Gas and electricity prices have reached record levels in 2022 and hit all-time highs. Families and companies in EU are paying an extra cost for energy. After its defeat at the last EU Energy Council to limit the bills, the Commission proposed three new measures last 12 September. One to cut electricity consumption, another to limit excessive marginal revenues from renewable sources and, finally, a measure to charge the extra profits made by the electricity companies.
Brussels, 14 September 2022
The new Commission’s proposals
- Reduce the demand of electricity
The proposal – The Commission is proposing electricity demand reduction measures, to target the most expensive hours of electricity consumption, when gas-fired power generation has a significant impact on the price. The Commission proposes an obligation to reduce electricity consumption by at least 5% during selected peak price hours.
More, member States could be required to identify the 10% of hours with the highest expected price and reduce demand during those peak hours.
According to the estimate of the Commission, reducing demand at peak times would lead to a reduction of gas consumption by 1.2bcm over the winter. Increasing energy efficiency is also a key part of meeting our climate commitments under the European Green Deal. In 2021, Europe consumed 360 bcm of gas, but in previous years it came close to 600bcm (before COVID-19).
Criticism – Since the electricity saving suggested by the Commission would be equal to only 0.3%, some member States said it is better to justify the measure of saving on the cut of the daily peak, the one that raises the prices of all electricity. Other countries want the savings imposed to be limited to domestic consumption and not to businesses, given that there are infinite types of companies, from SMEs to large industrial enterprises, from service activities to those responsible for the general economy.
This proposal will be examined by prime ministers in mid-October, as it involves direct intervention on families and on the economy.
- Revenue cap to electricity producers
The proposal – The Commission also proposes a temporary ceiling on revenues for “inframarginal” electricity producers, that is, those who use other sources of energy and who now require lower production costs than gas, such as renewables, nuclear and lignite, which they supply. electricity to the grid at a lower cost.
The Commission proposes to set the maximum intra-marginal revenue ceiling at 180€/MWh. According to the Commission, this will allow manufacturers to cover their investments and operating costs without compromising investments.
Revenues above the ceiling set at 180€/MWh should be collected by Member State governments and used to help energy consumers reduce their bills.
As some Member States sell their own electricity, they are invited to conclude bilateral agreements to share part of the intra-marginal revenue collected by the producing State for the benefit of end users in the purchasing Member State. Such agreements are requested to be concluded by 1 December 2022 if a Member State’s net electricity imports from a neighboring country are at least 100%.
Criticisms – This proposal has been criticized by some member states, because it would artificially keep high the price of electricity produced from renewables. Small producers could be incentivized in some cases and in some countries to sell their productions to national networks, from which they then draw for their consumption, which is sometimes subsidized.
As revenue limit regulation is believed to be more appropriate than price limit regulation when costs do not vary significantly with sales units (like in this period), countries seem perplexed about this proposal, unless to be quick to change the revenue cap if the price of gas should drop significantly.
In some member countries, the competing idea of decoupling the price of gas from the price of electricity sold is gaining ground, as in Europe only 19% of electricity is produced with gas.
The trend in electricity prices in recent years are represented by 4 graphs: price per country for domestic consumers in 2021, price per country for industrial consumers in 2021, average price in the EU over the last 10 years for domestic consumption and average price in the EU for industrial consumption in the last 10 years. The EU does not want to set a maximum price per kWh of electricity also because, as the graphs in this page show, there is no uniformity of the EU electricity market.
- Solidarity contribution
The companies with excess profits generated from activities in the oil, gas, coal and refinery sectors should pay a temporary solidarity contribution. And which are not covered by the inframarginal revenue cap.
However, the Commission’s third proposal does not want to undermine investment incentives for the green transition. So the contribution would be raised by the Member States on 2022 profits which exceed a 20% increase compared to the average profits of the previous three years. Revenues would be collected by Member States and redirected to energy consumers, in particular vulnerable households, hard-hit businesses and energy-intensive industries. Member States can also finance cross-border projects in line with REPowerEU objectives or use part of the revenue to jointly finance employment protection measures or promote investments in renewable energy and energy efficiency.
Criticisms – Italy and the United Kingdom have implemented similar taxes/contribution, while Spain has introduced a temporary one. But Italy is not able to collect them, due to court appeals. In France the discussion is open, as well in all other countries. Taxing “excessive” profits of energy companies has been a thorny issue for Germany’s ruling coalition, with political resistance from a junior party and constitutional barriers.
It seems very unlikely that a Council Regulation containing this provision will be decided, given that some countries have constitutional limitations.