EU introduces revenue cap on power producers

The European Council has formally adopted the Council Regulation on an emergency intervention to address high energy prices. The regulation builds on a proposal presented by the European Commission in September in response to the ongoing political and economic fallout from the Russian invasion of Ukraine. It contains measures to address the currently high prices in the energy market, among them a cap on net revenue for electricity from power producers at a level of €180 per MWh. Technologies with high marginal costs related to the price of the fuels required for electricity generation, such as gas and hard coal-fired power plants, are excluded from this cap. Also excluded are substitute fuels for gas such as biomethane.

The planned market revenue cap will apply from 1 December 2022 to 30 June 2023. According to the Council, "such operators have made unexpectedly large financial gains over the past months, without their operational costs increasing. This is because of the role of coal and gas as price-setting marginal sources that currently inflate the final price of electricity."

The cap will cover both electricity traded on the energy markets as well as electricity traded bilaterally (OTC). However, member states will have a degree of latitude when transposing the revenue cap into their national law. Among others, they have the option to exclude smaller generators, meaning producers generating electricity with power-generating facilities with an installed capacity of up to 1 MW, from the revenue cap. Member states may also exclude revenues obtained from sales in the balancing energy market and from compensation for re-dispatching - a measure by the system operator to avoid grid overload - and countertrading.

Although the broad objective and commentary is that the revenue from the price cap will be redistributed to businesses and households to mitigate high energy prices, it is up to the member states what form of measures they set in place to collect and redirect the surplus revenue. Member states can use the money to invest in energy security measures; or choose to set a revenue cap at lower level; or use additional measures to further limit market revenues. Significantly, member states will have the option to apply different measures to different types of energy generators, depending on the technology used, such as peat, solar, wind or others. This right would not extend to demonstration projects or those where revenue per MWh of electricity produced is already capped by the state. Member states will also be able to apply the measures on energy traders in addition to generators.  The Commission is expected to publish guidance to help the member states with the implementation of the regulation.

Dr Valerian von Richthofen, energy law expert at Pinsent Masons, said: "The Commission's package of measures is ambitious. Within a very short time, a complex redistribution mechanism is to be established, which is to be applied as early as 1 December 2022. This requires the participation of the individual member states and almost all market participants. The establishment of the necessary processes for data exchange alone is likely to be a considerable challenge. In addition, there are numerous legal questions that have not yet been conclusively clarified, especially with regard to a distribution of surplus revenues that meets the legal requirements.”

Additionally, the regulation introduces a "mandatory temporary solidarity contribution" on the profits of businesses in the crude petroleum, natural gas, coal and refinery sectors. The solidarity contribution will be calculated on taxable profits: if a businesses' average taxable profits have increased by more than 20% in 2022 and/or in 2023, compared to its taxable profits since 2018, the business will be charged with the "solidarity contribution". The exact amount of the solidarity contribution is up to each member state subject to a minimum 33% of the increase in profits above 20%.

"Member states can keep national measures that are equivalent to the solidarity levy provided they are compatible with the objectives of the regulation and generate at least comparable proceeds," the Council said. Profits from the solidarity contribution will be used to support households and businesses to "mitigate the effects of high energy prices".

Beyond these measures, the new regulation also introduces requirements for member states to cut their monthly electricity demand. Article 4 of the regulation sets an overall reduction target of 10% of gross electricity consumption and a reduction target of 5% of the electricity consumption in peak hours in the period between 1 December 2022 and 31 March 2023. According to the Council, member states will be "free to choose the appropriate measures to reduce consumption for both targets in this period".  

Additionally, member states may temporarily set a price for the supply of electricity to SMEs struggling with high energy prices. They can also exceptionally and temporarily set a price for the supply of electricity which is below cost. However, the price cap must cover a limited amount of consumption and retains an incentive for demand reduction.

The regulation has already entered into force. All measures are temporary, and most of them will apply from 1 December 2022 to 31 December 2023. However, requirements for member states to cut their electricity demand will apply only until 31 March 2023, and the cap on electricity producers’ market revenue will apply until 30 June 2023.