European Commission publishes further details of Energy Market Interventions
The Commission has published the Proposal for a Regulation on an emergency intervention to address high energy prices following the request from energy Ministers which we looked at here along with considerations applying in Ireland.
Caps on Revenues & Tax: The Commission proposes two instruments: (a) a temporary cap on revenues of inframarginal electricity producers (to be channelled to support customers), and (b) a temporary solidarity contribution from profits in the fossil fuel sector (specifically profits in 2022 above a 20% increase of average taxable profits in the three fiscal years starting on or after 1 January 2019). Potential uses of the solidarity fund include financial support measures to reduce energy consumption and to help companies in energy intensive industries.
The Commission states the cap on revenues of inframarginal producers is intended to mimic the market outcome producers could have expected if global supply chains were functioning normally. It is proposed that the cap is set at €180/MWh and is applied ex-post to market revenues from the sale of electricity produced by technologies whose marginal costs are lower than the cap. It would not apply to technologies with input fuel costs leading to break-even level above the cap (gas and coal-fired plant), nor to plant using biomethane, nor should it hamper incentives to invest in flexible generation such as demand-response or storage.
Regardless of the contractual form in which the trade of electricity takes place, the cap would apply to realised market revenues only, and not encompass total generation revenues (such as those stemming from support schemes), in order to avoid impacting the initial expected profitability of a project. Further: “In some Member States, the revenues obtained by some generators are already capped by way of State measures such as feed-in-tariffs and two-way contracts for difference. These generators do not benefit from increased revenues resulting from the recent spike of electricity prices. [They] …. should be excluded from the application of the cap on revenues.” It is also noted that the cap is designed not to interfere with price formation and should preserve incentives to conclude long terms PPAs – and Member States would be required to swiftly remove any unjustified administrative or market barriers to renewables PPAs.
It will be for Member States to put appropriate procedures in place to recover revenues above the cap. Certain features of the Irish energy sector will be relevant, as we noted here.
Demand Reduction: The Commission proposes that: (1) Member States would put measures in place to reduce their total monthly gross electricity consumption by 10% compared to the average in the corresponding months of the reference period (which is 1 November to 31 March in the past five consecutive years). (2) Each month, Member States would identify peak price hours corresponding to a minimum of 10% of all hours in the month and reduce gross electricity consumption during these hours. For every month, the reduction achieved over the identified hours should reach at least 5% on average per hour. Member States can choose the appropriate measures to achieve this, but the measures have to be clearly defined, transparent, proportionate, non-discriminatory and verifiable. In particular, they have to meet several conditions including being “market-based, with compensation, where applicable established through an open competitive process, including tenders in which successful bidders receive compensation”. These requirements are notable in the context of current proposals for demand reduction in Ireland, which we discussed here.
… the revenues obtained by some generators are already capped by way of State measures such as feed-in-tariffs and two-way contracts for difference. These generators do not benefit from increased revenues resulting from the recent spike of electricity prices …