EC proposes windfall tax on lower-cost generators, they hope it is temporary

In an effort to cope with soaring energy prices, the European Commission (EC) on Wednesday proposed an emergency intervention in Europe's energy markets, including the introduction of demand reduction measures and a revenue price cap on lower-cost electricity producers.

Speaking at her third State of the Union address, EC president Ursula von der Leyen said that the commission proposes an obligation to cut electricity consumption by at least 5% during selected peak price hours and a target for Member States to lower overall electricity demand by at least 10% until the end of March 2023.

The EC also tabled a proposal for a temporary revenue cap of EUR 180 (USD 179.82) per MWh on “inframarginal” electricity generation companies, meaning those relying on lower-cost technologies such as renewables, nuclear and lignite. Revenues above the cap will be collected by the governments of Member States and redirected toward energy consumers to help reduce their bills.

“These companies are making revenues they never accounted for, they never even dreamt of,” president von der Leyen stressed.

In addition, the commission proposed a temporary solidarity contribution from fossil fuel companies not covered by the inframarginal revenue cap. These contributions would be collected by Member States and redirected to aid energy consumers, finance cross-border projects or measures to protect employment or promote investments in renewables and energy efficiency.

The EC estimates that its proposals would raise over EUR 140 billion for Member States to cushion the blow directly, including EUR 117 billion from the windfall tax and about EUR 25 billion from the solidarity contributions.

“These unprecedented measures are a necessary response to the energy supply shortages and high energy prices affecting Europe. Demand reduction is fundamental to the overall success of these measures: it lowers energy bills, ends Putin's ability to weaponise his energy resources, reduces emissions and helps rebalance the energy market. A cap on outsize revenues will bring solidarity from energy companies with abnormally high profits towards their struggling customers. Above all, however, this crisis underlines that the era of cheap fossil fuels is over and that we need to accelerate the switch towards homegrown, renewable energy,” stated Executive Vice-President Frans Timmermans.

The proposals are to be discussed by EU Energy Ministers at an extraordinary Energy Council scheduled for September 30, 2022. If cleared, the measures will become effective for a period of one year, with an option to be prolonged if needed.

In the meantime, the commission continues its pursuit of other avenues to bring down prices for European consumers and industry.

“WindEurope supports the aim of cushioning the impact of high electricity prices on families and businesses. But national caps that deviate from an EU-wide cap would create a patchwork that would undermine investments in renewables,” the association said in a statement.

The wind industry body is worried that the proposal would allow Member States to go further in limiting the revenues of inframarginal power producers and that the already introduced price caps could be maintained. “That’s not helpful,” it stressed.

“The EU wants a huge expansion of renewables to help get out of the current energy crisis. That means loads of new investments in wind and solar. But investors need visibility. So an EU-wide cap on revenues from wind should be precisely that – a single EU-wide cap. Allowing countries to deviate from it and have lower caps creates confusion and certainty – and will slow down the investments we so badly need,” commented Giles Dickson, CEO of WindEurope.

Swedish utility Vattenfall AB agreed to the importance of measures for demand reduction but pointed out that the proposed revenue cap “risks hindering investments into new fossil-free electricity,” stressing that the proposal has to be temporary.

“It is also important to take into account that many electricity producers hedge their production and thereby are not benefiting from high electricity prices to the same extent,” the company said in a statement, adding that it will further analyse these measures to determine their possible impact on its business.

Simone Peter, president of German renewable energy association BEE, is of a similar opinion. She says that the revenue cap should be temporary and take into account the implications for long-term contracts, especially for renewable power purchase agreements (PPAs). The cap should not restrict the freedom of investment in renewables and there are a number of unresolved issues that need to be discussed in detail in further deliberations, according to her.

German energy management consultancy enervis energy advisors GmbH estimates that the proposed price cap would cost local power producers a total of EUR 30 billion in 2022, if the measure is retroactive for the entire year.

(EUR 1 = USD 0.999)

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