The EU is confronted with the effects of a severe mismatch between energy demand and supply, due largely to the continued weaponisation by Russia of its energy resources. To ease the increased pressure this puts on European households and businesses, the European Commission is now taking a next step in tackling this issue by proposing exceptional electricity demand reduction measures, which will help reduce the cost of electricity for consumers, and measures to redistribute the energy sector’s surplus revenues to final customers.
1. Context of the Proposal
Gas and electricity prices have reached record levels in 2022 and hit all-time highs following the Russian invasion of Ukraine. Over the past year, electricity prices in Europe have rapidly risen to a level much higher than in recent decades. This dynamic is intrinsically linked to the high price of gas, which increases the price of electricity produced from gas fired power plants, which are often needed to satisfy demand. Prices started rising rapidly last summer when the world economy picked up after COVID-19 restrictions were eased. Subsequently, Russia’s invasion of Ukraine has exacerbated this situation.
The European Commission is acutely aware of the impact that the uncertainty around gas supply is having on the electricity market. Member States across Europe have experienced a surge in electricity prices linked to rising gas prices, leading to gas becoming the marginal price setting fuel ahead of coal. At the same time, the availability of electricity generation in the EU has been below usual levels in the last months due to increased maintenance works of power stations, lower output from hydropower generation, and closures of some older power plants. In parallel, record-breaking temperatures this summer have pushed up energy demand for cooling and have added pressure on electricity generation. Additional supply pressures on energy and food commodity prices are feeding global inflationary pressures, eroding the purchasing power of households and the economy as a whole.
The Commission therefore proposes an integrated and interdependent package of measures to be introduced immediately. These measures seek, inter alia, to mitigate the impact of high electricity prices and protect consumers, while preserving the benefits of the internal market and a level-playing filed. Several Member States have already adopted or are currently considering the adoption of redistribution measures. However, measures adopted solely at national level risk creating uneven conditions for companies operating in the EU energy market.
In order to create a level playing field, the Commission proposes two complementary instruments so as to cover the full energy sector: (a) a measure that temporarily targets and reduces the revenues of electricity producers and (b) a measure that temporarily establishes a solidarity contribution on surplus profits in the fossil sector falling within the scope of this Regulation. By reducing the revenues of electricity producers, the measure proposed in the Regulation aims to mimic the market outcome that producers could have expected if global supply chains would function normally, in the absence of the gas supply disruptions that have taken place since the invasion of Ukraine in February 2022. Furthermore, the Commission proposes a temporary solidarity contribution applying to the profits of businesses active in the oil, gas, coal and refinery sectors, which has significantly increased compared to prior years.
2. Electricity Emergency Tool
Reduction in demand for electricity
In response to the heightened risk for the coming winter and the need to lower overall electricity demand, to preserve fuel stocks for electricity generation and take targeted action to reduce electricity prices in the most expensive hours, in a spirit of solidarity, the proposed Regulation sets out two electricity demand reduction targets. The first requires Member States to put measures in place to lower overall electricity consumption from all consumers, including those who are not yet equipped with smart metering systems or devices enabling them to adjust their consumption during the day. In addition, to specifically target the most expensive hours of electricity consumption when gas generally sets the marginal price, the Commission proposes a mandatory target of at least a 5% reduction in gross electricity consumption during selected peak price hours covering at least 10% of the hours of each month where prices are expected to be the highest.
Cap on market revenues for the generation of electricity from inframarginal technologies
Secondly, the proposed Regulation sets out an approach to recover excess revenues from generators with lower marginal costs such as renewables, nuclear, and lignite (“inframarginal technologies”) by setting an ex-post cap on revenues per MWh of electricity produced. In the day-ahead market, electricity prices are determined by the variable cost of the marginal technology, i.e. the last and most expensive plant that is needed to meet demand (marginal pricing). In view of the role that the electricity prices in the day-ahead market have as a reference for the pricing of electricity across all the other market timeframes, this measure reduces the impact that the margin-setting technology (typically coal, today often gas-fired power plants) has on the revenues of other generators with lower marginal costs such as most renewables, nuclear, and lignite.
The level of the cap on market revenues
The revenue cap prescribed in this Regulation should be set at a level that encompasses the majority of inframarginal generators in the EU and avoids jeopardising the availability and profitability of existing plants and future investment decisions for new inframarginal generation. The Commission proposes to set the revenue cap at 180 EUR/MWh, which incorporates the necessary security margin. Such a cap should be limited to market revenues rather than encompassing total generation revenues (including for instance those stemming from support schemes), to avoid significantly impacting the initial expected profitability of a project. Having a uniform cap on revenues across the Union is necessary to preserve the functioning of the internal electricity market as it would maintain price-based competition between electricity producers based on different technologies, in particular for renewables. As the cap will apply on the revenues per MWh of electricity produced, price formation in electricity wholesale markets will not be affected. The dispatch of power plants will continue to take place based on their level of efficiency, with those with lower marginal costs being dispatched first, and the cross-border trade of electricity will not be affected.
Scope of the cap
The market revenue cap would apply to revenues from the sale of electricity for all inframarginal generators as defined in the Regulation and cover all market timeframes, regardless of whether the trading of electricity takes place bilaterally (over-the-counter) or in centralised marketplaces. If the cap was to apply only to certain timeframes or only to exchanges and other organised marketplaces, inframarginal generators could have an incentive to trade electricity in the timeframes and marketplaces not covered by the measure. The cap on revenues will apply per MWh of electricity produced. Regardless of the contractual form in which the trade of electricity may take place, the cap should apply to realised market revenues only.
Definition of relevant inframarginal technologies
The revenue cap is applicable to market revenues from the sale of electricity produced from technologies whose marginal costs are lower than the cap, such as wind, solar, geothermal, nuclear energy, biomass, oil and oil-related products, hydropower installations without reservoir, etc.
Redistribution to final customers
The surplus revenues resulting from the application of the cap shall be channelled to final electricity customers. This includes all purchasers of electricity for their own consumption. In selecting the beneficiaries of the redistribution, Member States should target as much as possible the final customers, be it private or commercial ones, who are most strongly exposed to high electricity prices. The distribution the surplus revenues as set out in this instrument is without prejudice to the application of Article 107 and Article 108 TFEU.
Addressing difficulties faced by consumers
Finally, this proposal contains key provisions to address the difficulties being faced by consumers as a result of very high energy prices. A wide range of support measures have already been put in place by Member States, including measures based on the Toolbox. These have included direct income support, reductions in taxes, and levies and rebates on consumers energy bills, as well as measures to support energy efficiency and on-site renewable production. Member States have also intervened in price setting in the supply of electricity – that is establishing regulated prices for end-consumers. As far as possible, support to consumers will also need to support demand reduction. However, it is also important to recognise that some consumers may already be close to the minimum essential level of consumption necessary to safeguard their well-being.
3. Solidarity Contribution
Not only electricity generating companies, but also the fossil fuel sector is benefiting from extreme price increases due to the current market situation, generating profits that go beyond the result of usual business activities. Soaring energy and electricity prices are putting a significant burden on public authorities, consumers, and businesses alike, and action is needed to avoid the risk that prices reach unsustainable levels, with far greater and potentially detrimental social and economic implications.
In order to financially support the measures that are necessary to react to current crisis situations for households and businesses, those that generate excess profits need to contribute a portion of them in the spirit of solidarity.
This Regulation introduces a solidarity contribution for the fossil industry applicable in all Member States. This solidarity contribution is an exceptional and temporary measure appropriate to the current situation that Member States would take in a spirit of solidarity to mitigate the direct economic effects of the soaring energy prices for public authorities’ budgets, consumers and businesses across the Union.
To that end, this proposal establishes a measure that consists of a temporary solidarity contribution based on taxable surplus profits made in the fiscal year 2022 from companies and permanent establishments active only in the oil, gas, coal and refinery sectors that is commensurate and appropriate to the current socio-economic situation. The measure will help preserve the smooth functioning of the internal market and ensure the necessary solidarity between Member States.
Access the complete proposal here
