The introduction of price caps and windfall taxes in the EU and their implementation in Germany

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On 6 October 2022, the European Council formally adopted the Council Regulation (EU) 2022/1854 on an Emergency Intervention to Address High Energy Prices (“Regulation”). The Regulation is a response to high energy prices in Europe caused by the Russian war against Ukraine. The war has led to a shortage in the supply of gas and oil, resulting in very high gas and oil prices across Europe, which in turn have led to historically high electricity prices: As an example, one megawatt hour was traded at the Leipzig Energy Exchange EEX in September of this year at more than €340/MWh which is an increase of more than 250% compared to August 2021.

Against this background, the Regulation aims at reducing the cost of electricity for consumers and at ensuring security of supply for the upcoming winter by way of the following key emergency measures:

  • reducing electricity consumption,
  • introducing a price cap on market revenues that certain so-called infra-marginal producers receive from the generation of electricity due to the merit-order principle and redistribution to final electricity customers, and
  • a temporary solidarity contribution on excess profits generated from activities in the oil, gas, coal and refinery sectors.

In this article we provide an overview of the emergency measures set out in the Regulation, focusing in particular on the introduction of the revenue cap and the solidarity contribution, and a first indication of how German legislators currently envisage implementing these measures in Germany.

Background

In response to the ongoing political and economic fallout caused by the Russian invasion of Ukraine, the EU has already adopted a number of measures in the past months aimed at strengthening the EU’s energy independence, the joint procurement of gas, and gas storage facilities in the EU. Regulation is now focusing on measures to curb energy prices for end-consumers because the increase in energy prices is substantially contributing to general inflation in the Eurozone and a decline in economic growth in the EU. These measures shall be co-financed by skimming (crisis-related) high profits from electricity producers and companies operating in the fossil fuel sector.

With the reduction and finally the stop of gas supplies from Russia, gas prices in Europe and Germany have risen dramatically. Electricity prices have also risen significantly since June 2022. The background to this is the current principle of price setting on the electricity market, according to which the most expensive power plant needed to meet demand at any given time sets the price for all suppliers on the market (so-called “merit-order principle”). Gas-fired power plants currently often set the price as the most expensive power plants. As a result, due to the gas shortage, the current high gas prices also result in very high electricity prices and thus very high margins for operators of lower-cost generation technologies, the so-called “inframarginal producers”. A similar effect applies to companies in the fossil fuel sector which receive surplus profits due to the unforeseen circumstances in the commodities market.

The Regulation is based on Article 122 (1) TFEU, enabling the Council to implement measures if serious difficulties arise in the supply of certain goods, especially in the energy sector.

Reducing electricity consumption

The Regulation stipulates that the EU Member States shall implement measures to reduce their total monthly gross electricity consumption by 10% compared to the average gross electricity consumption in the corresponding months of the reference period (i.e., 1 November to 31 March in the last five consecutive years, starting with the period starting from 1 November 2017 to 31 March 2018). In addition, the EU Member States shall also reduce their gross electricity consumption during the identified peak hours by at least 5%. This reduction during peak hours aims to contribute to reduced fuel consumption and to a smoother repartition of demand across hours, impacting hourly market prices.

EU Member States are basically free to choose und implement their respective measures to achieve the goals set in the Regulation. Possible measures to reduce gross electricity consumption may include national awareness-raising campaigns, publishing targeted information on the forecasted situation in the electricity system, regulatory measures limiting non-essential energy consumption, and targeted incentives to reduce electricity consumption.

Revenue cap for inframarginal electricity generators

The Regulation has also introduced a price cap of €180/ MWh as a temporary revenue cap for “inframarginal” electricity generators, i.e., for electricity generation technologies that deliver electricity to the grid at a cost below the price level set by the more expensive “marginal” generators. This applies in particular to electricity generators from renewable energy sources, hydropower, nuclear energy, and also to energy generated from waste and peat or from lignite. These inframarginal generators have achieved extraordinary revenues at relatively stable operating costs, while gas generators have driven up the wholesale electricity price due to the merit-order effect.

Revenues exceeding the cap of €180/MWh will be collected on or after transaction settlement and be redirected to finance measures in support of final electricity customers, such as households and small and medium-sized enterprises exposed to high electricity prices.

The precise measures to redistribute such revenues will be taken at a national level. The Commission, however, anticipates that by ways of this revenue cap up to €117 billion can be collected.

The revenue cap will apply from 1 December 2022 to 30 June 2023 and will cover both electricity traded on the energy markets as well as electricity traded bilaterally (OTC). A review of this measure shall be made by 30 April 2023. The measure may be prolonged or adjusted, should this be deemed necessary due to the economic circumstances.

The solidarity contribution

The EU Emergency Regulation also provides for a temporary solidarity contribution for companies and establishments with activities in the crude petroleum, natural gas, coal and refinery sectors amounting to 33% of the tax base. According to the European Council, the solidarity contribution is an appropriate means to tackle surplus profits in the event of unforeseen circumstances. Similar to the inframarginal generators, companies active in the fossil fuel sector have experienced a significant increase in revenues due to the energy crisis. These profits would not have been achievable in a normal market situation.

The idea of the solidarity contribution is to assess the taxable profits, as determined under national tax rules, in the four fiscal years starting on or after 1 January 2018 and to compare them to the taxable profits of 2022/2023. If this comparison shows that the profits have increased more than 20%, the solidarity contribution has to be paid. Only profits made in 2022 and/or 2023 shall be subject to the solidarity contribution.

The solidarity contribution shall only be used for specific purposes which are further specified in the Regulation, i.e., financial support measures to

  • final energy customers, and in particular vulnerable households, to mitigate the effects of high energy prices;
  • help reduce energy consumption;
  • support companies in energy intensive industries; and
  • develop the energy autonomy of the EU.

Implementation in Germany

The German Government is currently working on the implementation of the Regulation. Initial conceptional ideas have recently become public, which are quite far-reaching and which go beyond even the proposed measures at EU level:

  • The Government is considering differentiating the price cap for the different inframarginal electricity generators and lowering the cap below the cap of €180/MWh. The settlement is to be based on fed-in generation quantities and the variable costs are to be determined on a technology and plant-specific basis. For renewable energy plants in particular, this shall mean, according to the first conceptual ideas that have been published, that reference costs will be considered to be the applicable tariff per plant (as determined under the German Renewable Energies Act – “EEG”) and that an additional buffer of €30/MWh shall apply (or at a level of €100/MWh if there is no applicable tariff for the respective plant).
  • For the “collection” of the revenue cap and the financial support of German end customers the established market processes of the EEG levy system shall be used. Under this system, the EEG levy was collected from end customers to finance the subsidised renewable energies. The EEG levy system has been abandoned as of 1 July 2022, but shall now be used in “reverse order” to collect surplus profits above the capped revenues from the plant operators and pass these on via the utilities to the end customers.
  • The start date for the revenue cap is envisaged to be 1 December 2022, in line with the Regulation. Furthermore, the Government considers as a “potential option” to introduce the price cap for spot marketed power with retroactive effect from 1 March 2022; this option has, however, been subject to immediate and fierce criticism by all industry associations based on the German constitutional principle of trust which prohibits retroactive cuts in EEG tariffs. As a consequence, and differently from other markets in the EU (e.g., Italy and Spain), the German government has never changed EEG tariffs with retroactive effect so far. This has been considered by renewables investors and developers alike as a significant advantage of the German renewables market. The introduction of a retroactive cut would lead to a loss of trust in the stability of the regulatory landscape in Germany and a devaluation of the German renewables market, and therefore should therefore not be adopted.

The German Ministry for Economic Affairs and Climate Protection has not published an official implementation bill yet. Apparently, the Government plans to agree on the new measures in cabinet on 18 November and to finally adopt the measures on 16 December.

Conclusion and outlook

The emergency measures set out in the Regulation are of an exceptional and temporary nature and will have a massive impact on electricity generators and companies operating in the fossil fuel sector, and are therefore subject to very strict legal requirements. In view of their contribution to reducing and mitigating the harmful effects of the energy crisis for households and companies with the objective of protecting the internal market and preventing the risk of further fragmentation, however, the European emergency measures are reasonably legitimate.

Legal concerns, however, may arise with regard to the envisaged national implementation of these measures. It remains to be seen whether the measures currently planned by the German Government will actually be implemented or whether they will still be changed. In particular with regard to any retroactive effect of the revenues cap, there remain concerns about its constitutional permissibility, so that it does not seem unlikely that this will be still be changed. Other issues, such as dealing with different marketplaces (futures market, OTC trade, etc.) or different contracts, also still seem to be unresolved at the moment.

Even apart from certain legal doubts or outstanding issues, the package of emergency measures as a whole is very ambitious. This applies in particular to the short time in which the measures are to be implemented (by 1 December 2022) and the complexity of the processes. If the German implementation of the revenue cap actually uses the former EEG levy system, this would mean that almost all market participants in the energy market would be involved in new processes. It certainly takes a fair degree of optimism to assume that this implementation will work smoothly as of 1 December 2022.

Following the much criticized and now rejected gas price levy (Gaspreisumlage), hope remains that the German government will implement a reliable and well thought-through legal instrument this time.

 

maximilian.uibeleisen@ashurst.com

simon.groneberg@ashurst.com

constanze.goetz@ashurst.com

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