The European Commission unveiled a proposal for an EU Council regulation with three key emergency measures to mitigate the impact of high electricity prices on households and businesses, while preserving the benefits of the internal market and a level playing field, on Wednesday 14 September, hours after the State of the Union speech by Commission President Ursula von der Leyen.
There are few changes to be noted compared to the last draft of the text detailed here (see EUROPE 13020/15).
The Commission thus proposes to: - cap the revenues of electricity producers with a cost below the wholesale market price (‘inframarginal producers’); - introduce a “temporary solidarity contribution” to redistribute part of the windfall profits of certain fossil fuel companies; - set targets for reducing electricity demand.
In the institution’s view, the “current unprecedented challenges call for putting in place appropriate, proportionate and temporary measures, to be taken in a spirit of solidarity, in order to address the severe difficulties arising in the area of energy and overcome the energy crisis by acting together”.
A cap of €180/MWh
The Commission wants to introduce a limit on the income of sub-marginal electricity producers to allow Member States to capture the difference between this limit and the actual income earned and then redistribute it to households and companies in difficulty.
“In these times it is wrong to receive extraordinary record profits benefitting from war and on the back of consumers. (These) profits must be shared and channelled to those who need it the most”, said Ms von der Leyen.
The cap, common to the whole EU, would be set at €180/MWh.
The Commission estimates that such a cap would allow Member States to collect up to €117 billion on an annual basis.
The measure would apply to market revenues only in order to avoid “targeting producers who do not actually benefit from the current high electricity prices due to having hedged their revenues against fluctuations in the wholesale electricity market at a price below the cap level”.
The sources of electricity concerned would be: wind power, solar power (solar thermal and solar photovoltaic), geothermal power, hydroelectricity without water retention, solid or gaseous biomass fuels (excluding biomethane), waste, nuclear power, lignite, crude oil and other petroleum products.
This instrument would therefore not cover technologies with a break-even point above the level of the cap, such as gas and coal-fired power plants, as “this would jeopardise these activities and ultimately security of supply”.
Member States could decide to apply the revenue cap at the time of settlement of the energy exchange or afterwards.
The Commission also leaves them the possibility to maintain or introduce national measures that further limit the market revenues of generators (e.g. a cap lower than €180/MWh), provided in particular that these measures are proportionate and non-discriminatory and do not distort the functioning of wholesale electricity markets.
Taxing the super-profits of fossil fuel companies
The Commission also intends to target the fossil fuel sector.
“Major oil, gas and coal companies are also making huge profits. So they have to pay a fair share – they have to give a crisis contribution”, said the President of the institution.
The Commission advocates the introduction of a temporary solidarity contribution that would apply to excess profits generated by companies in the oil, gas, coal and refining sectors.
It would be levied by Member States on profits in 2022 exceeding the average profits of the previous 3 years by more than 20%, at a rate of at least 33%.
This would allow Member States to raise about €25 billion in additional government revenue, the Commission estimates.
The latter would be responsible not only for collecting the solidarity contribution, but also for redistributing the revenues collected to households and businesses and for investments in renewable energy, energy efficiency or other decarbonising technologies.
A binding demand reduction target
The Commission also proposes to set two targets for electricity demand reduction.
The first, binding, would require Member States to reduce their gross electricity consumption by at least 5% during certain peak hours, covering at least 10% of the hours in each month when prices are expected to be highest.
Under the ‘merit order’ system on which the EU electricity market operates, the wholesale price of electricity is aligned with the marginal cost of the last generation unit mobilised to meet demand (the one with the highest marginal cost), which is usually a gas-fired plant in case of high demand.
The Commission estimates that this obligation would result in the selection of an average of 3 to 4 hours per day, normally corresponding to peak loads.
It would be up to the Member States to identify the peak demand hours in their own markets.
“Overall, this targeted reduction can lead to a reduction of gas consumption estimated at around 1.2 billion cubic metres over 4 months. This represents a reduction of gas use for power by around 4% over the winter season across the EU”, says a document from the institution.
The second, indicative, objective would be to require Member States to put in place measures (information and communication campaigns, calls for tender, financial incentives, etc.) to reduce their overall electricity consumption by at least 10% by 31 March 2023.
Towards a European hydrogen bank?
In addition to these emergency measures, the Commission wants to set up a European hydrogen bank “in order to bridge the investment gap and connect future supply and demand”, announced Ms von der Leyen.
Planned for 2023, this bank will “help build the future market for hydrogen” by guaranteeing the purchase of hydrogen through a €3 billion investment budget from the ‘Innovation Fund’.
Electricity market reform
The Commission also intends to continue its work on the revision of the EU’s internal electricity market rules with a view to presenting a legislative proposal in early 2023.
Ms von der Leyen called for electricity prices to be decoupled from the “dominant influence of gas”.
She added: “The current electricity market design – based on merit order – is not doing justice to consumers anymore”.
Gas price cap on hold
On the idea of capping gas prices, an issue that divides Member States, Ms von der Leyen simply said that the Commission will develop, together with Member States, “a set of measures that take into account the specific nature of our relationship with suppliers – ranging from unreliable suppliers such as Russia to reliable friends such as Norway”.
To this end, she has agreed with the Norwegian Prime Minister to set up a working party.
It is therefore unclear whether a proposal for a gas price cap will be presented before the extraordinary meeting of EU energy ministers on 30 September.
See the proposal for a Council Regulation: https://aeur.eu/f/32u
See the Letter of Intent accompanying the State of the Union speech: https://aeur.eu/f/32e (Original version in French by Damien Genicot)