed prices or netting arrangements respectively. Parties to PPAs should still ensure that any future measures (the form and extent of which may be currently unknowable) are appropriately addressed in the PPA. For instance if a cap were introduced on retail (import) electricity price for the corporate counterpart to a virtual PPA, but without capping the reference wholesale/index price itself, this could upset the balance of the PPA or result in a windfall for the corporate in a manner that requires temporary or permanent changes to the PPA.

The skimmed off earnings are then to be used for the benefit of the final electricity customers in form of households and the industry. In this respect, the Member States will have the discretion to pre-finance support measures to final electricity customers and collect the market revenues at a later stage. In addition, the Regulation provides that Member States may, by way of derogation from the applicable EU rules on congestion income (Article 19 para. 2 of Regulation (EU) 2019/943), use surplus congestion income revenues resulting from the allocation of cross-zonal capacity as well as budgetary resources to finance measures in support of final electricity customers.

The revenue cap shall be effective as of 1 December 2022 and shall apply until 30 June 2023.

Intervention in electricity price setting for small and medium-sized enterprises

The Council also agreed on the Commission's proposal to allow Member States to intervene in the setting of electricity purchase prices not only for household costumers but also for small and medium-sized enterprises. This could even lead to Member States temporarily setting an electricity price that is below the cost price. However, it needs to be ensured that only a limited electricity consumption amount is covered by the price setting, there is no discrimination between suppliers and all suppliers are eligible to provide offers at the price for the supply of electricity which is below cost on the same basis. Also, this is under the condition of the suppliers being compensated for supplying below cost. The revenues stemming from the application of the cap on the market revenues are supposed to be used for this compensation.

Member States shall have the option to introduce retail measures until 31 December 2023.

Skimming off surplus profits of the fossil fuel sector to use it as a solidarity contribution

The Council also adopted the Commission's proposal to enable the skimming of temporary solidarity contributions applying to the profits of businesses in the crude oil, natural gas, coal and refinery sector. In deviation from the Commission proposal, the contribution shall be based on the taxable profits above a 20% increase of the average of profits of the previous four years, (previously three) made in the fiscal year 2022 and/or 2023 (previously only 2022), from companies active in the above-mentioned sectors, on top of the regular taxes.

These contributions are to be used to provide financial support to mitigate the effects of high energy prices and for campaigns aimed at reducing energy consumption, including financial support:

  • for final energy customers, notably vulnerable households;
  • to help reduce energy consumption (in particular for compensation paid after auctions or tender schemes);
  • to support companies in energy intensive industries committed to investments into renewable energies, energy efficiency or other decarbonisation technologies;
  • for protecting employment and the re- and upskilling of the workforce.

Member States will adopt such measures by 31 December 2022.

Outlook

The Council announced that the Regulation shall be formally adopted by written procedure in early October 2022. It would then be published in the EU’s Official Journal and enter into force the next day. We would anticipate this to be by mid-October. In addition to these further steps in the legislative process, the issuance of Commission guidelines on the implementation of the skimming of windfall profits can be expected.

As discussed in our last briefing, the debate of equality of treatment is yet to be held. It is only the energy generators who, as a single industry, are solely exposed to the skimming of windfall profits, whereas "windfall winners" from other industries can keep their additional profits. Adding to this, the Regulation now allows the Member States to set specific revenue caps for each power generator separately. This has the potential for more unequal treatment. Then the revenue cap would not just intervene with the merit order, it would also lead to the need of further reasoning why certain energy generators should be capped at another price level than others.

A legal assessment will be possible when the Member States present their first implementation measures which are expected over the coming weeks.