The European Commission first suggested measures against rising electricity prices in its non-papers of 1 September and 9 September 2022 (see our briefing of 12 September 2022). It is now becoming more specific.

On 14 September 2022, the Commission published a "Proposal for a Council Regulation on an emergency intervention to address high energy prices". It outlines four main measures to reduce electricity costs while concurrently creating a level playing field in the European Union's energy sector. The measures are:

  1. the reduction in demand for electricity;
  2. a cap on market revenues for the generation of electricity from inframarginal technologies and the skimming off "windfall profits";
  3. an electricity price setting for small and medium-sized enterprises; and
  4. a solidarity contribution by fossil fuel companies.

Missing from this list is the initially proposed price cap for natural gas that is imported from Russia. This has not been addressed by the European Commission yet, but remains a topic of debate.

This briefing describes all four proposed measures at the European Union level. The focus is on market intervention, in the form of capping revenues and skimming off windfall profits, due to its massive market intervention and impact for investors.

Reduction in demand for electricity

The Commission proposes that Member States should seek to implement electricity savings of 10% of the total monthly gross electricity consumption and at least 5% in gross electricity consumption during selected peak price hours where prices are expected to be the highest.

For the selection of such time periods the Commission wants to grant the Member States a margin of discretion. The Commission also suggests that the Member States put measures in place to encourage consumers to reduce their electricity consumption. This may include tenders where successful bidders receive compensation for reducing their electricity consumption. The provisions regarding the reduction of electricity consumption will be effective as of 1 December 2022 and shall apply until 31 March 2023.

Price cap for inframarginal power generation technologies

Whilst the above-mentioned non-papers of the European Commission left questions unanswered – such as, when will a price cap be introduced? At what value will it be set? And how will the surplus profit be skimmed off? The Commission now lays out further details.

It suggests an ex-post cap on all 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 oil and other oil products. The Commission proposes to set the cap at 180 EUR/MWh, as this is, in the European Commission’s view, a limit that does not impair the investment in new inframarginal capacities such as renewable energy plants.

Since the cap targets all market revenues of the aforementioned energy generators, it covers revenues achieved via OTC trade and at an exchange, on the day ahead market and the futures market, but also via power purchase agreements (PPAs). In practice, PPAs with a price that reflects the exchange price (like direct marketing agreements which are common for plant operators benefitting from the renewable energy support scheme in Germany) would therefore be affected. Corporate PPAs, which usually have a fixed price over the agreed contract term, may not be affected since the agreed upon price of such PPAs will hardly exceed the price cap of 180 EUR/MWh. However, generators who have entered into PPAs with corporate offtakers on a contract for difference, “fixed for floating” or “virtual” basis (whereby payments are settled on the difference between the fixed price and the market price) should consider this impact this may have on the settlement mechanics under the contract and in particular ensuring that any surplus revenues are excluded from the difference payments owing to the offtaker. This may require triggering the change in law or hardship provisions of some contracts.

Pursuant to the proposed Regulation, the Member States will be responsible to skim off the surplus revenues from generators which result from earnings over the price cap. These earnings are then to be used for the benefit of the final electricity customers (private and commercial). The Commission suggests introducing e.g. direct financial transfers to final electricity customers or lowering their electricity purchase costs.

The price cap will be effective as of 1 December 2022 and shall apply until 31 March 2023.

Electricity price setting for small and medium-sized enterprises

The proposed Regulation also contains so-called retail measures which would allow Member States to set a certain electricity purchase price for small and medium-sized enterprises. This could even lead to the Member State temporarily setting an electricity price that is below the cost price. Member States will have the option to introduce retail measures for a period of one year from the Regulation's entry into force.

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

The Commission proposes a temporary solidarity contribution applying to the profits of businesses in the fossil fuel sectors. The contribution will be based exclusively on the taxable profits above a 20% increase of the average of profits of the previous three years made in the fiscal year 2022 from companies active only in the oil, gas, coal and refinery sectors. These contributions are to be used to provide financial support to households and companies to mitigate the effects of high energy prices and for campaigns aimed at reducing energy consumption.

Further measures to incentivise PPAs

In addition, the draft Regulation provides that the Member States will remove an unjustified barrier to PPAs with operators of renewable energy plants. They shall take measures to accelerate the uptake of such PPAs in particular by small and medium-sized enterprises.

More specifically, the Member States will design, schedule and implement support schemes – and guarantees of origin (GoO) – in a way that they are compatible with, complement and enable renewables PPAs. This would be relevant for countries like Germany where the renewable energies support scheme does not currently allow plant operators who benefit from financial support to also sell GoO to their off-takers.

Outlook

The Commission's proposal marks the first step in the European legislative procedure under Article 122 para. 1 TFEU which enables the Commission together with the Council in the event of serious difficulties to take legislative action, skipping the ordinary legislative procedure. EU energy ministers are due to meet on 30 September 2022 to discuss the Commission’s proposal, before the Council of the EU might adopt the underlying Regulation.

However, there is still room for debate. The planned price cap would affect power generators and investors in their right to entrepreneurial freedom, the intervention also marks a heavy and unprecedented incision into the principle of a free market economy.

The European Commission shows that it is aware of this by only allowing the price cap to run until the end of March 2023 and by also only allowing it to kick-in at a value of 180 EUR/MWh. It begs the question whether the intervention is justified at all if the main reason given for the skimming is that the profits would not have been possible without the war in Ukraine. Irrespective, it is typical for market prices to be determined by external unforeseeable factors.. The call for justice remains on the side of the energy generators who, as a single industry, are solely exposed to the skimming, whereas other "windfall winners" from other industries can keep their windfall profits.

If adopted, the Regulation will become directly effective and binding in all Member States. However, details regarding the implementation of each single measure still need to be addressed at the level of each Member State. In this respect, the following points need to be addressed:

  • Does the relevant Member State see a need to take action implementing retail measures? Namely the Czech Republic is already planning to adopt such measures in the form of large consumers being entitled to a compensation of up to 80% of their highest energy consumption over the last five years.
  • Who will be the responsible authority for collecting and later distributing the surplus revenues of inframarginal producers? How is this going to be implemented? The German Federal Government seems to consider involving the grid operators similar to their role in the German renewable energies incentive scheme.
  • Who is responsible for the collection and distribution of the solidarity contribution? Which purpose does each Member State see as fitting for the usage of the proceeds?
  • What support schemes will be introduced with regard to PPAs?